<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997.
REGISTRATION NO. 333-35629
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LANDMARK SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
VIRGINIA 7372, 7379 54-1221302
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
LANDMARK SYSTEMS CORPORATION
8000 TOWERS CRESCENT DRIVE
VIENNA, VIRGINIA 22182
(703) 902-8000
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RALPH E. ALEXANDER
PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER
LANDMARK SYSTEMS CORPORATION
8000 TOWERS CRESCENT DRIVE
VIENNA, VIRGINIA 22182
(703) 902-8000
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT OF SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN L. MELTZER, ESQ. BRUCE S. MENDELSOHN, ESQ.
DANIELLE R. SROUR, ESQ. KAY TATUM, ESQ.
SHAW PITTMAN POTTS & TROWBRIDGE AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
2300 N STREET, N.W. 1333 NEW HAMPSHIRE AVE., N.W.
WASHINGTON, D.C. 20037 WASHINGTON, D.C. 20036
(202) 663-8000 (202) 887-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ] If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] If delivery of the prospectus is expected
to be made pursuant to Rule 434, please check the following box. [ ] If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same offering. [
]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
3,200,000 SHARES
[LANDMARK LOGO]
COMMON STOCK
------------------------
Of the 3,200,000 shares of Common Stock offered hereby, 2,000,000 shares
are being offered by
Landmark Systems Corporation (the "Company") and 1,200,000 shares are being
offered by the selling stockholders (the "Selling Stockholders"). The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock of the Company. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "LDMK."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $7.00 $0.49 $6.51 $6.51
- ------------------------------------------------------------------------------------------------
Total(4)................ $22,400,000 $1,568,000 $13,020,000 $7,812,000
================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $885,000.
(3) The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders.
(4) The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up to
480,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Stockholders will be
$25,760,000, $1,803,200 and $10,936,800, respectively. See "Underwriting."
The Common Stock offered by the Underwriters is subject to receipt and
acceptance by them. The Underwriters reserve the right to reject any order in
whole or in part. It is expected that the Common Stock will be ready for
delivery on or about November 21, 1997.
------------------------
C.E. UNTERBERG, TOWBIN WHEAT FIRST BUTCHER SINGER
November 17, 1997
<PAGE> 3
[INSIDE FRONT COVER]
[LANDMARK LOGO]
Focused on Performance
PerformanceWorks enables organizations to model
or predict system and application performance,
and allows businesses to increase system
availability, improve user productivity, reduce
computing costs and limit the adverse business
effects of system degradation.
Businesses and other
organizations
are increasingly relying
upon computer
systems to run and manage
their
key business processes.
[PHOTO OF
COMPUTER
USER]
[GRAPHIC REPRESENTATION
OF COMPUTER TERMINAL
AND END-USER
TRANSACTIONS]
Computing environments are
increasingly
complex and dynamic--users,
hardware
and software are often added,
moved or
changed, and new,
business-critical
applications are developed and
deployed on an ongoing basis.
As businesses place
greater reliance
on complex computer
systems, the
cost of suboptimal
performance
increases dramatically.
[PHOTO OF
SUPERMARKET
COMPUTERIZED
CHECK-OUT]
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
PerformanceWorks and The Monitor are trademarks of the Company. This
Prospectus also contains trademarks and trade names of companies other than the
Company.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The shares of the Company's common
stock, $.01 par value per share (the "Common Stock"), offered hereby involve a
high degree of risk. See "Risk Factors." Unless otherwise indicated, the
information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option, (ii) reflects a 3-for-2 split of the Common Stock which
took effect immediately prior to the date of this Prospectus, (iii) reflects the
mandatory redemption on November 1, 1997 of 54,944 shares of Series A Preferred
Stock, (iv) reflects the conversion, upon the closing of the Offering, of
855,165 shares of Series A Preferred Stock into 833,785 shares of Common Stock
and of 395,195 shares of Series B Preferred Stock into 592,793 shares of Common
Stock and (v) reflects the lapse, upon the closing of the Offering, of the
rights of certain holders of 236,426 shares of Common Stock and options to
acquire 191,262 shares of Common Stock to require the Company to repurchase such
shares (collectively, the "Redeemable Common Stock Instruments"). References in
this Prospectus to "Landmark" or the "Company" mean Landmark Systems Corporation
and its subsidiaries.
THE COMPANY
Landmark is a leading provider of performance management software products
which measure, analyze, report and predict performance for both mainframe and
client/server computing environments. Landmark's PerformanceWorks product family
is distinct in its ability to monitor the key components of a computing
environment, provide early warning of potential system problems and enable
effective planning for changes in the computing environment. The Company
believes these capabilities improve user productivity, reduce computing costs,
increase system availability and optimize use of system resources. Landmark's
products address performance management across leading hardware platforms,
operating systems from DEC, Hewlett-Packard, IBM, Microsoft and Sun and
databases consisting of DB2, Oracle, SQL Server and Sybase. As of September 30,
1997, Landmark had licensed over 15,300 copies of its products to over 3,900
customers worldwide.
Businesses and other organizations are increasingly relying upon computer
systems to run and manage their key business processes. As a result of the
growing dependence on, and increasing complexity of, computing environments
(consisting of both mainframe systems in which processing is conducted centrally
and client/server systems in which processing takes place by both personal
computers or workstations and by networked servers) to run business-critical
applications, demand has increased for comprehensive software solutions capable
of planning, implementing and optimizing these information technology resources.
According to International Data Corporation ("IDC"), a leading provider of
information technology data, revenues from the overall system management
software market are expected to rise to $17 billion by 2000. Performance
management is the largest sector of this market and is expected by IDC to grow
from $1.8 billion in 1996 to $3.1 billion by 2000.
The ability to monitor performance data, or "metrics," from each system
component in a complex, heterogeneous computing environment is a key feature of
Landmark's software, particularly because performance problems in these
environments can originate from any one or a combination of components. The
Company's PerformanceWorks products use software agents to gather performance
metrics automatically from a system's pressure points -- including the central
processing unit ("CPU"), memory and storage, input/output ("I/O"), disk space,
workload, operating system and network. The agent-based architectures of the
Company's products allow users to manage computing environments that are
large-scale, distributed and multi-platform. By monitoring performance data from
each component of a system from real-time, recent past and historical
perspectives, Landmark's products allow users to identify the source of a
problem so a solution can be implemented and to anticipate potential problems so
that they can be avoided.
Landmark's solutions are based on its "lifecycle" view of performance
management and are designed to allow customers to address each stage of the
application lifecycle: planning, development and production. The Company's
PerformanceWorks products cover a broad range of functionality, including
monitoring, reporting, exception handling (notification that a threshold has
been exceeded), trend analysis, tuning (adjustment of
3
<PAGE> 5
system resources to optimize performance) and capacity planning. Landmark's
products provide its customers with the ability to transform raw data into
useful information through an intelligent aggregation and automatic
summarization process which collects data on a continuous basis and generates
summary information at prescribed intervals.
The Company's strategy is to enhance, extend and expand its product
offerings, to capitalize on its large installed customer base, to strengthen its
distribution capability and to grow through acquisitions and partnering
arrangements.
The Company's customers consist of organizations across a wide variety of
industries that are developing or have deployed business-critical applications
in complex, multi-user environments. Representative customers of the Company
include ABN-AMRO, Amoco, BMW, Foundation Health, IBM, Kodak, Lockheed Martin,
Putnam Investor Services, Wachovia Bank, Wells Fargo Bank and Whirlpool. See
"Business -- Customers." Historically, over 90% of Landmark's customers have
renewed their maintenance and support arrangements with the Company.
The Company was incorporated in Virginia on November 3, 1982. The Company's
principal executive offices are located at 8000 Towers Crescent Drive, Vienna,
Virginia 22182. Its telephone number is (703) 902-8000.
THE OFFERING
Common Stock offered by the
Company............................. 2,000,000 shares
Common Stock offered by the Selling
Stockholders...................... 1,200,000 shares
Common Stock to be outstanding after
the Offering........................ 11,213,331 shares (1)
Use of proceeds..................... For general corporate purposes,
including sales and marketing, working
capital, research and development,
capital expenditures and potential
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol....... LDMK
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of the date of
this Prospectus. Excludes a total of 2,792,756 shares subject to outstanding
options and warrants and 1,272,141 shares available for future issuance
pursuant to the Company's stock option plans as of the date of this
Prospectus. The sale of certain of these shares in the public market is
limited by restrictions under the Securities Act of 1933 and lock-up
agreements with the Underwriters. See "Shares Eligible for Future Sale,"
"Management" and Notes 10 and 12 of Notes to Consolidated Financial
Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................... $32,674 $34,460 $36,556 $26,200 $30,377
Gross profit........................ 24,830 26,797 27,643 19,185 26,045
Operating expenses
Sales and marketing................. 11,716 13,092 11,671 8,522 10,275
Product research and development.... 9,094 12,490 13,924 10,773 10,079
General and administrative.......... 7,800 6,872 4,776 3,501 3,970
------- ------- ------- ------- -------
Total operating expenses....... 28,610 32,454 30,371 22,796 24,324
------- ------- ------- ------- -------
Operating (loss) income.................. (3,780) (5,657) (2,728) (3,611) 1,721
Net (loss) income........................ (1,921) (4,169) (1,202) (1,897) 1,222
Pro forma net (loss) income per
share(1)............................... $ (0.13) $ (0.20) $ 0.12
Shares used to compute pro forma net
(loss) income per share(1)............. 9,578 9,578 10,148
OTHER FINANCIAL DATA:
EBITDA(2)................................ $ 406 $(1,700) $ 3,138 $ 1,214 $ 4,034
Cash flow from operations................ 1,311 (362) 4,144 3,443 4,125
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 4,168 $ 15,928
Working capital (deficit)........................................... (2,578) 9,182
Total assets........................................................ 28,635 40,395
Long-term debt (less current portion)............................... 191 191
Mandatorily redeemable securities(4)................................ 10,333 --
Stockholders' (deficit) equity...................................... (5,860) 16,234
</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 pro
forma net (loss) income per share.
(2) EBITDA represents earnings before net interest and other income, income
taxes, depreciation and amortization expense. EBITDA does not represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operations or other measures of
liquidity determined in accordance with generally accepted accounting
principles. EBITDA may not be comparable to other similarly titled measures
of other companies.
(3) Adjusted to reflect the sale of the 2,000,000 shares offered by the Company
hereby at the initial public offering price and the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds."
Includes the effect of the mandatory redemption on November 1, 1997 of
54,944 shares of Series A Preferred Stock, and, upon the closing of the
Offering, the conversion of the Series A and Series B Preferred Stock into
Common Stock and the lapse of the rights of holders of the Redeemable Common
Stock Instruments to require the Company to repurchase the Redeemable Common
Stock Instruments.
(4) Includes Series A Preferred Stock, Series B Preferred Stock and Redeemable
Common Stock Instruments.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
Risk of Significant Fluctuations in Operating Results; Timing of
Revenues. The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results, on an annual and a quarterly
basis, which may result in volatility in the price of the Company's Common
Stock. Such fluctuations may result from a number of factors, many of which are
outside of the Company's control. These factors include the size and timing of
customer orders; changes in the level of operating expenses; customer budget
cycles; the timing of introductions or enhancements of products by the Company
or its competitors; customer order deferrals in anticipation of new products or
product enhancements; customer renewal of maintenance and support agreements;
changes in pricing policy of the Company or its competitors; the mix of
distribution channels and products sold; increased competition; technological
changes; the ability of Landmark to develop or acquire, introduce and market on
a timely basis new products or enhancements to its existing products; the
quality of products sold; market acceptance of new products and product
enhancements; seasonality of revenues; the Company's ability to expand its sales
and marketing programs; personnel changes; foreign currency exchange rates;
costs or other nonrecurring charges in connection with the acquisition of or
investment in companies, products or technologies; and general economic
conditions.
Order backlog at the beginning of any quarter has represented only a small
portion of that quarter's total revenues because products are typically shipped
on a trial basis prior to the receipt of customer orders. As a result, total
revenues in any quarter are substantially dependent on orders obtained during
that quarter. Because Landmark's expense levels are based in significant part on
expectations as to future revenues, expense levels are relatively fixed in the
short run. If near-term demand for the Company's products weakens or if sales do
not close in any quarter as anticipated, the Company's results of operations for
that quarter would be adversely affected. Even though sales activities, such as
product demonstrations, presentations and trials, are conducted throughout each
quarterly period, in the Company's experience, most license transactions come to
closure at or near the end of a quarter. Accordingly, Landmark has often
recognized a significant portion of its license revenues in the last weeks of a
quarter. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of, a quarter.
Landmark believes that its annual and quarterly revenues, expenses and
operating results may vary significantly in the future, that period-to-period
comparisons of its results of operations are not necessarily meaningful and
that, in any event, such comparisons should not be relied upon as indications of
future performance. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."
History of Operating Losses. Although the Company had operating profits in
the fourth quarter of 1996 and the first, second and third quarters of 1997, the
Company has experienced operating losses for the years ended December 31, 1992,
1993, 1994, 1995 and 1996. In recent years, the Company has expanded its product
line to include products for the client/server computing environment, has
increased its research and development expenditures, has established an
international direct sales force to supplement or replace certain third party
distributors and has instituted company-wide cost controls. As a result of these
various initiatives and their potential impact on the Company's financial
condition, prediction of the Company's future operating results is difficult.
There can be no assurance that the Company will be able to continue generating
operating profits on a quarterly basis or achieve consistent operating
profitability on an annual basis. See "-- Risk of Significant Fluctuations in
Operating Results; Timing of Revenues" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Intense Competition. The market for the Company's performance management
software products is highly competitive, fragmented and characterized by
increasingly rapid technological developments, evolving standards and rapid
changes in customer requirements. To maintain and improve its position in this
market, the Company must continue to enhance current products and develop new
products in a timely fashion. The Company competes primarily with vendors that
provide mainframe performance management software and vendors that provide
performance management software for client/server computing environments.
Landmark
6
<PAGE> 8
believes that its principal competitors with respect to mainframe performance
management software products include Candle Corporation and Boole and Babbage,
Inc. In the client/server market, the Company believes that its principal
competitors include BMC Software, Inc., Compuware Corporation, BGS Systems Inc.
and Platinum technology, inc. See "Business -- Competition."
Some of Landmark's competitors have longer operating histories and
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
those of the Company. The Company's current and future competitors could
introduce products with more features, greater scalability, increased
functionality and lower prices than the Company's products. These competitors
could also bundle existing or new products with other, more established products
in order to compete with Landmark. 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. Moreover, there can be no assurance that the Company will be able to
differentiate its products from the products of its competitors. Due to
potentially lower barriers to entry for platform-specific niche products in the
performance management software market, the Company believes that emerging
companies may enter this market, particularly in the client/server environment.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially and adversely affect the
Company's business, financial condition and results of operations. Any material
reductions in the prices of Landmark's products would negatively affect gross
margins and would require the Company to increase sales in order to maintain
gross profits. There can be no assurance that the Company will be able to
compete successfully against current or future competitors, and the failure to
do so could have a material adverse effect upon Landmark's business, financial
condition and results of operations. See "Business -- Competition."
Rapid Technological Change; Product Development. The market for
performance management software products is increasingly characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and product enhancements. Landmark's future success will
depend in large part on its ability to enhance its current products and to
develop and introduce new products that keep pace with technological
developments, achieve market acceptance and respond to increasingly complex
customer requirements. Landmark believes that its future operating results will
be dependent upon the continued market acceptance of its products, the timing of
orders for such products and the level and effectiveness of research and
development expenses incurred in connection with the Company's ongoing and
planned product development programs. Responding to rapid technological change
and the need to develop and introduce new products quickly to meet its
customers' evolving needs will require the Company to make substantial
investments in research and product development. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements or any significant delays in product development or introduction
could result in a loss of competitiveness and could materially and adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that new products will be successfully developed or
marketed by the Company, that any new products will achieve market acceptance or
that other software vendors will not develop and market products which are
superior to Landmark's products or that such products will not achieve greater
market acceptance. See "Business -- Product Development."
Dependence on Certain Products. Landmark has historically derived, and in
the foreseeable future expects to continue to derive, a substantial majority of
its revenues from performance management software products and services for use
in mainframe-based computing environments. The Company derived 93.0%, 90.3%,
89.2% and 87.8% of its revenues from mainframe products and services in 1994,
1995, 1996 and for the nine months ended September 30, 1997, respectively.
Accordingly, Landmark's future success will depend in part on the continued
market acceptance of its performance management software products and services
for mainframe-based systems. A decline in demand for these products and
services, whether as a result of an actual or a perceived decline in the use of
mainframe-based systems, new product introductions, increased competition,
technological change, failure of the Company's existing and new products to
address customer requirements or otherwise, could have a material adverse effect
on the Company's business, financial condition and results of operations.
7
<PAGE> 9
Dependence on New Products and Markets. Landmark has recently introduced a
number of performance management software products for use in client/server
computing environments. The Company expects these products to generate a
significant portion of the Company's future revenue growth. Landmark's client/
server products are designed for use in complex, distributed computing
environments comprised of a variety of hardware platforms, operating systems and
databases, each of which may come from a different vendor. The market for
performance management software in the client/server computing environment is
relatively new and still emerging. The Company's future financial performance
will depend in part on continued growth in the market for performance management
products in complex, heterogeneous environments, which in turn will depend on
growth in the number of large and medium sized organizations with such computing
environments which deploy performance management solutions. There can be no
assurance that the market for performance management products in the
client/server computing environment will continue to grow or that Landmark will
be able to respond effectively to the evolving requirements of this market.
Moreover, if the Company's recently introduced products for client/server
computing environments, or future releases of new products or product
enhancements for client/server systems, do not achieve meaningful market
acceptance, Landmark's business, financial condition and results of operations
could be materially and adversely affected.
Need to Attract and Retain Qualified Technical Personnel. The Company's
future success will depend in large part on its ability to hire, train and
retain technical personnel who have expertise in a wide array of network and
computer systems and a broad understanding of the markets Landmark serves.
Competition for such technical personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Although the Company to date has not experienced significant employee
turnover, there can be no assurance that it will not experience such turnover in
the future. Any inability of the Company to hire, train and retain a sufficient
number of qualified technical personnel could, among other things, impair the
Company's ability to develop new products and enhance existing products in a
timely manner, which, in turn, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Key Personnel. Landmark's future success will depend on the
continued contributions of its executive officers and key employees. The loss of
the services of any one of the Company's executive officers or other key
employees or the decision of one or more of such officers or employees to join a
competitor or otherwise compete directly or indirectly with the Company could
have a material adverse effect on the business, financial condition and results
of operations of the Company. With the exception of Ralph E. Alexander, who is
President, Chief Operating Officer and Chief Financial Officer of the Company,
Landmark does not have employment contracts with any of its executive officers.
Mr. Alexander's employment agreement is for a term of three years beginning
April 9, 1997.
The Company's future success will also depend on its continuing ability to
identify, hire, train and retain highly qualified sales, marketing and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that Landmark will be able to attract, assimilate or retain such
highly skilled personnel in the future. The inability to attract, hire and
retain the necessary sales, marketing and managerial personnel could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."
Potential Acquisitions. As part of its business strategy, the Company
intends to acquire or invest in complementary companies, products and
technologies, although the Company is not engaged in any negotiations and has no
current or pending arrangements, agreements or understandings with respect to
any acquisitions or investments. Any such future transactions would be
accompanied by the risks commonly encountered in making acquisitions of
companies, products and technologies. Such risks include, among other things,
the difficulty associated with assimilating the personnel and operations of the
acquired companies, the potential disruption of the Company's ongoing business,
the distraction of management and other resources, the inability of management
to maximize the financial and strategic position of the Company through the
successful integration of acquired personnel and technology rights, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers of both the Company and
the acquired business as a result of the integration of new management
personnel. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems
8
<PAGE> 10
encountered in connection with any such acquisitions. In addition, future
acquisitions by the Company could result in the issuance of dilutive equity
securities, the incurrence of debt or contingent liabilities and the
amortization of goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the market price of the Company's Common Stock. See
"Business -- Strategy."
International Sales. Revenues from customers outside the United States and
Canada were 27.6%, 32.4%, 32.4% and 34.2% of total revenues in 1994, 1995, 1996
and for the nine months ended September 30, 1997, respectively. Landmark intends
to continue to expand its operations outside of the United States and Canada and
to enter additional international markets, which will require significant
management attention and financial resources. The Company intends to establish
additional international operations and hire additional personnel in order to
increase its sales levels and gross margins on products sold in these markets.
To the extent that the Company is unable to do so, the Company's growth, if any,
in international sales could be limited, and the Company's business, financial
condition and results of operations could be materially and adversely affected.
There can be no assurance that the Company will be able to maintain or increase
international market demand for its products. International revenue transactions
are denominated in local currencies. Any future unfavorable changes in the
exchange rates of foreign currencies would reduce the U.S. dollar amount of the
Company's revenues from international sales, and would therefore adversely
affect the year to year comparisons of the Company's results of operations. The
Company has not sustained material foreign currency exchange losses and
presently does not attempt to hedge its exposure to fluctuations in foreign
currency exchange rates because this exposure has historically been minimal. The
Company could experience foreign currency exchange losses based upon the amount
of cash and receivables denominated in local currencies held by the Company's
subsidiaries. These amounts have not been significant. Furthermore, the Company
is not exposed to foreign currency exchange losses with respect to its
receivables from international distributors because the distributor's obligation
to the Company is denominated in U.S. dollars at the time a transaction occurs.
Additional risks inherent in Landmark's international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles in certain territories,
adverse tax consequences, restrictions on repatriating earnings and the burdens
of complying with a wide variety of foreign laws. There can be no assurance that
such factors will not have a material adverse effect upon the Company's future
international revenues and, consequently, the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
Reliance on Third Party Distributors. Landmark has historically relied
primarily on third-party distributors to market its products internationally.
Revenues attributable to such distributors were 27.6%, 28.9%, 27.5% and 19.0% of
total revenues in 1994, 1995, 1996 and for the nine months ended September 30,
1997, respectively. Any material increase in the Company's sales through such
third-party distributors as a percentage of total revenues will adversely affect
the Company's average selling prices and gross margins due to the lower unit
prices the Company receives when selling through such distributors. The
Company's agreements with its distributors generally permit the distributor to
market software products in addition to Landmark's. As a result, there can be no
assurance that these distributors will give a priority to marketing the
Company's products or that they will continue to carry the Company's products.
In addition, some agreements allow the distributor to terminate the relationship
without cause or restrict Landmark's ability to terminate the relationship.
There can be no assurance that Landmark will retain any of its current
distributors or that the Company could successfully replace such distributors.
Any of the foregoing changes in Landmark's distribution channels could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing." In addition,
although the Company employs certain controls to ensure an accurate accounting
of revenues generated by distributors, there can be no assurance that all such
revenues will be properly reported to the Company.
Trademarks and Proprietary Rights; Risks of Infringement. The Company
regards its products and technology as proprietary and attempts to protect them
with licensing agreements, patents, trademark and trade secret laws, copyrights,
restrictions on disclosure and confidentiality procedures. Although Landmark
generally enters into license agreements with its customers, distributors and
corporate partners, and
9
<PAGE> 11
confidentiality agreements with its employees and other third parties and
controls access to and distribution of its documentation and other proprietary
information, there can be no assurance that any such person will not copy or
otherwise obtain and use the Company's proprietary technology or products
without its permission, or develop similar technology independently. Landmark
pursues the registration of its trademarks in the United States and
internationally, and has registered certain of its trademarks, including "The
Monitor," and has applied for registration of "Performance Works." Landmark also
pursues U.S. registrations of certain of its copyrights, particularly of the
Company's software products. It is difficult to police unauthorized use of
Landmark's technology, products and trademarks and the Company is unable to
determine the extent to which piracy and misappropriation of its products,
technology and trademarks occur. Software piracy and misappropriation may
adversely affect the Company's results of operations. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. The Company may in the future
rely on "shrink wrap" licenses that are not signed by licensees and, therefore,
may be unenforceable under the laws of certain jurisdictions. Accordingly, there
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate the Company's trademarks, trade secrets and proprietary
technology and rights.
The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
current or future products. 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, result in costly litigation, 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 or at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Intellectual Property."
Risk of Software Defects. Software products as complex as those offered by
Landmark may contain errors or defects, especially when first introduced or when
new versions or enhancements are released. The Company has in the past
discovered software errors in certain of its products and has experienced delays
in shipments of products during the period required to correct these errors.
Despite testing by the Company and by current and potential customers, there can
be no assurance that defects and errors will not be found in new versions or
enhancements of existing products or in new products, after commencement of
commercial shipments. Any such defects and errors could result in adverse
customer reactions, delays in market acceptance, expensive product changes or
loss of revenues, any of which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Benefits of the Offering to Current Shareholders. Patrick H. McGettigan, a
director and Chairman of the Board of the Company, Katherine K. Clark, a
director and Chief Executive Officer of the Company, Jeffrey H. Bergman, a
director of the Company, and the Bergman Family Trust are offering for sale in
the Offering an aggregate of 1,200,000 shares of Common Stock (1,680,000 shares
of Common Stock if the over-allotment option is exercised in full). The Selling
Stockholders will receive an aggregate of approximately $7.8 million in net
proceeds ($10.9 million in net proceeds if the over-allotment option is
exercised in full), based on the initial public offering price and after
deducting the underwriting discount. In addition, all of the current
shareholders of the Company will benefit from the creation of a public market
for the Common Stock held by them. Immediately following the Offering, the
executive officers and directors of the Company will beneficially own shares of
Common Stock having a market value of $56.5 million, based on the initial public
offering price. The average price per share paid to the Company upon issuance of
the shares held by the current shareholders was $0.37. See "Dilution" and
"Principal and Selling Stockholders."
Control by Existing Shareholders. Following the Offering, the Company's
officers, directors and their affiliated entities together will beneficially own
approximately 69.6% of the outstanding shares of Common Stock (65.4% if the
Underwriters' over-allotment option is exercised in full). Accordingly, such
persons, if they were to act as a group, would be able to elect all of the
Company's directors and to otherwise control the
10
<PAGE> 12
outcome of corporate actions requiring stockholder approval, regardless of how
other stockholders of the Company may vote. In addition, this concentration of
ownership may have the effect of delaying or preventing a change of control of
the Company. See "Principal and Selling Stockholders."
Shares Eligible for Future Sale; Registration Rights. Sales of a
substantial number of shares of Common Stock in the public market following the
Offering could adversely affect the market price for the Company's Common Stock.
The sale of Common Stock in the public market is limited by restrictions under
the Securities Act of 1933, as amended (the "Securities Act"), and lock-up
agreements (the "Lock-Up Agreements") under which the holders of such shares
have agreed not to sell or otherwise dispose of any of their shares for a period
of 180 days after the date of this Prospectus (the "Lock-Up Period") without the
prior written consent of C. E. Unterberg, Towbin. However, C. E. Unterberg,
Towbin may, in its sole discretion and at any time without notice, release all
or any portion of the securities subject to the Lock-Up Agreements. Any such
release could have a material adverse effect upon the market price of Landmark's
Common Stock.
On the date of this Prospectus, 68,096 shares not subject to Lock-Up
Agreements will be eligible for sale in the public market in reliance on Rule
144(k) and 105,584 shares will be eligible for sale in the public market
beginning 90 days after the date of this Prospectus in reliance on Rule 701.
Upon expiration of the Lock-Up Period, 7,839,652 shares will be eligible for
sale in the public market subject to compliance with Rule 144 or Rule 701, of
which 7,513,857 are held by affiliates of the Company and will be subject to the
volume and other resale limitations of Rule 144, other than the one-year holding
period. The remaining 325,795 shares not held by Affiliates will be freely
tradeable after expiration of the Lock-Up Period. On the date of this
Prospectus, options to acquire a total of 2,567,756 shares of Common Stock were
outstanding. Of this amount, options to acquire 2,206,643 shares are subject to
Lock-Up Agreements, and options to acquire the remaining 361,113 shares are not
subject to the Lock-Up Agreements and will be eligible for sale in the public
market beginning 90 days after the date of this Prospectus, subject to
applicable vesting requirements and compliance with the Securities Act and
applicable state securities laws.
The Company intends to file a registration statement on Form S-8 under the
Securities Act (the "Form S-8") covering approximately 3,917,618 shares issued
or issuable under its stock incentive and stock purchase plans. Of the shares
covered by the Form S-8, 960,654 shares are subject to vested options as of the
date of this Prospectus. Of these options, options to acquire 889,095 shares are
subject to Lock-Up Agreements and options to acquire 71,559 shares are not
subject to Lock-Up Agreements. The Form S-8 is expected to be filed
approximately 90 days after the date of this Prospectus and will become
effective automatically upon filing.
Further, upon expiration of the Lock-Up Period, holders of approximately
7,501,578 shares of Common Stock will be entitled to certain demand and
piggyback registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price of the Company's Common Stock. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
No Prior Public Market; Potential Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after the Offering. The public offering price has been determined
through negotiations among the Company, the Selling Stockholders and the
representatives of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after the Offering. The
market price of the shares of Common Stock is likely to be highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's results of operations, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the mainframe and client/server computing environments
and other technology industries, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stock of technology companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. See
"Underwriting."
11
<PAGE> 13
Dilution. Investors participating in the Offering will incur immediate and
substantial dilution. To the extent outstanding options or warrants to purchase
Common Stock are exercised, there will be further dilution. See "Dilution" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Anti-Takeover Effects of Certain Charter Provisions. Landmark's Board of
Directors has the authority to issue up to 8,000,000 shares of Preferred Stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders of the Company. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, also could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. After giving effect to
the mandatory redemption of 54,944 shares of Series A Preferred Stock on
November 1, 1997, Landmark currently has two series of Preferred Stock
outstanding, including 855,165 shares of Series A Preferred Stock and 395,195
shares of Series B Preferred Stock. Upon completion of the Offering, all shares
of Series A and Series B Preferred Stock will be converted into Common Stock
and, as a result, no Preferred Stock will be outstanding after the Offering. The
Company has no present intention to issue additional shares of Preferred Stock.
In addition, certain provisions of the Company's Articles of Incorporation and
Bylaws and of Virginia law could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. See "Management" and "Description
of Capital Stock."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby at the initial public offering price are estimated
to be approximately $12.1 million, after deducting the underwriting discount and
estimated offering expenses.
The Company intends to use the net proceeds of the Offering primarily for
working capital and other general corporate purposes, including expansion of the
Company's product development and sales and marketing efforts and potential
acquisitions. The amounts actually expended by the Company for working capital
purposes will vary significantly depending upon a number of factors, including
future revenue growth, the amount of cash generated by the Company's operations
and the progress of the Company's product development efforts. The principal
purposes of the Offering include increasing the Company's equity capital,
creating a public market for the Common Stock and facilitating future access by
the Company to public equity markets. In addition, the Company may acquire or
invest in complementary technologies, products or businesses to broaden or
enhance the Company's current product offerings. However, the Company is not
engaged in any negotiations and has no current or pending arrangements,
agreements or understandings with respect to any such acquisition or investment.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pending the uses described above, the net proceeds from the Offering will
be invested in deposits with banks and in short-term investment grade,
interest-bearing securities, including government obligations and money market
instruments.
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The Company currently intends to retain its future earnings, if any, to fund the
development and finance the growth of its business. The amount and timing of any
future dividends will depend on general business conditions encountered by the
Company, as well as the financial condition, earnings and capital requirements
of the Company and such other factors as the Board of Directors (the "Board")
may deem relevant. Pursuant to an agreement between the Company and the lender
of its term note, the Company may not pay a cash dividend on the Common Stock
without the consent of the lender so long as the term note is outstanding. The
outstanding balance of the term note as of September 30, 1997 was $719,000 and
is payable through January 1999.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis after giving effect to the 3-for-2
split of the Company's Common Stock, (ii) on a pro forma basis after giving
effect to the mandatory redemption on November 1, 1997 of 54,944 shares of
Series A Preferred Stock and, upon the closing of the Offering, the conversion
of the remaining 855,165 shares of Series A Preferred Stock into 833,785 shares
of Common Stock, the conversion of 395,195 shares of Series B Preferred Stock
into 592,793 shares of Common Stock and the lapse of the rights of the holders
of the Redeemable Common Stock Instruments to require the Company to repurchase
the Redeemable Common Stock Instruments, and (iii) as adjusted to reflect the
receipt of the estimated net proceeds from the sale of 2,000,000 shares of
Common Stock in the Offering at the initial public offering price, after
deducting the underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Short-term debt..................................... $ 528,515 $ 528,515 $ 528,515
Long-term debt, net of current portion.............. 190,588 190,588 190,588
Redeemable common stock instruments(1).............. 1,512,002 -- --
Mandatorily redeemable Series A Preferred Stock,
$0.01 par value; 1,300,000 shares authorized;
910,109 shares issued and outstanding, actual..... 6,211,494 -- --
Mandatorily redeemable Series B Preferred Stock,
$0.01 par value; 1,580,779 shares authorized;
395,195 shares issued and outstanding, actual..... 2,609,778 -- --
Stockholders' equity (deficit):
Common Stock, $.01 par value; 30,000,000 shares
authorized; 7,384,010 shares issued and
outstanding, actual; 9,045,446 shares issued
and outstanding, pro forma; 11,045,446 shares
issued and outstanding, pro forma and as
adjusted(2).................................. 73,840 90,455 110,455
Additional paid-in capital..................... 993,981 10,935,647 23,050,647
Accumulated deficit............................ (6,952,847) (6,952,847) (6,952,847)
Foreign currency translation................... 25,483 25,483 25,483
---------- ----------- -----------
Total stockholders' equity (deficit)........... (5,859,543) 4,098,738 16,233,738
---------- ----------- -----------
Total capitalization...................... $ 5,192,834 $ 4,817,841 $16,952,841
========== =========== ===========
</TABLE>
- ---------------
(1) The Redeemable Common Stock Instruments represent 234,858 shares of Common
Stock and options to acquire 194,820 shares of Common Stock issued by the
Company to certain employees pursuant to agreements whereby each holder has
the right to require the Company to repurchase such shares at then current
fair market value as determined by the Board. The right of holders of
Redeemable Common Stock Instruments to require the Company to repurchase
such shares automatically lapses on the closing of the Offering.
(2) Excludes shares of Common Stock reserved for future issuance pursuant to the
Company's stock option plans, other option arrangements and an outstanding
warrant. As of September 30, 1997, 4,372,622 shares were reserved for
issuance under the Company's stock option plans, other option arrangements
and an outstanding warrant, of which options and warrants to purchase
3,140,259 shares at a weighted average exercise price of $3.76 per share
were outstanding. The sale of certain of these shares in the public market
is limited by restrictions under the Securities Act and Lock-Up Agreements.
See "Shares Eligible for Future Sale," "Management," and Notes 10 and 12 of
Notes to Consolidated Financial Statements.
14
<PAGE> 16
DILUTION
As of September 30, 1997, the pro forma net tangible book value of the
Company (the "net tangible book value") was approximately $2,044,572, or $0.23
per share. Net tangible book value per share represents the amount of total
tangible assets of the Company reduced by the amount of total liabilities,
divided by the pro forma number of shares of Common Stock outstanding. After
giving effect to the sale of 2,000,000 shares of Common Stock by the Company at
the initial public offering price and after deducting the underwriting discount
and estimated offering expenses payable by the Company, the net tangible book
value of the Company at September 30, 1997 would have been $14,179,572, or $1.28
per share. This represents an immediate increase in net tangible book value of
$1.05 per share to existing stockholders and an immediate dilution of $5.72 per
share to new investors purchasing Common Stock in the Offering. Dilution per
share represents the difference between the price per share to be paid by new
investors and the net tangible book value per share after the Offering. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share............................... $7.00
-----
Net tangible book value per share as of September 30, 1997....... $0.23
Net tangible book value per share attributable to new
investors....................................................... 1.05
-----
Net tangible book value per share after the Offering.................. 1.28
-----
Dilution per share to new investors................................... $5.72
=====
</TABLE>
The following table sets forth, as of September 30, 1997, the differences
in the total consideration paid and the average price per share paid by the
Company's existing stockholders and the purchasers of shares in the Offering (at
the initial public offering price):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 9,045,446 81.9% $ 3,302,606 19.1% $0.37
New investors................ 2,000,000 18.1% 14,000,000 80.9% 7.00
---------- ----- ----------- -----
Total.............. 11,045,446 100.0% $17,302,606 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
The above computations assume the pro forma adjustments described in
"Capitalization" and no exercise of options or warrants after September 30,
1997. At September 30, 1997, there were outstanding options and warrants to
purchase an aggregate of 3,140,259 shares of Common Stock at a weighted average
exercise price of $3.76 per share. If all of such options and warrants were
exercised, the net tangible book value of the Company as of September 30, 1997
would have been $13,845,614 or $1.14 per share, the increase in net tangible
book value to existing stockholders would have been $0.69 per share and the
dilution in net tangible book value to purchasers of Common Stock in the
Offering would have been $5.17 per share. See "Capitalization,"
"Management -- Executive Compensation," "Management -- Stock Option Plans" and
Notes 10 and 12 of Notes to Consolidated Financial Statements.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein. The
consolidated statements of operations data for the years ended December 31,
1994, 1995 and 1996 and the consolidated balance sheet data at December 31, 1995
and 1996 are derived from, and are qualified by reference to, Consolidated
Financial Statements of the Company which were audited by Price Waterhouse LLP
and are included elsewhere in this Prospectus. The consolidated statements of
operations data for the years ended December 31, 1992 and 1993 and the
consolidated balance sheet data at December 31, 1992, 1993 and 1994 are derived
from the Company's audited financial statements not included in this Prospectus.
The data at September 30, 1997 and for the nine month periods ended September
30, 1996 and 1997 are derived from the Company's unaudited financial statements
for such periods and, in the opinion of the Company's management, contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position at September 30, 1997 and the results of
operations for such interim periods.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
License revenues..................... $13,221 $11,643 $11,268 $10,392 $11,268 $ 7,524 $10,549
Services revenues.................... 18,684 18,860 21,406 24,068 25,288 18,676 19,828
------- ------- ------- ------- ------- ------- -------
Total revenues.................. 31,905 30,503 32,674 34,460 36,556 26,200 30,377
Cost of revenues......................... 6,878 7,267 7,844 7,663 8,913 7,015 4,332
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 25,027 23,236 24,830 26,797 27,643 19,185 26,045
------- ------- ------- ------- ------- ------- -------
Operating expenses
Sales and marketing.................. 10,819 13,219 11,716 13,092 11,671 8,522 10,275
Product research and development..... 7,539 7,780 9,094 12,490 13,924 10,773 10,079
General and administrative........... 7,528 7,319 7,800 6,872 4,776 3,501 3,970
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 25,886 28,318 28,610 32,454 30,371 22,796 24,324
------- ------- ------- ------- ------- ------- -------
Operating (loss) income.................. (859) (5,082) (3,780) (5,657) (2,728) (3,611) 1,721
Net interest and other income............ 1,537 12,059 701 548 713 596 317
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes........ 678 6,977 (3,079) (5,109) (2,015) (3,015) 2,038
Provision for (benefit from) income
taxes.................................. 274 2,651 (1,158) (940) (813) (1,118) 816
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................ $ 404 $ 4,326 $(1,921) $(4,169) $(1,202) $(1,897) $ 1,222
======= ======= ======= ======= ======= ======= =======
Pro forma net income (loss) per share
(1).................................... $ (0.13) $ (0.20) $ 0.12
Shares used to compute pro forma net
income (loss) per share (1)............ 9,578 9,578 10,148
OTHER FINANCIAL DATA:
EBITDA (2)............................... $ 2,859 $ (999) $ 406 $(1,700) $ 3,138 $ 1,214 $ 4,034
Cash flow from operations................ $ 6,552 $ 9,876 $ 1,311 $ (362) $ 4,144 $ 3,443 $ 4,125
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 677 $ 1,197 $ 800 $ 316 $ 339 $ 4,168
Working capital (deficit)........................ (7,327) (3,160) (1,544) (5,985) (4,138) (2,578)
Total assets..................................... 28,294 31,487 33,172 31,479 25,076 28,635
Long-term debt (less current portion)............ 18 4 -- 1,084 592 191
Redeemable Common Stock Instruments.............. 261 311 319 1,049 704 1,512
Mandatorily redeemable preferred stock........... 6,500 5,391 5,391 5,865 5,865 8,821
Stockholders' (deficit) equity................... (1,313) 1,852 (204) (4,915) (6,290) (5,860)
</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 pro
forma net income (loss) per share.
(2) EBITDA represents earnings before net interest and other income, income
taxes, depreciation and amortization expense. EBITDA does not represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operations or other measures of
liquidity determined in accordance with generally accepted accounting
principles. EBITDA may not be comparable to other similarly titled measures
of other companies.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Landmark commenced operations in 1983 with the release of its first
product, a performance monitor for IBM's on-line transaction processing system,
CICS. Since 1983, the Company has introduced a number of additional performance
management products for a variety of mainframe computing environments. In 1993,
financed by the sale of a complementary product line to another software vendor,
Landmark broadened the scope of the environments supported by its performance
management products when it released products which operate in certain
client/server computing environments. Since inception, the Company has financed
its product development activities using cash generated from operations and term
and revolving credit facilities.
During 1996, Landmark re-focused its development efforts in support of
client/server computing environments with the goal of introducing new and
enhanced products, broader platform coverage and additional functionality. In
addition, the Company increased its mainframe development activities, commencing
several new product offerings. Concurrent with these development investments,
the Company's management implemented several initiatives to improve Landmark's
financial performance, including re-negotiation of property leases and employee
benefit plans and tighter cost controls. The Company also refined its sales and
marketing strategy, particularly related to its client/server products, and
accelerated the amortization of capitalized software costs to reflect the
increasingly rapid pace of technology change in the software industry. These
efforts resulted in increased license revenues, increased cost of license
revenues, reduced operating expenses and improved operating results beginning in
1996.
The Company derives its revenues from software licensing and related
services. Service revenues include fees for software maintenance and support,
consulting and training provided by the Company. The Company's maintenance fees
have provided a stable and recurring revenue stream due to relatively high
maintenance renewal rates, which have exceeded 90% each year since inception.
Service revenues were $21.4 million, $24.1 million and $25.3 million, or 65.5%,
69.8% and 69.2% of total revenues, in 1994, 1995 and 1996, respectively.
Revenues are recognized in accordance with AICPA Statement of Position
91-1, "Software Revenue Recognition." Accordingly, sales of perpetual software
licenses are recognized as license revenues when performance under the related
contract is completed, collection is probable and no significant vendor
obligations remain. Service revenues, which primarily consist of maintenance
fees collected prior to the performance of the related services, are recorded as
deferred revenue and recognized ratably over the period during which the
services are performed, generally twelve months.
In certain instances, primarily where the Company is replacing its
competitors' mainframe products, the Company enters into a long-term payment
arrangement with a licensee. Under this type of arrangement, licensees may pay
the license fees plus service fees over a three to five year period, generally
in annual installments. If collectibility by the Company is probable, the
Company recognizes the present value of the contracted stream of payments as an
unbilled receivable in its financial statements. Of this amount, the Company
recognizes the underlying license fee as license revenues and defers the
underlying service fees. As installments are invoiced to the licensee in
accordance with the payment arrangement, the Company reflects a reduction in its
unbilled receivable and an increase in its accounts receivable. In addition, the
Company records service revenues over the related maintenance service period.
Historically, the Company has not granted concessions nor experienced any
significant bad debts associated with these long-term arrangements.
The Company accounts for its software development activities in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed." The Company
capitalizes significant development costs incurred subsequent to the point of
demonstrated technological feasibility and up to the time the product is
available for release to customers. Effective January 1, 1996, the Company
prospectively decreased the estimated economic life of its capitalized software
products from three to five years to 18 months. This reduction in estimated
economic life is considered by management to be necessary in light of (i) the
increasingly rapid pace of change in
17
<PAGE> 19
technology in the market, (ii) the changes implemented by management in early
1996 regarding the Company's pace of development efforts and product
enhancements and introductions, (iii) the fact that shortened development cycles
do not afford the opportunity to use a detail program design, and (iv) the
increased need for the Company to constantly update its products for the latest
technological innovations. Amortization expense recorded in 1996 and the nine
months ended September 30, 1997 would have been $2.3 million lower and $610,000
higher, respectively, if this change had not been made. The effect of the change
was to decrease net income in 1996 by $1.5 million ($0.16 per share) and
increase net income for the nine months ended September 30, 1997 by $370,000
($0.04 per share).
The Company classifies revenue transactions occurring within the United
States and Canada as "North American" transactions and all other transactions as
"international" transactions. The Company records international revenues net of
commissions paid to distributors. International revenue transactions are
denominated in local currencies. Revenues generated by the Company's
international distributors are translated into U.S. dollars at the time the
transaction occurs. The Company has not sustained material foreign currency
exchange losses, and presently does not attempt to hedge its exposure to
fluctuations in foreign currency exchange rates. International revenues
generated by the Company during 1994, 1995 and 1996 totaled $9.0 million, $11.2
million and $11.8 million, respectively, contributing 27.6%, 32.4% and 32.4% of
total revenues in 1994, 1995 and 1996, respectively.
The Company replaced certain of its international distributors with direct
international operations through wholly owned subsidiaries in Australia and
Southeast Asia effective January 1, 1995, in Spain effective April 1, 1996, and
in Austria, the Benelux countries, Germany and Switzerland effective January 1,
1997. The Company's direct international operations contributed $1.2 million and
$1.8 million in revenues in 1995 and 1996, respectively.
18
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth the Company's Consolidated Statements of
Operations expressed as percentages of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues
License revenues.................. 34.5% 30.2% 30.8% 28.7% 34.7%
Service revenues.................. 65.5 69.8 69.2 71.3 65.3
----- ----- ----- ----- -----
Total revenues............... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues
Cost of license revenues.......... 13.6 12.4 15.8 17.9 6.3
Cost of service revenues.......... 10.4 9.8 8.6 8.9 8.0
----- ----- ----- ----- -----
Total cost of revenues....... 24.0 22.2 24.4 26.8 14.3
----- ----- ----- ----- -----
Gross profit...................... 76.0 77.8 75.6 73.2 85.7
----- ----- ----- ----- -----
Operating expenses
Sales and marketing............... 35.9 38.0 31.9 32.5 33.8
Product research and
development..................... 27.8 36.3 38.1 41.1 33.2
General and administrative........ 23.9 19.9 13.1 13.4 13.0
----- ----- ----- ----- -----
Total operating expenses..... 87.6 94.2 83.1 87.0 80.0
----- ----- ----- ----- -----
Operating (loss) income................ (11.6) (16.4) (7.5) (13.8) 5.7
Net interest and other income.......... 2.2 1.6 2.0 2.3 1.0
----- ----- ----- ----- -----
(Loss) income before income taxes...... (9.4) (14.8) (5.5) (11.5) 6.7
(Benefit from) provision for income
taxes................................ (3.5) (2.7) (2.2) (4.3) 2.7
----- ----- ----- ----- -----
Net (loss) income...................... (5.9)% (12.1)% (3.3)% (7.2)% 4.0%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Total revenues. Total revenues increased 15.9% from $26.2 million for the
nine months ended September 30, 1996, to $30.4 million for the nine months ended
September 30, 1997. The increase was attributable to increases in both license
and service revenues.
License revenues. License revenues increased 40.2% from $7.5 million for
the nine months ended September 30, 1996, to $10.5 million for the nine months
ended September 30, 1997. The increase in license revenues is attributable to
increased customer acceptance of existing products, impacted by additional
personnel involved in direct sales activities, the introduction of new products
and product enhancements, and the commencement of direct operations in Austria,
the Benelux countries, Germany and Switzerland on January 1, 1997.
Service revenues. Service revenues increased 6.2% from $18.7 million for
the nine months ended September 30, 1996, to $19.8 million for the nine months
ended September 30, 1997. This increase is a result of growth in North American
service revenues, due to normal price increases and maintenance renewals on
prior year's license transactions, which were partially offset by reduced
international service revenues.
Cost of license revenues. Cost of license revenues includes amortization
of capitalized software costs, product royalties, materials and packaging
expenses. Costs of license revenues were $4.7 million and $1.9 million for the
nine months ended September 30, 1996 and 1997, respectively, representing 62.3%
and 18.0% of license revenues, respectively. The decrease of $2.8 million is
attributable to a reduction in the amortization expense from $4.1 million to
$1.0 million for the nine months ended September 30, 1996 and 1997,
respectively, partially offset by amortization, beginning in 1997, of the
intangible assets acquired from
19
<PAGE> 21
the Company's former distributor in Austria, the Benelux countries, Germany, and
Switzerland. The decrease in amortization expense is due to the completion of
amortization on certain capitalized software costs recorded by the Company in
prior years.
Cost of service revenues. Cost of service revenues consists of personnel
and related costs for customer support, training and consulting services. Costs
of service revenues were $2.3 million and $2.4 million for the nine months ended
September 30, 1996 and 1997, respectively, representing 12.5% and 12.3% of
service revenues.
Sales and marketing. Sales and marketing includes personnel and related
costs for the Company's direct sales organization, marketing staff and
promotional expenses. Sales and marketing expenses were $8.5 million and $10.3
million for the nine months ended September 30, 1996 and 1997, respectively,
representing 32.5% and 33.8% of total revenues. The increase of $1.8 million is
attributable to the expansion of the North American and international direct
sales forces and the creation of the telesales organization within the North
American sales force, offset by a reduction in costs of marketing personnel.
Product research and development. Product research and development
includes personnel and related costs for the Company's development staff.
Product research and development expenses were $10.8 million and $10.1 million
for the nine months ended September 30, 1996 and 1997, respectively,
representing 41.1% and 33.2% of total revenues. The decrease of $700,000 is
comprised of a reduction in the Company's investment in client/server product
development and a reduction in office and technical support expenses, offset by
an increase in the Company's investment in mainframe product development and a
reduction in the amount of development costs qualifying for capitalization.
General and administrative. General and administrative includes salaries
and related costs of administration, finance and management personnel, as well
as legal and accounting fees. General and administrative expenses were $3.5
million and $4.0 million for the nine months ended September 30, 1996 and 1997,
respectively, representing 13.4% and 13.0% of total revenues. The increase of
$500,000 is a result of the favorable settlement in 1996 of an estimated lease
obligation accrued in a prior year, which reduced 1996 expenses by $350,000, and
the recording in 1997 of $570,000 in stock compensation expense, offset by the
impact of management's cost containment efforts.
Net interest and other income. Net interest and other income includes
interest recorded on installment receivables, interest income earned by the
Company on its excess cash balances, interest expense incurred on term and
revolving credit facilities, and exchange gains (losses) incurred by the Company
on foreign exchange transactions. The amount for the nine months ended September
30, 1996 included interest received on a federal tax refund.
Provision for income taxes. The Company records interim period tax
provisions utilizing management's estimate of the approximate effective tax rate
for the year. The Company recorded interim tax provisions of 37.1% and 40.0% for
the nine months ended September 30, 1996 and 1997, respectively.
FISCAL 1994, 1995 AND 1996
Total revenues. Total revenues increased 5.5% from $32.7 million in 1994
to $34.5 million in 1995, and increased 6.1% to $36.6 million in 1996. Increases
in service revenues from 1994 to 1995 were partially offset by reductions in
license revenues during this period; from 1995 to 1996, both license revenues
and service revenues increased.
License revenues. License revenues decreased 7.8% from $11.3 million in
1994 to $10.4 million in 1995, and increased 8.4% to $11.3 million in 1996. The
decline in 1995 license revenues was a result of a temporary decline in sales of
the Company's mainframe products, impacted by reduced emphasis on these products
by the Company's direct sales force as the Company increased its focus on the
client/server market. The increase in 1996 license revenues reflects a focusing
of the Company's direct sales force on larger dollar amount transactions, and
greater success in selling additional products to existing customers.
20
<PAGE> 22
Service revenues. Service revenues increased 12.4% from $21.4 million in
1994 to $24.1 million in 1995, and increased 5.1% to $25.3 million in 1996.
Service revenues were impacted by customer maintenance renewals, the volume of
prior year's license sales, and the effects of increases in the Company's
maintenance prices.
Cost of license revenues. Costs of license revenues were $4.5 million,
$4.3 million and $5.8 million in 1994, 1995 and 1996, respectively, representing
39.5%, 41.3% and 51.3% of license revenues. The decline of $200,000 from 1994 to
1995 is attributable to a 1994 royalty charge of $560,000 resulting from the re-
negotiation of prior year obligations, offset by a 1995 write-off of $510,000 of
previously capitalized software costs after management concluded such amount was
not recoverable. The increase of $1.5 million from 1995 to 1996 is the result
primarily of increased amortization of capitalized software costs and, to a
lesser extent, of product royalties on client/server products which vary with
revenues generated.
Amortization of capitalized software costs totaled $3.2 million, $3.1
million and $4.8 million in 1994, 1995 and 1996, respectively. The increase
between 1995 and 1996 principally is a result of the reduction, effective
January 1, 1996, of the estimated economic life of capitalized software
products. Amortization expense recorded in 1996 would have been $2.3 million
lower without this change.
Cost of service revenues. Costs of service revenues were $3.4 million,
$3.4 million and $3.1 million in 1994, 1995 and 1996, respectively, representing
15.8%, 14.0% and 12.4% of service revenues. In 1995, reductions in personnel
deployed in the Company's technical support center were offset by increased
costs associated with the Company's commencement of direct international
operations in Australia and Southeast Asia. The decline of $300,000 from 1995 to
1996 is a result of further reductions in personnel deployed in the Company's
technical support center and reduced office and other support costs, offset by
increased costs associated with the Company's commencement of direct
international operations in Spain.
Sales and marketing. Sales and marketing expenses were $11.7 million,
$13.1 million and $11.7 million in 1994, 1995 and 1996 respectively,
representing 35.9%, 38.0% and 31.9% of total revenues. The $1.4 million increase
in these expenses from 1994 to 1995 was primarily a result of the Company's
commencement of direct international operations in Australia and Southeast Asia.
The $1.4 million decrease from 1995 to 1996 resulted from elimination of several
sales and marketing programs, consolidation of functions previously spread over
several groups, and reduced office and other support costs.
Product research and development. Product research and development
expenses were $9.1 million, $12.5 million and $13.9 million in 1994, 1995 and
1996, respectively, representing 27.8%, 36.3% and 38.1% of total revenues. The
increase from 1994 to 1995 is a result of significant increases in resources
deployed for the development of the Company's client/server products and
reductions in the amount of software development costs qualifying for
capitalization. The increase in product research and development expenses from
1995 to 1996 reflects increased investments in both mainframe and client/server
products and reductions in the amount of software development costs capitalized.
The Company capitalized software development costs of $1.5 million, $1.1
million and $730,000 in 1994, 1995 and 1996, respectively. The effect of
capitalization of software development costs is to reduce the current period
expenses by such amounts.
General and administrative. General and administrative expenses were $7.8
million, $6.9 million and $4.8 million in 1994, 1995 and 1996, respectively,
representing 23.9%, 19.9% and 13.1% of total revenues. The decline from 1994 to
1995 is a result of the impact of several charges recorded by the Company in
1994, including a $780,000 reserve for a lease obligation and $1.0 million paid
to a former international distributor to resolve a dispute regarding the
termination of the distribution agreement. The 1995 expenses include $770,000 in
stock compensation expense, offset by a credit for the favorable resolution of
certain previously accrued obligations. The decline from 1995 to 1996 is a
result of the Company's cost control efforts including reductions in general
management and legal expenses, reduced severance costs, the favorable settlement
in 1996 of an estimated lease obligation accrued in a prior year, and a reversal
of accruals relating to forfeitures of stock options.
21
<PAGE> 23
Net interest and other income. During the three year period ending
December 31, 1996, these amounts were not material. The 1995 amount includes
foreign exchange losses of $100,000 recorded during the year. The 1996 amount
includes interest received on a federal tax refund.
Provision for (benefit from) income taxes. The Company's effective rates
were 37.6%, 18.4% and 40.3% for 1994, 1995 and 1996, respectively, and differ
from the federal and state statutory income tax rate primarily as a result of
the adjustments of valuation allowances to reflect management's judgment as to
whether certain tax credit carryforwards would expire before utilization by the
Company, and as to the likelihood that foreign subsidiary net operating losses
would not be recovered.
QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data
for each of the eight quarters ended September 30, 1997, both in dollar amounts
and as percentages of total revenues represented by each item of the respective
quarter. This information has been derived from unaudited consolidated financial
statements that, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary to fairly present this
information when read in conjunction with the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30,
1995 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
License revenues.......... $4,112 $1,847 $2,909 $2,768 $3,744 $3,513 $3,319 $ 3,717
Service revenues.......... 5,972 6,201 6,324 6,151 6,612 6,482 6,641 6,705
-------- -------- ------ ------ ------- ------ ------ -------
Total revenues........ 10,084 8,048 9,233 8,919 10,356 9,995 9,960 10,422
-------- -------- ------ ------ ------- ------ ------ -------
Cost of revenues
Cost of license
revenues................ 944 1,643 1,594 1,451 1,087 640 652 607
Cost of service
revenues................ 885 789 770 768 811 782 833 818
-------- -------- ------ ------ ------- ------ ------ -------
Total cost of
revenues............ 1,829 2,432 2,364 2,219 1,898 1,422 1,485 1,425
-------- -------- ------ ------ ------- ------ ------ -------
Gross profit.............. 8,255 5,616 6,869 6,700 8,458 8,573 8,475 8,997
-------- -------- ------ ------ ------- ------ ------ -------
Operating expenses
Sales and marketing....... 3,931 2,680 2,995 2,847 3,149 3,366 3,373 3,536
Product research and
development............. 3,674 3,729 3,811 3,233 3,151 3,231 3,457 3,391
General and
administrative.......... 1,615 1,492 816 1,193 1,275 1,398 1,500 1,072
-------- -------- ------ ------ ------- ------ ------ -------
Total operating
expenses............ 9,220 7,901 7,622 7,273 7,575 7,995 8,330 7,999
-------- -------- ------ ------ ------- ------ ------ -------
Operating (loss) income....... (965) (2,285) (753) (573) 883 578 145 998
Net interest and other
income...................... 18 395 139 62 117 18 138 161
-------- -------- ------ ------ ------- ------ ------ -------
(Loss) income before income
taxes....................... (947) (1,890) (614) (511) 1,000 596 283 1,159
(Benefit from) provision for
income taxes................ 387 (701) (228) (189) 305 239 113 464
-------- -------- ------ ------ ------- ------ ------ -------
Net (loss) income............. $(1,334) $(1,189) $ (386) $ (322) $ 695 $ 357 $ 170 $ 695
======== ======== ====== ====== ======= ====== ====== =======
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30,
1995 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
License revenues........... 40.8% 22.9% 31.5% 31.0% 36.2% 35.1% 33.3% 35.7%
Service revenues........... 59.2 77.1 68.5 69.0 63.8 64.9 66.7 64.3
------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues
Cost of license revenues... 9.4 20.4 17.3 16.3 10.5 6.4 6.5 5.8
Cost of service revenues... 8.8 9.8 8.3 8.6 7.8 7.8 8.4 7.9
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues............. 18.2 30.2 25.6 24.9 18.3 14.2 14.9 13.7
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............... 81.8 69.8 74.4 75.1 81.7 85.8 85.1 86.3
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses
Sales and marketing........ 39.0 33.3 32.4 31.9 30.4 33.7 33.9 33.9
Product research and
development.............. 36.4 46.3 41.3 36.2 30.4 32.3 34.7 32.5
General and
administrative........... 16.0 18.5 8.8 13.4 12.3 14.0 15.1 10.3
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 91.4 98.1 82.5 81.5 73.1 80.0 83.7 76.7
------ ------ ------ ------ ------ ------ ------ ------
Operating (loss) income........ (9.6) (28.3) (8.1) (6.4) 8.6 5.8 1.4 9.6
Net interest and other
income....................... 0.2 4.9 1.5 0.7 1.1 0.2 1.3 1.5
------ ------ ------ ------ ------ ------ ------ ------
(Loss) income before income
taxes........................ (9.4) (23.4) (6.6) (5.7) 9.7 6.0 2.7 11.1
(Benefit from) provision for
income taxes................. 3.8 (8.7) (2.5) (2.1) 2.9 2.4 1.1 4.4
------ ------ ------ ------ ------ ------ ------ ------
Net (loss) income.............. (13.2)% (14.7)% (4.1)% (3.6)% 6.8% 3.6% 1.6% 6.7%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company has historically experienced a seasonal pattern in its license
revenues, and expects this pattern to continue. Historically, the fourth quarter
has higher license revenues than the other three quarters, and the second half
of a year has higher license revenues than the first half. However, these
patterns will be affected by events both within and outside of the Company's
control, including economic conditions, the Company's new product release
schedules and those of its competitors, the timing of customer expenditures, and
the timing of delivery of new hardware platforms, operating systems and
databases by third party vendors.
Cost of license revenues historically has not fluctuated significantly with
revenue. The expense level is primarily impacted by amortization of capitalized
software costs. The amount of research and development costs being capitalized
has been, and likely will continue to be, reduced due to the increasingly rapid
pace of development and technological change. As a result, the relative
amortization expense will, over time, be reduced and therefore have a positive
impact on profits. From 1997 to 2000, cost of license revenues will be impacted
by the amortization of the intangible assets acquired from the Company's former
distributor in Austria, the Benelux countries, Germany and Switzerland. Cost of
service revenues has not historically varied with revenue.
Sales and marketing expenses vary both with revenue and as a result of
changes in the Company's distribution strategy and approach. The Company
believes further expansion of the Company's direct international operations will
increase sales and marketing expenses. Product research and development expenses
vary with the Company's level of investment in new products and the proportion
of such investment which is capitalized by the Company. Beginning in late 1995
and continuing through mid-1996, as a result of the increasingly rapid changes
in technology and anticipated demands of the Company's customers, the Company's
investment in client/server product research and development increased
significantly.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, the Company financed its activities through cash
flow generated by operations and through term and revolving credit facilities.
In March and April 1997, the Company obtained $2.5 million in outside equity
through the issuance of shares of Series B Preferred Stock and repaid in full
the
23
<PAGE> 25
outstanding balance on its revolving credit facilities. As of September 30,
1997, the Company had cash and cash equivalents totaling $4.2 million. The
Company's revolving credit facilities, which expired on June 30, 1997, have not
been utilized by the Company since March 1997.
As a result of significant non-cash expenses, such as depreciation and
amortization, and the advanced billing and collection of annual maintenance
fees, the Company has generated operating cash flow significantly in excess of
its net income. During 1995, the Company's operating cash outflow totaled
$360,000 on net losses of $4.2 million. During 1996, operating cash flow totaled
$4.1 million on net losses of $1.2 million. During the nine months ended
September 30, 1997, operating cash flow totaled $4.1 million on net income of
$1.2 million.
The Company's investing activities include primarily expenditures for fixed
assets in support of the Company's product development activities and
infrastructure, and for capitalized software costs. During 1995, the Company
invested $2.2 million in fixed assets, consisting of computer equipment to
expand and upgrade the Company's development environments and infrastructure.
Continuing this program, the Company invested $730,000 in fixed assets in 1996
and $1.3 million in the nine months ended September 30, 1997. The Company
expects to upgrade, on an ongoing basis, its development environments to meet
changing customer and market requirements.
The Company's investing activities also include amounts recorded as
capitalized software. Of the total research and development expenditures of
$10.6 million, $13.6 million, $14.7 million and $10.1 million for 1994, 1995,
1996 and the nine months ended September 30, 1997, $1.5 million, $1.1 million
and $730,000 were capitalized for the years ended December 31, 1994, 1995 and
1996, respectively.
In 1995, the Company borrowed $1.5 million under a term loan, with interest
at 9% payable monthly and principal due in monthly installments of $47,700
beginning in February 1996 through January 1999, secured by fixed assets. The
balance of this term loan at September 30, 1997 was $719,000. While in the past
the Company has been in default on certain profitability and net worth covenants
associated with its term loan and revolving credit facilities, the lender waived
these defaults in each instance. No financial covenants currently govern the
outstanding term note and the Company is in compliance with the non-financial
covenants associated with the term note.
On May 1, 1997 and on August 1, 1997, the Company made mandatory
redemptions of Series A Preferred Stock each in the amount of $375,000. The
Company will continue to make quarterly redemptions until the Series A Preferred
Stock is either fully redeemed or converted to Common Stock. The Company paid
$153,000 in 1995 and 1996, and $198,000 during the nine months ended September
30, 1997 in dividends to holders of its Series A Preferred Stock. Upon the
closing of the Offering, all the outstanding Series A Preferred Stock will be
converted to Common Stock.
The Company has received a letter from the lender of its term note offering
a commitment for a revolving credit facility. Although it has not accepted or
rejected this offer and there can be no assurance that additional credit
facilities will be available to the Company in amounts or on terms acceptable to
the Company, the Company believes that it will be able to obtain credit
facilities in the future.
The Company believes that cash on hand at September 30, 1997, the net
proceeds from the sale of shares of Common Stock in the Offering and cash flow
generated from operations will provide sufficient liquidity to meet its needs
for at least the next twelve months. To the extent the Company makes
acquisitions of other companies, products or technologies, the Company may use
working capital, sell additional equity or debt securities (which could result
in dilution to the purchasers of the Common Stock offered hereby) or use credit
facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128) entitled "Earnings per
Share". This statement establishes standards for computing and presenting
earnings per share (EPS), simplifying previous standards for computing EPS and
making them comparable to international standards. SFAS 128 replaces the
presentation of primary EPS with
24
<PAGE> 26
a presentation of basic EPS, and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. Basic EPS excludes dilution and is computed by dividing income
available for common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. SFAS 128 requires
restatement of all prior period earnings per share presented, and is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Early application of SFAS 128 is not permitted.
The Company will adopt SFAS 128 for its December 31, 1997 financial
statements and will restate all prior period EPS data. To illustrate the effect
of adoption, the pro forma basic and diluted EPS for the year ended December 31,
1996, and for the nine months ended September 30, 1996 and 1997, are set forth
below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED
DEC 31, ------------------------
1996 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma basic (loss) earnings per share........ $ (0.13) $ (0.20) $ 0.13
Pro forma diluted (loss) earnings per share...... $ (0.13) $ (0.20) $ 0.12
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information."
These statements become effective for the Company's 1998 financial statements.
The Company is evaluating these statements to determine the impact on its
reporting and disclosure requirements.
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<PAGE> 27
BUSINESS
OVERVIEW
Landmark is a leading provider of performance management software products
which measure, analyze, report and predict performance for both mainframe and
client/server computing environments. Landmark's PerformanceWorks product family
is distinct in its ability to monitor the key components of a computing
environment, provide early warning of potential system problems and enable
effective planning for changes in the computing environment. The Company
believes these capabilities improve user productivity, reduce computing costs,
increase system availability and optimize use of system resources. Landmark's
products address performance management across leading hardware platforms,
operating systems from DEC, Hewlett-Packard, IBM, Microsoft and Sun and
databases consisting of DB2, Oracle, SQL Server and Sybase. As of September 30,
1997, Landmark had licensed over 15,300 copies of its products to over 3,900
customers worldwide.
INDUSTRY BACKGROUND
Businesses and other organizations are increasingly relying upon computer
systems to run and manage their key business processes. These processes include
transactions such as credit card validation, electronic commerce, point-of-sale
processing, supply chain management and call center processing and fulfillment.
In doing so, these organizations are able to compete more effectively by
processing transactions more quickly and accurately, responding to customers
more rapidly and achieving lower cost structures. Because of this increased
reliance on computing resources to support business-critical applications, poor
system performance or system failure can have an immediate and substantial
impact on an organization's competitiveness and financial results.
As computer systems are being used increasingly to gain competitive
advantage, they are also becoming more complex. These systems may be comprised
of a variety of inter-operable hardware platforms, operating systems, databases,
networks and applications, each potentially from different vendors, deployed
across widely dispersed geographical locations. Moreover, computing environments
are increasingly dynamic -- users, hardware and software are often added, moved
or changed, and new, business-critical applications are developed and deployed
on an ongoing basis.
As businesses place greater reliance on complex computer systems, the cost
of suboptimal performance increases dramatically. For example, an operator at a
catalog clothing company processing incoming telephone orders uses the system to
enter customer information and the items ordered, check inventory and verify
credit information. The operator waits for a system response after each step in
this process. If the system experiences a degradation in response time, each
order takes longer to process, fewer orders can be processed in a given amount
of time, and potential customers have to wait longer before they can reach an
operator and have their transactions completed. As the effect of a slowdown in
system response time is compounded over tens or hundreds of operators, the
overall impact could adversely affect the business' competitive advantage and
market share.
Performance management software can provide early warning and facilitate
resolution of system problems by monitoring a system's key components, including
the CPU, memory and storage, I/O, disk space, workload, operating system and
network. Identifying and addressing system problems allows businesses to
increase system availability, improve user productivity, reduce computing costs
and limit the adverse business effects of system degradation. Performance
management tools also enable organizations to model or predict system and
application performance which improves the acquisition, development and
implementation of new or changed applications and hardware.
As a result of the increasing need to effectively manage complex computing
environments, revenues from the overall system management software market are
expected to rise to $17 billion by 2000, according to IDC. Performance
management is the largest sector of this market and is expected by IDC to grow
from $1.8 billion in 1996 to $3.1 billion by 2000. For the IBM mainframe
operating environment, IDC estimates that worldwide performance management
software revenues will grow from $1.1 billion in 1996 to $1.4 billion by 2000.
For
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multi-user UNIX and Windows NT server operating environments, IDC estimates that
worldwide performance management software revenues will grow from $400 million
in 1996 to $1.2 billion by 2000.
Landmark believes that businesses are seeking comprehensive performance
management software products with the ability to support heterogeneous computing
environments consisting of numerous types of applications and platforms. These
products must be scalable to support the rapid growth of computing environments
and flexible to accommodate the dynamic nature of these systems. Additionally,
these products should automatically retrieve and manage performance data to
produce useful information for system planning and management decision-making.
This information should be accessible and relevant to real-time, recent past and
historical analyses. Finally, these products should be easy to use, consume
minimal computing resources and adhere to industry standards.
THE LANDMARK SOLUTION
Landmark's PerformanceWorks product family enables businesses to optimize
system performance and resource utilization while maintaining a high and
consistent level of user productivity. Landmark's products provide the ability
to transform raw data into useful information through an intelligent aggregation
and automatic summarization process, which collects data on a continuous basis
and generates summary information at prescribed intervals. This data can be
measured against a variety of performance thresholds and easily formatted into
understandable reports to facilitate the quick identification and resolution of
performance problems. In addition, Landmark's products self-manage the
collection, summarization and distribution of performance data, and consequently
require minimal computing and personnel resources. As a result of this efficient
gathering, storage and presentation of performance data, Landmark's products are
scalable to accommodate system growth.
Landmark's solutions are based on its "lifecycle" view of performance
management and are designed to allow customers to address each stage of the
application lifecycle: planning, development and production. Landmark views
performance management as a continuous process in which each stage of the
application lifecycle provides input and feedback for the next.
[This picture shows three arrows, each identifying a stage in the application
lifecycle, forming a circle. The activities performed at each stage of the
lifecycle are identified.]
Planning stage. Landmark's products are used to identify resource
requirements and to establish appropriate service levels through modeling,
trend analysis and load simulation (simulating use of computing resources
at different percentage levels of total capacity).
Development stage. Landmark's products perform application tuning
(adjusting applications to optimize performance), assist in stress testing
(simulation of maximum workloads on computing resources) and conduct
resource impact analysis to assess application performance prior to
deployment.
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<PAGE> 29
Production stage. Landmark's products provide data collection, real-time
monitoring and troubleshooting to provide optimal system operation.
After the initial deployment is completed, the application lifecycle begins
again with planning for additional deployments or modifications to the computing
environment.
Landmark's products address performance management across leading hardware
platforms, operating systems from DEC, Hewlett-Packard, IBM, Microsoft and Sun
and databases consisting of DB2, Oracle, SQL Server and Sybase. Each of
Landmark's products has been developed to work with different configurations of
system components from multiple vendors while providing comparable functionality
across each platform.
Through its maintenance and support program, Landmark offers its customers
extensive technical support, including telephone consultation, product
maintenance and product upgrades. Landmark also provides its customers with
consulting and training services. Historically, over 90% of Landmark's customers
have renewed their support and maintenance arrangements with the Company.
STRATEGY
Landmark's objective is to strengthen its position as a worldwide leader in
providing performance management software solutions by addressing customers'
performance management needs throughout the application lifecycle. By
establishing relationships at the beginning of the application lifecycle, the
Company positions itself to continue providing products and services to the
customer in the future.
Landmark's strategy includes the following key elements:
Enhance, Extend and Expand Performance Management Products. Landmark
is leveraging its 14 years of experience providing performance management
solutions to enhance the functionality of and extend the hardware
platforms, operating systems and databases supported by existing mainframe
and client/server products. In addition, the Company plans to develop new
products providing performance management solutions in support of different
application vendors. As a result of its relationships with major vendors of
hardware platforms, operating systems and databases, Landmark is often
selected to participate in beta testing of new products and upgrades. The
Company believes that this early access to new technologies gives it a
strategically important opportunity to upgrade its existing products and to
develop new products. The Company plans to enhance, extend and expand its
product offerings through internal development and through acquisitions.
See "-- Grow Through Acquisitions and Partnering Arrangements."
Capitalize on Large Installed Customer Base. As of September 30,
1997, Landmark had over 3,700 customers licensing performance management
products for the mainframe environment and 200 customers licensing its
client/server products. The Company expects to continue selling additional
products to its current customers as they upgrade their computing systems
by adding new hardware and software to address evolving business-critical
needs. Landmark also plans to sell client/server products to existing
mainframe customers who are expanding their computing environments to
include distributed systems.
Strengthen Worldwide Distribution Capability. Landmark provides
performance management products and services to customers worldwide. In the
United States and Canada, the Company employs a direct sales force
comprised of field sales representatives and systems engineers. In January
1997, the Company established a telesales force to support and complement
its North American field sales operations. The Company believes that the
telesales force permits the field sales force to focus on account
opportunities with major businesses involving larger dollar transactions,
and on establishing and maintaining relationships with these organizations,
thereby increasing the productivity of the direct sales effort. Although
the majority of the Company's international sales are currently conducted
through third party distributors, the Company has in place a direct sales
force in Australia, the Benelux countries, Germany, Hong Kong, Spain and
the U.K. Landmark intends to expand its world-wide distribution capability
by growing its direct sales force and by establishing additional
relationships and joint marketing programs with system integrators and
original equipment manufacturers ("OEMs").
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<PAGE> 30
Grow Through Acquisitions and Partnering Arrangements. Landmark
intends to accelerate its growth by acquiring or licensing products and
technologies that enhance or expand the Company's current product
offerings. In addition, Landmark intends to selectively acquire or partner
with companies offering complementary products and businesses. The Company
believes that this growth strategy will allow it to enhance the
functionality of its PerformanceWorks products, extend the number of
platforms which the Company's products support and expand the number of
products it offers. Although Landmark evaluates opportunities on an ongoing
basis, it is not engaged in any negotiations and has no current or pending
arrangements, agreements or understandings with respect to any acquisitions
or investments.
TECHNOLOGY AND PRODUCTS
The PerformanceWorks family of products is comprised of PerformanceWorks
for MVS, PerformanceWorks for VSE, PerformanceWorks for UNIX and
PerformanceWorks for Windows NT. PerformanceWorks enables a user to monitor and
analyze performance metrics in three different timeframes: real-time,
recent-past and historical.
- Real-time monitoring. Real-time monitoring allows users to view the
current status of the computing environment. To do this, performance
metrics are collected from throughout the system and displayed
graphically at a single workstation. The real-time monitoring feature can
be used as an early warning tool by establishing thresholds against which
critical performance metrics are measured. If a metric or combination of
metrics exceeds the established threshold, an alarm is generated to
notify the user of a potential system or application problem. The user is
then guided through increasingly detailed levels of performance data
until the cause of the problem is identified. The user can then either
solve the problem or an automated action can be triggered to correct the
problem.
- Recent-past monitoring. Recent-past monitoring displays the performance
metrics collected within the past few minutes or hours. If a system has
experienced a degradation in performance, recent-past monitoring can be
used to review the performance metrics leading up to the occurrence of
the problem to help identify its source and to facilitate a resolution.
Recent-past monitoring can also be used to identify trends in system
utilization and performance which may result in system errors. These
trends can be used to predict and prevent future system problems.
- Historical data analysis. Historical data analysis is used to review
performance metrics collected over days, weeks and months to understand
how system resources have been used and whether trends have developed
which could lead to future performance problems. Landmark's products
automatically store and aggregate performance data so users can quickly
retrieve and view information over the desired period of time from
multiple systems on one report.
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TECHNOLOGY. The technology underlying the PerformanceWorks family of
products is based on a multi-tiered architecture which can be represented by a
data collection layer, a core services layer and a user interface and external
tools layer.
[This picture provides a conceptual representation of PerformanceWorks
architecture, showing user interface and external tools layer, core services
layer and data collection layer.]
Data Collection Layer. The data collection layer consists of
PerformanceWorks agents, referred to as "SmartAgents," designed to collect
performance data automatically for on-line analysis and historical data storage
and to translate the data into useable information. SmartAgents are installed on
each element in the computing environment for which performance metrics will be
monitored and automatically collect performance data at set intervals. After
collection, SmartAgents compare the collected information against defined
thresholds. If any threshold is exceeded, the SmartAgent will generate a warning
or error message.
Core Services Layer. The core services layer is comprised of three key
components: data management, data brokering and network services.
Data Management. The data management component manages the storage
and retention of performance data throughout the system and includes the
following functionalities:
- Data normalization gathers disparate performance data and normalizes it
into common categories, such as CPU, memory, disk I/O, workload, disk
space and network. Users can view similar performance data from different
hardware platforms, operating systems and databases and easily make
comparisons and draw conclusions.
- Data summarization averages performance data into logical intervals of
minutes, hours, days, weeks, months and years. Without time-consuming
preparation, users can view data in various formats in order to identify
trends quickly.
- Data administration records all information in a data store, allowing
users to manage and protect performance data. Data administration also
provides efficient storage of collected performance data.
Data Brokering. The data brokering component receives all incoming
requests and routes them either to the appropriate SmartAgent for real-time
data or to a data store for historical data without requiring that the
end-user have knowledge of where these components are located.
Network Services. The network services component provides a registry
and look-up service that allows transmission of real-time, recent past and
historical performance data from where it is collected to
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<PAGE> 32
where it is used. Since the architecture of a distributed computing
environment frequently changes with the addition or deletion of servers,
applications and users, the registry is designed to communicate changes in
system configuration automatically.
Landmark supports third party applications and access to performance data
by publishing detailed record formats and by providing application programming
interfaces ("APIs") for standard Open Data Base Connectivity ("ODBC")
applications and Simple Network Management Protocol ("SNMP") interface modules
for industry leading systems and network management frameworks.
User Interface and External Tools Layer. The user interface for
PerformanceWorks allows users to view and analyze the status of their critical
applications. Performance management data for each application can be viewed
statistically and graphically to show consumption of system resources, proximity
to critical threshold values and alarm situations requiring immediate attention.
In addition, users can generate customized reports incorporating any combination
of real-time, recent-past and historical performance data analyses. The
available user interfaces operate using Motif (UNIX), Windows 95/NT (NT), OS/2
(MVS-NaviPlex) and 3270 (MVS and VSE).
In addition to the user interfaces provided directly by Landmark's
products, customers can also gain access to PerformanceWorks data through the
use of external tools provided by third party vendors. Published record formats
are utilized by third party vendor products such as Computer Associates MICS,
Merrill Consultants MXG, IBM SNAPSHOT, SAS and BGS Systems Best/1. ODBC
connectivity permits a multitude of applications, including Microsoft Excel and
Lotus 1-2-3, to be used to process, analyze, and report on Landmark's
performance data. In addition, SNMP integration modules allow PerformanceWorks
products to operate within leading systems management frameworks including IBM
Netview, Tivoli TME, Hewlett-Packard OpenView, Computer Associates Unicenter,
Cabletron Spectrum and Sun Solstice.
PRODUCTS. The ability to monitor performance metrics from each system
component in a complex, heterogeneous computing environment is a key feature of
Landmark's software, particularly because performance problems in these
environments can originate from any one or a combination of components.
[Illustration of components in a complex, heterogenous computing environment
consisting of an application client, middleware, application server and
relational database management system.]
If applications running in a distributed environment are experiencing slow
response time, the cause of the problem could be a memory problem on the
distributed application server, a disk contention problem (where two or more
applications are attempting to access the same data simultaneously) on the
mainframe database server, an overloaded network, a poorly written application
or any combination of these conditions. By monitoring performance data from each
of the system components, Landmark's products are able to efficiently identify
the source of the problem so a solution can be implemented quickly or the
potential problem can be anticipated and avoided altogether by taking immediate
corrective actions. The Company believes its users
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benefit from the ease of use, depth of metrics and diagnostic tools it provides,
as well as the level of intelligent integration which allows enhanced
manageability in production environments.
Landmark's products are easily installed and implemented and generally do
not require additional customization before the products can be used by the
customer. The Company's products are also easily tailored so that the
performance metrics, data retention standards and data storage locations are
appropriate for each customer.
LANDMARK'S FAMILY OF PERFORMANCEWORKS PRODUCTS
<TABLE>
<CAPTION>
MVS VSE UNIX WINDOWS NT
<S> <C> <C> <C> <C>
Core Performance Monitor MVS VSE HP-UX Windows NT
CICS/MVS CICS/VSE DEC SQL Server
CICS/ESA VM Contention IBM/AIX
VTAM Monitor SUN/OS
DB2 Sun Solaris
SQL/Capture Oracle
Sybase
Capacity Planning Interface to third Interface to third Predictor
party software party software
User Interface NaviGraph NaviGraph SmartStation SmartStation
NaviPlex
Integrated Interfaces SNMP SNMP SNMP
Vendor API's ODBC ODBC
Number of licenses (as of
September 30, 1997) 6,500 1,900 5,900 1,000
Average transaction size (during
the nine months ended
September 30, 1997) $60,500 $14,100 $26,500 $33,300
</TABLE>
The Company derived 93.0%, 90.3%, 89.2% and 87.8% of its revenues from
mainframe products and services in fiscal years 1994, 1995, and 1996 and the
nine months ended September 30, 1997, respectively. See "Risk
Factors -- Dependence on Certain Products."
PerformanceWorks for MVS. PerformanceWorks for MVS is Landmark's
integrated set of performance management tools for use in the MVS environment
and consists of The Monitor for CICS, The Monitor for DB2, The Monitor for MVS,
The Monitor for VTAM, NaviGraph and NaviPlex. Landmark's family of MVS products
provide a complete solution for optimizing and monitoring environments running
the MVS operating system.
The Monitor products support data collection in the mainframe
environment for real-time, recent-past and historical performance
management monitoring. Each of these products incorporates Landmark's
Navigate technology which provides intelligent transfer of control from one
monitor to another, facilitating intuitive problem solving.
NaviGraph provides users with a graphical display of the performance
of key applications and system resources. NaviGraph is an easy-to-use,
Windows-based display providing a single point of access and control for
monitoring and analysis of the data collected by The Monitor products.
NaviPlex is designed for IBM's Parallel Sysplex technology which
introduces to mainframe environments performance complexities similar to
those of a distributed processing environment. NaviPlex consolidates
performance information from all MVS system environments into a single
workstation for managing performance issues, handling exception conditions
and trending information.
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PerformanceWorks for VSE. PerformanceWorks for VSE is similar to
PerformanceWorks for MVS in terms of the performance management functionality.
PerformanceWorks for VSE includes The Monitor for VSE, The Monitor for CICS,
NaviGraph and VM Contention Monitor.
PerformanceWorks for UNIX. PerformanceWorks for UNIX is Landmark's
integrated set of performance management tools for use in the UNIX environment
and consists of SmartAgent for UNIX, SmartAgent for Oracle, SmartAgent for
Sybase, SmartStation and Predictor.
SmartAgent for UNIX, SmartAgent for Oracle and SmartAgent for Sybase
provide collection of performance metrics for each UNIX operating system
and database supported. Specific metrics collected vary with the individual
platforms. SmartAgents employ the Core Services features of the
PerformanceWorks architecture to manage, analyze and present performance
data across tens or hundreds of locations operating with hundreds or
thousands of servers.
SmartStation provides a central control point to access performance
information collected by SmartAgents. Information is presented in
easy-to-understand charts, graphs, reports and gauges. Alarms warn of
potential system problems before they become serious. SmartStation provides
a complete set of pre-configured reports and graphics which can be tailored
to users' specific needs. Users can also define exception conditions, and
SmartStation will provide an alarm when performance thresholds are
exceeded. The alarms provide the user with an explanation of the error,
sending notifications through email systems, alphanumeric pagers and
management platforms. In addition, the alarms can be configured to take
corrective actions automatically.
Predictor is a capacity planning tool designed to help planners in
determining the types and quantities of new equipment and software required
to handle increased system utilization and performance requirements. Based
on the performance metrics stored for historical data analysis, Predictor
can predict the impact of adding new applications, modifying an existing
application, removing an application, adding users, changing the server
hardware configuration or changing the server entirely.
PerformanceWorks for Windows NT. PerformanceWorks for Windows NT is
similar to PerformanceWorks for UNIX in terms of the performance management
functionality of products currently available in the Windows NT environment.
PerformanceWorks for Windows NT includes SmartAgent for NT, SmartAgent for SQL
Server and SmartStation.
SERVICES
Landmark offers its customers a maintenance and support program which
provides telephone consultation, product maintenance and product upgrades.
Customers can communicate with Landmark technical support representatives 24
hours-per-day, 7 days-per-week. In addition, Landmark provides its customers and
distributors access to on-line maintenance information through an Internet-based
application. Landmark's maintenance and support program entitles participants to
product enhancements and upgrades as well as maintenance information. The first
year of maintenance and support is typically included in the license fee and
thereafter may be renewed for an annual fee. Historically, over 90% of
Landmark's customers have renewed their maintenance and support arrangements
with the Company.
In January 1997, Landmark established a Professional Services organization
to offer consulting services to users of its products. These consulting services
are designed to support the effective deployment and implementation of
Landmark's products by assisting in the location of appropriate components on
which to run Landmark's software, identifying which performance metrics to
monitor, establishing rules concerning how to aggregate, retain and store data,
and customizing the presentation of reports generated from the collected
information. The demand for these consulting services has grown as
business-critical applications are increasingly deployed in complex,
heterogeneous computing environments. Moreover, many businesses lack sufficient
technical staff to fully implement Landmark's performance management solution
and require external assistance. The Professional Services organization offers a
variety of training programs to assist customers in implementing Landmark's
performance management tools, including a number of standard programs and custom
presentations to fulfill specific requests. Training courses are held at
Landmark's Vienna, Virginia training center as well as on-site at customers'
facilities.
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CUSTOMERS
The Company's target customers consist of organizations across a wide
variety of industries that are developing or have deployed business-critical
applications in complex, multi-user environments. The following table lists
certain customers of the Company that have purchased at least $50,000 of the
Company's products and services during the twelve months ended September 30,
1997:
ABN-AMRO
Alpine Computer Services
American Electric Power Service Co.
Amoco
Beiersdorf AG
Blue Cross Blue Shield of Georgia
BMW AG
J.I. Case Corporation
Centraal Beheer Holding BV
ChoicePoint
CSC Australia
Deutsche Bahn AG
First American National Bank
First of America Computer Services
Foundation Health Corporation
Frontier Information Technologies
Great West Life Assurance
IBM and ISSC
Ikon Capital
ING US Insurance Holding
Kodak
Lockheed Martin
Mercantile Bank
MicroAge Computer Centers
Old Mutual
Physicians Mutual Insurance
Proffitt's
Putnam Investor Services
Sony Nederland BV
Spartan Stores
Thrift Drug
Wachovia Bank
Wells Fargo Bank
Westpac Banking
Whirlpool Corporation
Zurich Kemper
SALES AND MARKETING
Landmark markets its products and services through its North American and
international sales organizations. The North American direct sales force, which
covers the United States and Canada, consists of field sales representatives,
mainframe and client/server system engineers and telesales personnel. The
telesales force was established in January 1997 to increase the productivity of
the field sales representatives by undertaking a variety of support activities.
These include generating and following up on leads, handling and closing smaller
transactions, maintaining a current database of existing and potential customers
and providing general assistance and account management. Each telesales
representative supports the efforts of two direct sales representatives. The
Company believes that the telesales force permits the field sales force to focus
on account opportunities with major businesses involving larger dollar
transactions, and on establishing and maintaining relationships with these
organizations. Landmark intends to establish additional relationships with
system integrators and OEMs to expand the breath of its sales channel. See
"Business -- Strategy."
Landmark has historically relied primarily on third-party distributors to
market and sell the Company's products internationally. Revenues from
international sales accounted for 27.6%, 32.4%, 32.4% and 34.2% of total
revenues in 1994, 1995, 1996 and for the nine months ended September 30, 1997,
respectively. Of those amounts, 27.6%, 28.9%, 27.5% and 19.0%, respectively,
were attributable to third party distributors. Landmark has recently established
a direct sales force in certain strategic international markets to increase
sales levels and gross margins on products sold in such markets. To date,
Landmark's international direct sales efforts consist of six sales offices
located in London, Dusseldorf, Utrecht (Netherlands), Madrid, Melbourne and Hong
Kong.
The Company also maintains relationships with leading vendors including
DEC, Hewlett-Packard, IBM, Microsoft, Oracle, Sun, Sybase and Tivoli. These
relationships afford the Company opportunities to participate in joint marketing
programs with the vendors such as sales seminars, trade shows and other
promotional activities.
Revenues received from individual customers of the Company vary
significantly based on the size of the product installation. The sales cycle for
Landmark's products is lengthy and unpredictable, and may range from a few
months to over a year, depending upon the interest of the prospective customer
in the Company's products, the size of the order (which may involve a
significant commitment of capital by the customer), the decision-making and
acceptance procedures within the customer's organization and other factors.
PRODUCT DEVELOPMENT
Since its inception in 1983, Landmark has made substantial investments in
performance management software development. In 1994, 1995, 1996 and for the
nine months ended September 30, 1997, Landmark's product development
expenditures, including amounts capitalized, totaled $10.6 million, $13.6
million,
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<PAGE> 36
$14.7 million and $10.1 million, respectively. The Company anticipates that, in
the future, it will continue to commit substantial resources to research and
development. Landmark maintains mainframe, UNIX and Windows NT development labs
which it uses to develop, enhance and test its products. Landmark believes that
its future success will depend in large part on its ability to continue to
enhance the functionality of its existing products, extend its product line to
support additional hardware and software platforms, respond to changing customer
requirements and develop and introduce in a timely manner new products that keep
pace with technological developments and emerging industry standards. See "Risk
Factors -- Rapid Technological Change; Product Development."
As of September 30, 1997, the Company had 97 employees engaged in product
development. As it continues to implement its growth strategies, Landmark
intends to increase the size and depth of its product development operation.
However, competition for highly qualified technical employees is intense and
there can be no assurance that the Company will be successful in recruiting or
retaining product development employees. See "Risk Factors -- Need to Attract
and Retain Qualified Technical Personnel."
INTELLECTUAL PROPERTY
Landmark relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and corporate partners, and license agreements with its customers,
distributors and corporate partners with respect to its software, product
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of the Company's products is
difficult, and Landmark is unable to determine the extent to which piracy of its
software products and misappropriation of its technology occur. Software piracy
and misappropriation may adversely affect the Company's results of operations.
Landmark currently relies on signed license agreements, but may in the future
rely on "shrink wrap" licenses that are not signed by licensees and, therefore,
may be unenforceable under the laws of certain jurisdictions. In addition,
effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. There can be no assurance that the Company's
protection of its proprietary rights, including any patent that may be issued,
will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
any patents issued to the Company or other intellectual property rights.
Landmark is not aware that any of its products infringes the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products in the
industry segment overlaps. Any such claims, with or without merit, could result
in costly litigation that could absorb significant management time, which could
have a material adverse effect on Landmark's business, financial condition and
results of operations. Such claims might require the Company to enter into
royalty or license agreements. Such royalty or license agreements, if required,
may not be available on terms acceptable to Landmark or at all, which could have
a material adverse effect upon the Company's business, financial condition and
results of operations. See "Risk Factors -- Trademarks and Proprietary Rights;
Risks of Infringement."
COMPETITION
The market for performance management software is intensely competitive,
fragmented and characterized by increasingly rapid technological developments,
evolving standards and rapid changes in customer requirements. To maintain and
improve its position in this market, Landmark is enhancing current products and
the inter-operability of its products with one another and developing new
products. Landmark competes primarily with vendors that provide mainframe
performance management software and vendors that provide client/server
performance management software. The Company believes that principal competitors
with respect to mainframe performance management software products include
Candle Corporation and Boole and Babbage, Inc. In the client/server market,
Landmark believes that its principal competitors include BMC Software, Inc.,
Compuware Corporation, BGS Systems Inc. and Platinum technologies, inc. The
Company
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<PAGE> 37
believes that no single principal competitor currently offers products in each
of the mainframe, UNIX and Windows NT operating environments.
Some of the Company's competitors have longer operating histories and
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
those of the Company. The Company's current and future competitors could
introduce products with more features, greater scalability, increased
functionality and lower prices than the Company's products. These competitors
could also bundle existing or new products with other, more established products
in order to compete with the Company. The Company's focus on performance
management software may be a disadvantage competing with vendors that offer a
broader range of products. Moreover, as the client/server performance management
software market develops, a number of companies with significantly greater
resources than those of the Company could increase their presence in this market
by acquiring or forming strategic alliances with competitors or business
partners of the Company. In addition, due to potentially lower barriers to entry
for platform-specific niche products in the performance management software
market, the Company believes that emerging companies may enter this market,
particularly in the client/server environment. Increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any of which could materially and adversely affect the Company's business,
financial condition and results of operations. Any material reduction in the
price of the Company's products would negatively affect gross margins and would
require the Company to increase software unit sales in order to maintain gross
profits. 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, financial
condition and results of operation.
The principal competitive factors affecting the market for Landmark's
products are functionality and features (including breadth of data collection,
data management, integration and modeling), product quality, platform coverage,
product architecture, price, customer support and name recognition. Based on
these factors, the Company believes that it has competed effectively to date. In
the future, Landmark will be required to respond promptly and effectively to the
challenges of technological change, its competitors' innovations and customer
requirements. There can be no assurance that Landmark will be able to provide
products that compare favorably with the products of the Company's competitors
or that competitive pressures will not require the Company to reduce its prices.
See "Risk Factors -- Intense Competition."
EMPLOYEES
As of September 30, 1997, the Company employed 247 full time personnel,
including 97 in product development, 28 in technical support, 82 in sales and
marketing, and 40 in finance and administration. The Company's employees are not
represented by any collective bargaining organization, and the Company has never
experienced a work stoppage. The Company believes its success will depend in
part on its continued ability to attract and retain highly qualified personnel
in an intensely competitive market for experienced and talented software
engineers and sales and marketing personnel. The Company believes that its
relationship with its employees is satisfactory. See "Risk Factors -- Dependence
on Key Personnel" and "-- Need to Attract and Retain Qualified Technical
Personnel."
FACILITIES
Landmark's headquarters are located in 88,000 square feet of office space
in Vienna, Virginia, under a lease expiring in June 2003, with a renewal option
for an additional five years. The Company also leases approximately 4,000 square
feet of office space in Oak Brook, Illinois under a lease expiring in April
1999. In addition, Landmark leases office space in London, Dusseldorf, Utrecht
(Netherlands), Madrid, Melbourne and Hong Kong. Landmark believes that its
existing facilities and offices are adequate to meet its requirements for the
foreseeable future.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and proceedings
arising out of the ordinary course of its business. There are no pending legal
proceedings to which the Company is a party or to which the property of the
Company is subject.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
Patrick H. McGettigan.............. 56 Chairman of the Board of Directors
Katherine K. Clark................. 40 Chief Executive Officer and Director
Ralph E. Alexander................. 51 President, Chief Operating Officer, Chief
Financial Officer, Treasurer, Secretary and
Director
Leslie J. Collins.................. 41 Vice President, Finance
Theodore L. Cruse.................. 39 Vice President, North American Sales
John D. Hunter..................... 51 Vice President, Mainframe Products
Mark E. Knecht..................... 47 Vice President, Marketing and Business Development
Andrew L. McCasker................. 34 Vice President, Distributed Products
Roger A. Philips................... 51 Vice President, International Sales
Henry D. Barratt, Jr.(2)........... 45 Director
Jeffrey H. Bergman(1).............. 53 Director
T. Eugene Blanchard(1)(2).......... 66 Director
Patrick W. Gross(2)................ 53 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
PATRICK H. MCGETTIGAN, a co-founder of the Company, has served as Chairman
of the Board of Directors since 1982. Mr. McGettigan is the author of Landmark's
initial product, The Monitor for CICS. Mr. McGettigan served as President of the
Company from 1982 to 1989 and as Chief Executive Officer from 1982 to 1994.
Prior to founding Landmark, Mr. McGettigan held a variety of technical and
systems programming positions over a 17 year career at Blue Cross and Blue
Shield of the National Capital Area.
KATHERINE K. CLARK, a co-founder of Landmark, has headed product
development, technical support, finance and human resources at various times
over Landmark's history, has been a director of Landmark since 1983 and from
November 1993 to September 1997 was President of the Company. In 1994, Ms. Clark
assumed her current role as Chief Executive Officer of the Company and is
responsible for the long-term strategic direction of the Company.
RALPH E. ALEXANDER joined Landmark in November 1995 as Chief Financial
Officer, became Chief Operating Officer in March 1996, a director in March 1997
and President in September 1997. Prior to his employment with Landmark, Mr.
Alexander served as Executive Vice President and Chief Financial Officer of
Rational Software Corporation, a software development company, from 1994 to
1995. From 1991 to 1994, Mr. Alexander served as President and Chief Executive
Officer of Verdix Corporation, a software development company, which merged with
Rational in 1994.
LESLIE J. COLLINS has served as Vice President, Finance since September
1993, with responsibility for financial planning, operations and reporting,
contracting and purchasing activities, and information systems. From March 1990
to September 1993, Ms. Collins was Landmark's Director of Finance.
THEODORE L. CRUSE has served as Landmark's Vice President, North American
Sales since May 1996, with responsibility for sales and sales support within the
United States and Canada. Mr. Cruse served as Landmark's Director, North
American Sales, from June 1995 to May 1996 and as a Regional Sales Manager from
February 1993 to June 1995. Prior to joining Landmark, Mr. Cruse served as
Director, North American Sales, at Platinum technology, inc. from November 1991
to February 1993.
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<PAGE> 39
JOHN D. HUNTER has served as Landmark's Vice President, Mainframe Products
since June 1994. Mr. Hunter is responsible for strategy, development,
maintenance and planning for Landmark's mainframe product lines. Mr. Hunter
joined Landmark in August 1992 as Vice President, Development and Technology
after 24 years with IBM, during which time he held management roles in various
IBM development labs and was responsible for IBM's worldwide standards
participation as director of architecture and telecommunications.
MARK E. KNECHT has served as Vice President, Marketing and Business
Development since March 1997, and is responsible for Landmark's marketing and
business development efforts. Prior to joining Landmark, Mr. Knecht served as
Vice President/General Manager, Software Division, of DataFocus, a software
development company, from October 1995 to February 1997. Mr. Knecht worked at
NCR Corporation, and its successors, from 1975 to 1995 where he held various
positions in marketing, management and engineering.
ANDREW L. MCCASKER has served as Vice President, Distributed Products since
April 1996, and is responsible for product strategy, development, maintenance
and planning for Landmark's client/server product lines. From January 1995 to
April 1996, Mr. McCasker served as Landmark's Director of Strategic Marketing.
Prior to joining Landmark in 1995, Mr. McCasker served as Director, Technology
and Planning for the Enterprise Network Applications Division of Legent
Corporation, a software development company, from October 1993 to January 1995
and also served on Legent's Architecture Board from June 1994 to January 1995.
Mr. McCasker served as Manager of Product Development at Systems Center, Inc., a
software development company, from September 1989 to October 1993.
ROGER A. PHILIPS has served as Landmark's Vice President, International
Sales since September 1994, with responsibility for sales and operations outside
of the United States and Canada. Prior to joining Landmark, Mr. Philips was
General Manager, International for Viasoft, Inc., a software development
company, from 1988 to 1994.
HENRY D. BARRATT, JR. has served as a director of Landmark since March
1997. Since January 1996, Mr. Barratt has been Managing Director of Blue Water
Capital, LLC, a venture capital management company. From September 1994 to
January 1996, Mr. Barratt was President of The Drayton Company, an investment
banking firm, and from March 1990 to August 1994 was a partner with CEO Venture
Fund, a venture capital company. In addition, Mr. Barratt is a director of
Powerway, Inc., a work flow management software company, and Sirius Corporation,
a developer of medical imaging solutions.
JEFFREY H. BERGMAN, a director of Landmark since 1983, has served as a
principal of Interboard, a division of the Interface Group Ltd./Boyden, an
executive placement company, since 1996. From 1991 to 1996, Mr. Bergman was
President of Celedon Technologies, a technology consulting firm. From 1989 to
1991, Mr. Bergman held various positions within Landmark, including that of
President.
T. EUGENE BLANCHARD has been associated with Landmark as a member of the
Advisory Board (the "Advisory Board") since 1993 and was elected to the Board in
March 1997. From 1979 to February 1997, Mr. Blanchard served as Senior Vice
President, Chief Financial Officer and a director of DynCorp, a provider of
technical and professional services to government agencies and the airline
industry. Mr. Blanchard continues to serve as a director of DynCorp.
PATRICK W. GROSS has been associated with Landmark as a member of the
Advisory Board since 1993 and was elected to the Board in March 1997. Mr. Gross
is a founder of American Management Systems, Inc. ("AMS"), an international
business and information technology consulting firm, and has served as a
Director of AMS since 1974 and as Vice Chairman of the board of directors of AMS
since 1989. Mr. Gross is also a director of Capital One Financial Corporation
and Computer Network Technology Corporation.
The members of the Board are elected at the annual meeting of shareholders
and serve until their successors are duly elected and shall qualify or until
their earlier resignation or removal. Mr. Alexander has entered into an
employment agreement with the Company which is for a term of three years
beginning April 9, 1997. The remaining executive officers of the Company are
appointed by the Board and serve at the Board's discretion. See "-- Employment
Agreements."
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<PAGE> 40
BOARD OF DIRECTORS
Each director, other than those directors employed by Landmark, Henry D.
Barratt, Jr. and Jeffrey H. Bergman receives a fee of $1,250 for each Board
meeting attended, $500 for each committee meeting attended and reimbursement of
expenses incurred in attending meetings. Pursuant to an agreement between Mr.
Bergman and the Company in connection with the discontinuation of his employment
as an officer of Landmark, Mr. Bergman received a fee for his services as a
director of the Company of $50,000 annually from May 1992 to January 1993 and
$15,000 annually from February 1993 to April 1997. As of May 1, 1997, Mr.
Bergman no longer received payments from the Company for services as a director.
See "Certain Transactions -- Transactions With Mr. Bergman." Directors who are
employees of the Company are eligible to participate in each of the Company's
stock incentive and stock purchase plans, other than the 1996 Advisory Board and
Directors Stock Incentive Plan (the "Board Plan"). See "-- Stock Incentive
Plans." Directors who are not employees of the Company are not eligible to
participate in any of the Company's stock incentive or stock purchase plans
other than the Board Plan.
In 1993, the Board established an Advisory Board to make recommendations to
the Board concerning the business and policies of the Company. Advisory Board
members are not employees of the Company, and have no authority to make final
decisions in matters concerning the business of the Company. The number and
composition of the Advisory Board, and the term of Advisory Board members, was
determined by the Board of Directors. The Advisory Board was terminated in
October 1997. As a member of the Advisory Board, in 1996 Messrs. Blanchard and
Gross received a total of $7,250 and $6,500, respectively, in fees for attending
meetings of the Board. Prior to becoming members of the Board, in December 1996
T. Eugene Blanchard and Patrick W. Gross were each granted nonqualified stock
options to acquire 24,000 shares of Common Stock as members of the Advisory
Board under the Board Plan. See "Benefit Plans -- Board Plan."
The Board has standing Audit and Compensation Committees. The Audit
Committee consists of Messrs. Bergman and Blanchard, and the Compensation
Committee consists of Messrs. Barratt, Blanchard and Gross. The Audit Committee
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, reviews the independence of the independent
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal controls. The Compensation Committee is
responsible for establishing salaries, bonuses and other compensation for the
Company's officers and administering the Company's stock option and stock
purchase plans.
VOTING ARRANGEMENTS
In May 1990, Messrs. McGettigan and Bergman and Ms. Clark (the "Original
Shareholders") entered into an agreement (the "Shareholders' Agreement") whereby
each agreed to vote his or her Common Stock and Series A Preferred Stock
(collectively, the "Shares"), and to cause their respective family members to
vote their Shares, to elect each of Messrs. McGettigan and Bergman and Ms. Clark
(or a designee acceptable to all of the Original Shareholders) and the then
current President of the Company as directors of the Company. Pursuant to the
Shareholders' Agreement, the Original Shareholders also agreed not to vote their
Shares, and to ensure that their family members not vote their Shares, for the
election of any person other than as specified in the agreement unless holders
of at least two-thirds of all Shares held by the Original Shareholders and their
family members consent in writing to the election of such person as a director.
In addition, the Original Shareholders agreed not to vote any of their Shares,
and to ensure that their family members do not vote any of their Shares, to
amend the Company's Articles of Incorporation or Bylaws to change the number of
directors of the Company or the power of the Board to determine the number of
directors of the Company, unless holders of at least two-thirds of all Shares
held by the Original Shareholders and their family members consent in writing to
such an amendment. The Shareholders' Agreement will terminate on the closing of
the Offering.
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<PAGE> 41
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth summary information
concerning the compensation paid or earned for services rendered to Landmark in
all capacities during fiscal year 1996 by the Company's Chief Executive Officer
and each of the four other most highly compensated officers (the "Named
Executive Officers").
1996 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Katherine K. Clark(1)..................... $210,000 $12,500 -- --
Chief Executive Officer
Patrick H. McGettigan..................... $300,000(2) $12,500 -- $ 493(3)
Chairman of the Board
John D. Hunter............................ $200,000 $12,500 -- --
Vice President, Mainframe Products
Ralph E. Alexander(1)..................... $171,250 $12,500 174,375 --
President, Chief Operating Officer and
Chief Financial Officer
Theodore L. Cruse......................... $ 95,040 $66,166 38,250 $ 4,085(4)
Vice President, North American Sales
</TABLE>
- ---------------
(1) Ms. Clark was President from November 1993 to September 1997. Mr. Alexander
became President in September 1997.
(2) To be reduced to $100,000 per year upon the closing of the Offering.
(3) Represents insurance premiums paid on behalf of executive.
(4) Represents the cost of a sales incentive award.
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<PAGE> 42
The following table sets forth certain information concerning grants of
options to acquire Common Stock to each of the Company's Named Executive
Officers during the fiscal year ended December 31, 1996. In addition, in
accordance with the rules and regulations of the Securities and Exchange
Commission, the following table sets forth the hypothetical gains or "option
spreads" that would exist for the options. Such gains are based on assumed rates
of annual compound stock appreciation of 5% and 10% from the date on which the
options were granted over the full term of the options. The rates do not
represent the Company's estimate or projection of future Common Stock prices and
no assurance can be given that the rates of annual compound stock appreciation
assumed for the purposes of the following table will be achieved.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATE OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED(1) 1996(2) PRICE($/SH) DATE 5%($) 10%($)
- -------------------------- ---------- ------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Katherine K. Clark(4)..... -- -- -- -- -- --
Chief Executive Officer
Patrick H. McGettigan..... -- -- -- -- -- --
Chairman of the Board
John D. Hunter............ -- -- -- -- -- --
Vice President,
Mainframe Products
Ralph E. Alexander(4)..... 174,375 14.95% $ 4.00 4/23/01 $745,494 $995,141
President, Chief
Operating Officer and
Chief Financial Officer
Theodore L. Cruse......... 7,500 0.64% $ 4.00 4/23/01 $ 32,064 $ 42,802
Vice President, North 30,750 2.64% $ 4.00 8/27/06 $207,327 $373,926
American Sales
</TABLE>
- ---------------
(1) All options were granted at an exercise price equal to the fair market value
of the Common Stock as determined by the Board of Directors. The Common
Stock was not publicly traded at the time the options were granted. All
options vest ratably over four years beginning on the first anniversary of
the date of grant and are fully vested on the fourth anniversary of the date
of grant.
(2) Based on an aggregate of 1,166,010 options granted in 1996.
(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall market conditions and the
option holders' continued employment through the vesting period.
(4) Ms. Clark was President from November 1993 to September 1997. Mr. Alexander
became President in September 1997.
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<PAGE> 43
The following table sets forth certain information with respect to stock
options held by the Named Executive Officers as of December 31, 1996. None of
the Named Executive Officers exercised options during fiscal 1996.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END(#) YEAR-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Katherine K. Clark(2)...................... 213,915 8,805 $ 198,418 $ 3,639
Chief Executive Officer
Patrick H. McGettigan...................... -- -- -- --
Chairman of the Board
John D. Hunter............................. 235,010 1,773 $ 231,887 $ 733
Vice President, Mainframe Products
Ralph E. Alexander(2)...................... 39,845 262,031 $0 $0
President, Chief Operating Officer and
Chief Financial Officer
Theodore L. Cruse.......................... 13,266 46,734 $ 2,383 $ 407
Vice President, North American Sales
</TABLE>
- ---------------
(1) Based on the deemed fair market value of the Common Stock at December 31,
1996 of $4.00 per share, as determined by the Company's Board of Directors,
less the exercise price payable for such shares.
(2) Ms. Clark was President from November 1993 to September 1997. Mr. Alexander
became President in September 1997.
EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into an employment agreement with Ralph
E. Alexander, President, Chief Operating Officer and Chief Financial Officer of
the Company. The agreement has an initial term of three years and renews
automatically thereafter for consecutive terms of one year unless either party
elects not to renew the agreement by providing the other with 90 days prior
written notice. The Company has the right at any time to terminate Mr.
Alexander's employment agreement for convenience, provided the Company pays a
severance amount equal to three-fourths of the salary in effect at the time of
termination during the nine-month period following such termination.
STOCK INCENTIVE PLANS
Stock Incentive Plans. Landmark maintains the First Amended and Restated
1989 Stock Incentive Plan, the 1992 Executive Stock Incentive Plan and the 1994
Stock Incentive Plan (collectively, the "Stock Incentive Plans"). Under the
Stock Incentive Plans, incentive stock options, nonqualified stock options,
restricted stock and bonus stock may be granted to employees of the Company. The
purpose of the Stock Incentive Plans is to offer employees additional incentive
and encouragement to remain in the service of the Company by increasing their
personal participation in Landmark through stock ownership.
As of September 30, 1997, a total of 72,818 shares of Common Stock were
reserved for issuance under the First Amended and Restated 1989 Stock Incentive
Plan and options to acquire 72,818 shares of Common Stock were outstanding under
this plan. As of September 30, 1997, a total of 304,687 shares of Common Stock
were reserved for issuance under the 1992 Executive Stock Incentive Plan and a
total of 304,687 shares of common stock were outstanding under this plan. As of
September 30, 1997, a total of 2,961,600 shares of Common Stock were reserved
for issuance under the 1994 Stock Incentive Plan and options to acquire
1,909,237 shares of Common Stock were outstanding under this plan. The number of
shares of Common Stock reserved for issuance under the 1994 Stock Incentive Plan
was increased to 3,000,000 in August 1997.
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<PAGE> 44
Unless the plans are sooner terminated by action of the Board, these plans
terminate in February 1999, March 1999 and September 2004, respectively. The
number of shares subject to each Stock Incentive Plan may be adjusted by the
Board in the event of a merger, consolidation, sale of all or substantially all
of the assets of the Company, reorganization, reclassification, stock divided,
stock split, reverse stock split, or similar distribution with respect to the
outstanding shares of Common Stock.
The Stock Incentive Plans are administered by the Board, although the Board
is authorized to delegate the administration of the Stock Incentive Plans to a
committee. The Board may amend the Stock Incentive Plans at any time. The Board
(or the committee) is authorized to determine, consistent with the provisions of
the Stock Incentive Plans, the employees to be granted stock options, restricted
stock, and stock bonuses, and to determine the terms of each stock option and
restricted stock award. These terms include the number of shares subject to each
option, the exercise date of the option, the duration of the option and any
other terms of the option grant. The Board also may accelerate the time at which
any option may be exercised. Each Stock Incentive Plan provides that in the
event of a merger in which Landmark is not the surviving corporation, the sale
of 50% or more of the Company's outstanding stock to persons who are not
shareholders on the date of grant, or the liquidation or dissolution of the
Company, each outstanding option and restricted stock award will automatically
become vested immediately prior to the effective date of such event.
Each Stock Incentive Plan requires that the exercise price of each
incentive stock option be set at the fair market value of the Common Stock on
the date of grant. The First Amended and Restated 1989 Stock Incentive Plan and
the 1994 Stock Incentive Plan require that the exercise price of each
nonqualified stock option be set at no less than 85% of the fair market value of
the Common Stock on the date of grant. The 1992 Executive Stock Incentive Plan
provides that the exercise price of each nonqualified stock option be set at no
less than the par value of the Common Stock.
As of September 30, 1997, the Named Executive Officers of the Company had
options in the aggregate to purchase shares of Common Stock under the Stock
Incentive Plans as follows: Katherine K. Clark, 245,220 shares; John D. Hunter,
146,782 shares; Ralph E. Alexander, 324,375 shares; Theodore L. Cruse, 75,000
shares. In general, these options vest over a four year period from their grant
date, expire after a specified period not to exceed ten years, and have exercise
prices ranging from $3.00 to $4.99 per share.
Board Plan. Landmark adopted the Board Plan pursuant to which nonqualified
stock options are granted to members of the Advisory Board and to designated
members of the Board who are not employees of the Company (each, a "designee").
A total of 300,000 shares have been reserved for issuance under the Board Plan,
which terminates in December 2006.
Under the Board Plan, a designee receives a nonqualified stock option to
purchase the greater of 6,000 shares of Common Stock or the difference between
24,000 shares of Common Stock and the number of shares of Common Stock subject
to any option previously granted to such designee by the Company. As of the date
of each annual shareholders meeting, each designee who has not previously
received a grant during the calendar year will receive a nonqualified stock
option to purchase 6,000 shares of the Company's Common Stock. The exercise
price of each option is set at the fair market value of the Company's Common
Stock on the date of grant. The options vest over a four-year period.
As of September 30, 1997, options to purchase a total of 120,000 shares of
Common Stock were outstanding pursuant to the Board Plan. In December 1996, T.
Eugene Blanchard, Patrick W. Gross, Arthur E. Johnson, Steven L. Meltzer, and
Cornelis deKluyver each received grants to purchase 24,000 shares of Common
Stock at an exercise price of $4.00 per share, vesting ratably over a four year
period beginning on December 31, 1996. In October 1997, in connection with the
termination of the Advisory Board, the vesting of options to purchase 18,000
shares of Common Stock which would have vested on December 31, 1997 was
accelerated to vest in October 1997 and unvested options to acquire 36,000
shares were cancelled.
EMPLOYEE STOCK PURCHASE PLAN
In 1991, Landmark adopted the 1991 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), pursuant to which full-time employees of the Company who have
been employed by the Company on a full-
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<PAGE> 45
time basis for a period of six continuous months may purchase Common Stock
through payroll deductions or by direct payment. The purchase price is the fair
market value of the Common Stock at the time of purchase. In general, eligible
employees may not purchase more than the number of shares of Common Stock
determined by dividing 10% of the employee's cash compensation by the fair
market value of the Company's Common Stock on the date of purchase.
The Stock Purchase Plan is administered by the Board or by a committee
appointed by the Board. The Board determines the number of shares that will be
made available for purchase under the Plan on an annual basis. Effective April
1, 1997, the Board suspended purchases under the Stock Purchase Plan. As of
September 30, 1997, the Company's employees own an aggregate of 110,949 shares
of Common Stock issued under the Stock Purchase Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Landmark's Articles of Incorporation provide that Landmark shall, to the
fullest extent permissible under Virginia law, indemnify its directors, officers
and Advisory Board members against any damages arising out of their actions as
directors, advisors or officers of the Company. Landmark also intends to obtain
officer and director liability insurance with respect to liabilities arising out
of certain matters, including matters arising under the federal securities laws.
There is no pending litigation or proceeding involving any Landmark
director, officer, employee or agent with respect to which indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since March 1997, Henry D. Barratt, Jr., T. Eugene Blanchard and Patrick W.
Gross, none of whom is an employee of the Company, have served on the
Compensation Committee of the Board. On March 7 and April 1, 1997, the Company
issued to Blue Water Strategic Fund I, LLC ("Blue Water"), in a private
placement transaction, an aggregate of 395,195 shares of Series B Preferred
Stock at a purchase price of $6.326 per share. In connection with this
transaction and pursuant to the terms of the Series B Preferred Stock, Mr.
Barratt, an affiliate of Blue Water, became a member of the Board. Upon
consummation of the Offering, the outstanding shares of Series B Preferred Stock
will automatically be converted into 592,793 shares of Common Stock. See
"Description of Capital Stock -- Preferred Stock." No member of the Compensation
Committee serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of
Landmark's Board or the Compensation Committee.
44
<PAGE> 46
CERTAIN TRANSACTIONS
TRANSACTIONS WITH MR. BERGMAN
In connection with the discontinuation of Mr. Bergman's employment as an
officer of Landmark in June 1992, Mr. Bergman and Landmark entered into a
Separation Agreement and a Noncompetition Agreement, each of which expired in
April 1997. Pursuant to the Separation Agreement, Mr. Bergman received 1,300,000
shares of Series A Preferred Stock plus $500,000 in cash in exchange for
1,400,000 shares of his Common Stock. For a description of the Series A
Preferred Stock, see "Description of Capital Stock -- Preferred Stock." Also
pursuant to the Separation Agreement, from May 1992 to January 1993, the Company
paid Mr. Bergman a fee of $50,000 per year for his services to the Company as a
director and from February 1993 to April 1997, the Company paid Mr. Bergman a
fee of $15,000 per year for his services to the Company as a director. In
addition, the Separation Agreement provided that Mr. Bergman had the right to
engage Landmark employees in a limited capacity as consultants, and had access
to Landmark's mainframe computer facility, subject to certain restrictions.
Pursuant to the Noncompetition Agreement, Mr. Bergman agreed not to directly or
indirectly market or distribute in any area in which Landmark markets or
distributes its products any software which competes with any existing products
of Landmark. Pursuant to the Noncompetition Agreement, from May 1992 to January
1993, the Company paid Mr. Bergman $22,917 per month and from February 1993 to
April 1997, the Company paid Mr. Bergman $20,000 per month.
From May 1, 1992 through November 17, 1997, the Company paid an aggregate
of $938,272 in dividends to Mr. Bergman with respect to Series A Preferred Stock
registered in his name. Pursuant to the mandatory redemption provisions of the
Series A Preferred Stock, the Company redeemed 49,558 shares of Series A
Preferred Stock for $338,233 on May 1, 1997 and August 1, 1997 and redeemed
49,558 shares for $338,233 on November 1, 1997.
REGISTRATION RIGHTS
Landmark has granted to Messrs. McGettigan and Bergman, Ms. Clark, the
Bergman Family Trust and Blue Water, of which Mr. Barratt is an affiliate
(collectively, the "Stockholders"), certain registration rights in connection
with the Common Stock (including any Common Stock to be held upon the conversion
of any preferred stock of the Company). Blue Water has the right to demand
registration of its shares, subject to certain conditions and limitations
including that the Company is not obligated to file any registration statement
initiated by Blue Water within six months of the effective date of certain other
registration statements filed by the Company or with respect to registerable
shares having less than a $5.0 million aggregate offering price. Messrs.
McGettigan and Bergman and Ms. Clark have "piggyback" registration rights in
connection with any such registration statement, and all of the Stockholders
have piggyback registration rights in connection with shares proposed to be
registered by Landmark. The registration rights generally are transferable in
connection with any private sale of registerable shares, including to any
partner or member of a Stockholder. The Company will bear all expenses incident
to its registration obligations upon exercise of these demand and piggyback
registration rights, except that it will not bear any underwriting discounts or
commissions, federal or state securities registration fees or transfer taxes
relating to the exercise of those rights. All piggyback registration rights have
been waived in connection with the Offering.
45
<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership as of September 30, 1997 (i) by each person (or group of affiliated
persons) known by the Company to be the beneficial owner of more than five
percent of Landmark's capital stock, (ii) Patrick H. McGettigan, a director and
Chairman of the Board of the Company, Katherine K. Clark, a director and Chief
Executive Officer of the Company, Jeffrey H. Bergman, a director of the Company,
and the Bergman Family Trust (the "Selling Stockholders"), (iii) each of
Landmark's directors, (iv) each of the Named Executive Officers and (v) all
executive officers and directors of the Company, as a group. Unless otherwise
indicated, all such shares are owned directly by the person indicated. The table
also reflects a 3-for-2 split of the Common Stock, the mandatory redemption on
November 1, 1997 of 54,944 shares of Series A Preferred Stock and the conversion
of 855,165 shares of Series A Preferred Stock into 833,785 shares of Common
Stock and of 395,195 shares of Series B Preferred Stock into 592,793 shares of
Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE AFTER THE
OFFERING(1) OFFERING(1)(2)
-------------------- SHARES ---------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT BEING OFFERED SHARES PERCENT
- ------------------------------------------ --------- ------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
Patrick H. McGettigan..................... 4,687,500 51.8% 650,000 4,037,500 36.6%
Katherine K. Clark(3)..................... 2,501,415 27.0 50,000 2,451,415 21.8
Ralph E. Alexander(3)..................... 124,401 1.4 -- 124,401 1.1
Theodore L. Cruse(3)...................... 23,139 * -- 23,139 *
John D. Hunter(3)......................... 240,492 2.6 -- 240,492 2.2
Henry D. Barratt, Jr.(4).................. 592,793 6.6 -- 592,793 5.4
Jeffrey H. Bergman(5)..................... 947,042 10.5 450,000 497,042 4.5
T. Eugene Blanchard(3).................... 6,000 * -- 6,000 *
Patrick W. Gross(3)....................... 6,150 * -- 6,150 *
All directors and executive officers as a
group (13 persons)(3)................... 9,228,034 96.0 1,150,000 8,078,034 69.6
Blue Water Strategic Fund I, LLC(4)....... 592,793 6.6 -- 592,793 5.4
Bergman Family Trust(5)................... 186,743 2.1 50,000 136,743 1.2
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In comparing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
exercisable at or within 60 days of September 30, 1997 are deemed
outstanding. Such shares, however, are not deemed outstanding for purposes
of computing the percentage ownership of each other person. Unless otherwise
specified in the footnotes to this table, the address of each person set
forth in the above table is 8000 Towers Crescent Drive, Vienna, Virginia
22182.
(2) Assumes the Underwriters' do not exercise their over-allotment option. If
the over-allotment option is exercised in full, Mr. McGettigan, Ms. Clark,
Mr. Bergman and all directors and executive officers as a group will
beneficially own 3,637,500 shares (32.9%), 2,421,415 shares (21.5%), 447,042
shares (4.1%) and 7,598,034 shares (65.4%) respectively.
(3) Includes shares which may be acquired within 60 days of September 30, 1997
pursuant to outstanding options by the person or persons listed, as follows:
Ms. Clark, 213,915; Mr. Alexander, 123,039; Mr. Cruse, 23,063; Mr. Hunter,
122,510; Mr. Blanchard, 6,000; Mr. Gross, 6,000; all directors and executive
officers as a group, 564,179.
(4) Mr. Barratt is an affiliate of Blue Water which holds all of the outstanding
395,195 shares of Series B Preferred Stock. On the closing of the Offering,
such shares will be converted into 592,793 shares of Common Stock. Mr.
Barratt shares voting power with respect to such shares with the three other
principals of Blue Water. The address of Blue Water is 8300 Greensboro
Drive, Suite 1020, McLean, Virginia 22012.
(5) Of the 855,165 shares of Series A Preferred Stock outstanding, 771,326
shares were held by Mr. Bergman and 83,839 were held by the Bergman Family
Trust. On the closing of the Offering, these shares of Series A Preferred
Stock held by Mr. Bergman and the Bergman Family Trust will convert into
752,042 and 81,743 shares of Common Stock, respectively. Prior to the
closing of the Offering, Mr. Bergman also held 195,000 shares of Common
Stock and the Bergman Family Trust held 105,000 shares of Common Stock. The
shares reflected in the table for Mr. Bergman exclude all shares held by the
Bergman Family Trust, as to which Mr. Bergman disclaims beneficial
ownership. Prior to the conversion, holders of Series A Preferred Stock are
entitled to one vote for each share of such stock. Because the Series A
Preferred Stock converts at a ratio of approximately .975 shares of Common
Stock for each share of Series A Preferred Stock, the voting power
represented by the Series A Preferred Stock is accordingly reduced upon the
conversion to Common Stock. The address of the Bergman Family Trust is 9521
Woodington Drive, Potomac, Maryland 20854.
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $0.01 per share, and 8,000,000 shares of Preferred
Stock, par value $0.01 per share.
COMMON STOCK
As of the date of this Prospectus, there were 7,786,753 shares of Common
Stock outstanding that were held of record by 158 stockholders. Based on the
shares of Common Stock outstanding as of the date of this Prospectus and giving
effect to the issuance of the 2,000,000 shares of Common Stock offered by the
Company, following the Offering there will be 11,213,331 shares of Common Stock
outstanding (assuming the conversion of 855,165 shares of Series A Preferred
Stock into 833,785 shares of Common Stock, conversion of 395,195 shares of
Series B Preferred Stock into 592,793 shares of Common Stock, the lapse of the
rights of the holders of the Redeemable Common Stock Instruments, no exercise of
the Underwriters' over-allotment option and no exercise of options and warrants
outstanding as of the date of this Prospectus).
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of Common
Stock do not have cumulative voting rights in the election of directors and do
not have preemptive rights. Holders of the Common Stock are entitled to receive
dividends, when and if declared by the Board, out of funds legally available
thereunder. Subject to any preferential liquidation rights of holders of
Preferred Stock, upon any liquidation, dissolution or winding-up of the Company,
the holders of Common Stock are entitled to share ratably in all assets of the
Company remaining after payments in full of all liabilities of the Company.
All of the Common Stock offered hereby, when issued, will be fully paid and
nonassessable.
PREFERRED STOCK
As of the date of this Prospectus, there were 855,165 shares of Series A
Preferred Stock authorized, issued and outstanding and 1,580,779 shares of
Series B Preferred Stock authorized of which 395,195 shares were issued and
outstanding. Upon the closing of the Offering, there will be no shares of Series
A or Series B Preferred Stock outstanding. The Company has no present intention
to issue shares of Preferred Stock.
The Articles of Incorporation authorize the Board to issue up to an
aggregate of 8,000,000 shares of Preferred Stock and to determine the
preferences, rights and other terms of such stock. Although it has no present
intention to do so, the Board could, in the future, issue one or more series of
Preferred Stock which, due to their terms, could impede a merger, tender offer
or other transaction that some, or a majority, of Landmark's stockholders might
believe to be in their best interests. See "Risk Factors -- Anti-Takeover
Effects of Certain Charter Provisions."
Series A Preferred Stock
The holders of Series A Preferred Stock are entitled to receive cash
dividends, in any fiscal year, when and as declared by the Board and to the
extent permitted by the Virginia Stock Corporation Act, as amended ("VSCA"). As
of May 1, 1997, the annual rate of dividends on the Series A Preferred Stock was
$0.375. Such dividends are declared and paid in arrears on the first business
day of each succeeding calendar quarter. With certain exceptions, the
declaration and payment of dividends are mandatory. With respect to dividends or
distributions upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the Series A Preferred Stock ranks senior to the
Common Stock and junior to the Series B Preferred Stock. The holders of Series A
Preferred Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Except as otherwise provided by
the VSCA, holders of Series A Preferred Stock vote together with holders of
Common Stock.
Since May 1, 1997, the Company has been obligated to periodically redeem a
portion of the Series A Preferred Stock. On May 1, 1997, the Company redeemed a
total of 54,945 shares of Series A Preferred Stock. On August 1, 1997, the
Company redeemed a total of 54,946 shares of Series A Preferred Stock. On
November 1, 1997, the Company redeemed a total of 54,944 shares of Series A
Preferred Stock. The holders of Series A Preferred Stock also have the right to
convert all, but not less than all, of their Series A Preferred
47
<PAGE> 49
Stock into Common Stock at any time on or after the closing of the Offering. The
holders of Series A Preferred Stock have informed the Company that they intend
to convert all of the 855,165 shares of Series A Preferred Stock outstanding as
of the date of this Prospectus into 833,785 shares of Common Stock on the
closing of the Offering. See Note 9 of Notes to Consolidated Financial
Statements for a description of the conversion formula. After the closing of the
Offering, the Board intends to amend the Company's Articles of Incorporation to
eliminate the designation of the Series A Preferred Stock from the authorized
preferred stock of the Company.
Series B Preferred Stock
The holders of Series B Preferred Stock are entitled to receive dividends
when, as and if declared by the Board in its discretion. So long as any Series B
Preferred Stock remains outstanding, no class or series of stock other than
Series B Preferred Stock is entitled to dividends, other than to holders of
Series A Preferred Stock and any series or class of stock issued subsequent to
the issuance of the Series B Preferred Stock. Holders of shares of Series B
Preferred Stock have preferential rights to holders of Series A Preferred Stock
and Common Stock with respect to the assets of the Company in the event of any
liquidation, dissolution or winding up of the Company. Each share of Series B
Preferred Stock entitles the holder thereof to such number of votes per share
equal to the number of shares of Common Stock into which such share of Series B
Preferred Stock is convertible. So long as at least one share of Series B
Preferred Stock remains outstanding, holders of Series B Preferred Stock have
the right to select one of the Company's seven directors.
The 395,195 shares of Series B Preferred Stock outstanding prior to the
Offering will convert into 592,793 shares of Common Stock on the closing of the
Offering, and, after the sale of the shares of Common Stock pursuant to the
Offering, the Company will have no outstanding shares of Series B Preferred
Stock. See Note 9 of Notes to Consolidated Financial Statements. After the
closing of the Offering, the Board intends to amend the Company's Articles of
Incorporation to eliminate the designation of the Series B Preferred Stock from
the authorized preferred stock of the Company.
WARRANTS
In connection with early termination of the distributor relationship
between the Company and Infarmedica Holding AG ("Infarmedica"), on January 1,
1997, Landmark issued a warrant to Infarmedica to purchase 225,000 shares of
Common Stock at a price equal to $4.00 per share as partial consideration for
certain rights and related assets (including access to Landmark's customer base
in Austria, the Benelux countries, Germany, and Switzerland and assignment of
license and maintenance and support agreements) and covenants not to compete
from certain principals of the distributor. The warrant was fully vested upon
issuance, expires on January 1, 2007 and is transferable only with the Company's
consent.
VIRGINIA LAW AND CERTAIN CHARTER PROVISIONS
Landmark is a Virginia corporation subject to the VSCA which contains
certain anti-takeover provisions regulating affiliated transactions, control
share acquisitions and the adoption of shareholder rights plans. In general, the
affiliated transactions provisions prevent a Virginia corporation from engaging
in an "affiliated transaction" (as defined) with an "interested shareholder"
(generally defined as a person owning more than 10% of any voting securities of
the corporation) unless approved by a majority of the "disinterested directors"
(as defined) and the holders of at least two-thirds of the outstanding voting
stock not owned by the interested shareholder, subject to certain exceptions.
Under the control share acquisitions provisions of the VSCA, shares acquired in
a "control share acquisition" (defined generally as transactions that increase
the voting strength of the person acquiring such shares above certain thresholds
in director elections) generally have no voting rights unless granted by a
majority of the outstanding voting stock not owned by such acquiring person. If
such voting rights are granted and the acquiring person controls 50% or more of
the voting power, all shareholders, other than the acquiring person, are
entitled to receive "fair value" (as defined) for their shares. If such voting
rights are not granted, the corporation may, if authorized by its articles of
incorporation or bylaws, purchase the acquiring person's shares at their cost to
the acquiring person. Finally, the shareholder rights plan provisions of the
VSCA permit the Board to adopt a shareholder rights plan that could render a
hostile takeover prohibitively expensive if the Board determines that such a
takeover is not in the best interests
48
<PAGE> 50
of the corporation. The Board has no present intention to adopt a shareholder
rights plan and will not adopt any such plan in the future except on terms that
the Board deems to be in the best interests of Landmark's shareholders. The
existence of the shareholder rights plan provisions of the VSCA, as well as the
affiliated transactions and control share acquisition provisions could delay or
prevent a change in control of the Company, impede a merger, consolidation or
other business combination involving the Company or discourage a potential
acquirer from making a tender offer to otherwise attempting to obtain control of
the Company.
Charter provisions. Landmark's Articles of Incorporation and Bylaws
contain certain provisions that could inhibit or impede acquisition of control
of the Company by means of a tender offer, a proxy contest or otherwise and
inhibit attempts at such transactions. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of the Company to
negotiate first with the Board. The Company believes that these provisions
increase the likelihood that proposals initially will be on more attractive
terms than would be the case in their absence and increase the likelihood of
negotiations, which might outweigh the potential disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals might
result in improvement of terms. The description set forth below is a summary
only, and is qualified in its entirety by reference to the Articles of
Incorporation and Bylaws which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. See "Risk Factors -- Anti-Takeover
Effects of Certain Charter Provisions."
Number of Directors; Removal; Filling Vacancies. The Articles of
Incorporation provide that, subject to any rights of holders of Preferred Stock
to elect additional directors under specified circumstances, the number of
directors will be fixed by the Bylaws. The Bylaws provide that, subject to the
rights of any holders of Preferred Stock, the number of directors will be fixed
by the Board, but must be at least seven. In addition, the Bylaws provide that,
subject to the rights of the holders of any Preferred Stock, and unless the
Board otherwise determines, any vacancies (other than vacancies created by an
increase in the total number of directors) will be filled by the affirmative
vote of a majority of the remaining directors, though less than a quorum and any
vacancies created by an increase in the total number of directors may be filled
by a majority of the entire Board. Accordingly, the Board could temporarily
prevent any stockholder from enlarging the Board and then filling the new
directorship with such stockholder's own nominees.
The Bylaws provide that, subject to the rights of the holders of Preferred
Stock, if any, directors may only be removed upon the affirmative vote of at
least a majority of the entire voting power of all the then-outstanding shares
of Common Stock entitled to vote generally in the election of directors.
Preferred Stock. The Articles of Incorporation authorize the Board to
establish one or more series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the preferences, rights and other terms of
such series. See "Description of Capital Stock -- Preferred Stock." The Company
believes that the ability of the Board to issue one or more series of Preferred
Stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs. The authorized shares of Preferred Stock, as well as shares of Common
Stock, will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board has no present intention
to do so, it could, in the future, issue a series of Preferred Stock (other than
the Series A Preferred Stock or Series B Preferred Stock) which, due to its
terms, could impede a merger, tender offer or other transaction that some, or a
majority, of the Company's stockholders might believe to be in their best
interests, or in which stockholders might receive a premium over then-prevailing
market prices for their shares of Common Stock.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "LDMK."
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
49
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
SALES OF RESTRICTED SHARES
Based on shares of Common Stock outstanding as of the date of this
Prospectus, upon completion of the Offering, the Company will have 11,213,331
shares of Common Stock outstanding. See "Description of Capital Stock." Of these
shares, the 3,200,000 shares sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act, except
that any shares purchased by "affiliates" of the Company, as that term is
defined under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 as described below.
The remaining 8,013,331 shares of Common Stock are deemed "restricted
securities" under Rule 144. Of these shares, 7,839,652 shares are subject to
Lock-Up Agreements for a period of 180 days beginning after the date of this
Prospectus (the "Lock-Up Period). Of the 173,680 shares not subject to Lock-Up
Agreements, 68,096 shares will be eligible for sale in the public market on the
date of this Prospectus in reliance on Rule 144(k) and 105,584 shares will be
eligible for sale in the public market beginning 90 days after the date of this
Prospectus in reliance on Rule 701. Of the shares subject to Lock-Up Agreements,
7,839,652 shares will be eligible for sale in reliance upon Rule 144 and Rule
701 upon the expiration of the Lock-Up Period, of which 7,513,857 are currently
held by Affiliates. Such shares held by Affiliates will be subject to the volume
and other resale limitations of Rule 144, other than the one-year holding
period; the 325,795 shares not held by Affiliates will be freely tradeable after
expiration of the Lock-Up Period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned "restricted" shares for at least one year, including
a person who may be deemed an Affiliate of the Company, is entitled to sell
within any three month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Company's Common Stock
or (ii) the average weekly trading volume of the Company's Common Stock during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Securities Exchange Commission. Sales under Rule 144 are also subject
to certain manner of sales provisions, notice requirements and the availability
of current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who owns shares
within the definition of "restricted securities" under Rule 144 that were
purchased from the Company (or any Affiliate) at least two years previously,
will be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations, manner of sale provision, public information requirements or
notice requirements. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 prior
to effecting a transfer of such shares. Rule 701 provides that shares of Common
Stock acquired on the exercise of outstanding options issued before the date of
this Prospectus may be resold by persons other than Affiliates, beginning 90
days after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by Affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its one-year
minimum holding period.
Prior to the Offering, there has been no public market for the Common Stock
of the Company and no predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have on
the market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities.
50
<PAGE> 52
OPTIONS AND WARRANTS
As of the date of this Prospectus, options to acquire a total of 2,567,756
shares of Common Stock were outstanding. Of this amount, options to acquire
2,206,643 shares are subject to Lock-Up Agreements, and options to acquire the
remaining 361,113 shares are not subject to the Lock-Up Agreements and will be
eligible for sale in the public market beginning 90 days after the date of this
Prospectus, subject to applicable vesting requirements and compliance with the
Securities Act and applicable state securities laws. See "Shares Eligible for
Future Sale -- Lock-up Agreements." As of the date of this Prospectus, options
to purchase 1,272,141 shares of Common Stock were available for future grants
under the Company's Stock Incentive Plans. See "Management -- Stock Incentive
Plans."
As of the date of this Prospectus, warrants to purchase 225,000 shares of
Common Stock were outstanding. Such warrants were fully vested upon issuance and
expire on January 1, 2007. Shares of Common Stock received upon the exercise of
such warrants will be "restricted securities" within the meaning of Rule 144
and, as a result, may only be resold subject to the volume, manner of sale and
other limitations contained in Rule 144 beginning at least one year after the
date of such exercise. See "Description of Capital Stock -- Warrants."
REGISTRATION STATEMENT ON FORM S-8
The Company intends to file a registration statement on Form S-8 covering
approximately 3,917,618 shares of Common Stock issued or issuable under the
Stock Incentive Plans and the Stock Purchase Plan. Of the shares covered by the
Form S-8, 960,654 shares are subject to vested options as of the date of this
Prospectus. Of these options, options to acquire 889,095 shares are subject to
Lock-Up Agreements and options to acquire 71,559 shares are not subject to
Lock-Up Agreements. The Form S-8 is expected to be filed approximately 90 days
after the date of this Prospectus and will become effective automatically upon
filing. Accordingly, the shares of Common Stock covered by the Form S-8 will
become eligible for sale in the public markets, subject to the Lock-up
Agreements.
LOCK-UP AGREEMENTS
All officers and directors and certain holders of Common Stock and options
to purchase Common Stock have agreed pursuant to the Lock-Up Agreements that
they will not offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible or exercisable or exchangeable for
Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock during the
Lock-Up Period without the prior written consent of C. E. Unterberg, Towbin. C.
E. Unterberg, Towbin may, however, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
Lock-Up Agreements. Any such release could have a material adverse effect upon
the market price of the Company's Common Stock.
51
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company and the Selling Stockholders have
agreed to sell to each of the Underwriters named below, and each of the
Underwriters, for whom C. E. Unterberg, Towbin and Wheat, First Securities, Inc.
are acting as Representatives, has agreed to purchase the number of shares of
Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ----------
<S> <C>
C. E. Unterberg, Towbin........................................... 950,000
Wheat, First Securities, Inc. .................................... 950,000
BancAmerica Robertson Stephens.................................... 85,000
BT Alex.Brown Incorporated........................................ 85,000
CIBC Oppenheimer Corp............................................. 85,000
Cowen & Company................................................... 85,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 85,000
A.G. Edwards & Sons, Inc. ........................................ 85,000
Hambrecht & Quist LLC............................................. 85,000
Lehman Brothers Inc. ............................................. 85,000
PaineWebber Incorporated.......................................... 85,000
Prudential Securities Incorporated................................ 85,000
Burnham Securities Inc. .......................................... 45,000
Fahnestock & Co. Inc. ............................................ 45,000
First Albany Corporation.......................................... 45,000
Ferris, Baker Watts, Inc. ........................................ 45,000
Furman Selz LLC................................................... 45,000
Jefferies & Company............................................... 45,000
Legg Mason Wood Walker, Incorporated.............................. 45,000
Pennsylvania Merchant Group Ltd. ................................. 45,000
Gaines, Berland, Inc. ............................................ 30,000
Johnston, Lemon & Co. Incorporated................................ 30,000
Ryan Hartely & Lee................................................ 30,000
---------
Total................................................... 3,200,000
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock offered hereby, if any such shares are purchased. In the
event of a default by an Underwriter, the Underwriting Agreement provides that,
in certain circumstances, such commitments of the non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
C. E. Unterberg, Towbin has advised the Company that the Underwriters
propose initially to offer the shares of Common Stock offered hereby to the
public at the public offering price per share set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.29 per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.10 per share on sales to certain other
dealers. After the public offering, the offering price, discount and reallowance
may be changed.
The Selling Stockholders have granted the Underwriters an option, which may
be exercised within 30 days after the date of this Prospectus, to purchase up to
an additional 480,000 shares of Common Stock to cover over-allotments, if any,
at the initial public offering price, less the underwriting discount. To the
extent that the Underwriters exercise the option, each of the Underwriters will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage of shares that the number of shares of
52
<PAGE> 54
Common Stock to be purchased by it shown on the foregoing table bears to the
total number of shares initially offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
The Selling Stockholders, the Company, its officers and directors and
certain other stockholders have entered into Lock-Up Agreements under which they
have agreed not to offer, sell or otherwise dispose of any of their shares of
Common Stock or other securities of the Company for a period of 180 days after
the date of this Prospectus without the prior written consent of C. E.
Unterberg, Towbin. In the case of the Selling Stockholders, this agreement is
subject to an exception for sales pursuant to the Underwriters' over-allotment
option. In the case of the Company, this agreement is subject to exceptions for
the grant of options and the issuance of shares pursuant to the Company's stock
option plans and in connection with acquisitions. Any Common Stock issued in
connection with such acquisitions would be subject to a lock-up agreement with
the Representatives for 180 days from the date of issuance.
In connection with the Offering, C. E. Unterberg, Towbin, on behalf of the
Underwriters, may purchase and sell the Common Stock in the open market. Such
transactions may include (i) over-allotment transactions, (ii) stabilizing
transactions, consisting of certain bids for the purpose of preventing or
restraining a decline in the market price of the Common Stock, and (iii)
purchases to cover syndicate short positions created in connection with the
Offering. The Underwriters, also may impose a "penalty bid," whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the Common Stock sold in the Offering for their account may be reclaimed by the
syndicate if such shares of Common Stock are re-purchased by the syndicate in
stabilizing or covering transactions. These transactions may be effected on The
Nasdaq National Market or otherwise, and these activities, if commenced, may be
discontinued at any time.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock offered hereby has
been arbitrarily determined by negotiation between the Company and the
Representatives and is not necessarily related to the Company's asset value, net
worth or other established criteria of value. In determining the initial public
offering price, the Representatives and the Company considered, among other
things, market prices of similar securities of comparable publicly traded
companies, the financial conditions and operating information of companies
engaged in activities similar to those of the Company, the financial condition
and prospects of the Company and the general condition of the securities market.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Shaw Pittman Potts &
Trowbridge, Washington, D.C., a partnership including professional corporations.
Steven L. Meltzer holds 12,000 shares of Common Stock acquired pursuant to the
exercise of options granted in his capacity as a member of the Advisory Board
pursuant to the Board Plan. Mr. Meltzer is the sole stockholder of Steven L.
Meltzer, P.C., which is a partner in Shaw Pittman Potts & Trowbridge. Certain
legal matters will be passed upon for the Underwriters by Akin, Gump, Strauss,
Hauer & Feld, L.L.P.
EXPERTS
The Consolidated Financial Statements as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
53
<PAGE> 55
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 including amendments thereto, relating
to the Common Stock offered by the Company and the Selling Stockholders has been
filed with the Securities and Exchange Commission (the "Commission"),
Washington, D.C. 20549. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement may be inspected by anyone without charge at the
Commission's principal offices in Washington, D.C. and copies of all or any part
thereof may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's World Wide Web site is http://www.sec.gov.
The Company intends to furnish its stockholders annual reports containing
statements audited by its independent accountants and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
information.
54
<PAGE> 56
(This page intentionally left blank)
<PAGE> 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Landmark Systems Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Landmark Systems Corporation and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, 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.
PRICE WATERHOUSE LLP
Falls Church, Virginia
April 30, 1997, except as to Note 14,
which is as of November 17, 1997
F-2
<PAGE> 59
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------- -------------
1995 1996 1997 1997
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 316,333 $ 339,073 $ 4,168,081
Accounts receivable, net of allowance for doubtful
accounts of $656,000, $382,000 and $497,000
(unaudited)..................................... 9,632,617 10,139,856 7,643,742
Unbilled accounts receivable...................... 3,489,725 4,265,547 3,925,006
Deferred income taxes, net........................ 1,354,059 2,065,460 1,402,022
Income taxes receivable........................... 3,174,432 16,061 15,520
Other current assets.............................. 226,556 159,012 692,729
----------- ----------- -------------
Total current assets....................... 18,193,722 16,985,009 17,847,100
Unbilled accounts receivable........................ 4,335,708 2,995,868 4,192,463
Fixed assets, net................................... 3,191,852 2,896,225 3,295,215
Capitalized software costs, net..................... 5,757,252 1,650,339 668,166
Deferred income taxes............................... -- 414,928 1,120,300
Intangible assets, net.............................. -- -- 1,386,000
Other assets........................................ 674 133,613 125,690
----------- ----------- -------------
$31,479,208 $25,075,982 $28,634,934
============ ============ ============
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 1,682,645 $ 1,200,553 $ 1,122,232
Accrued expenses.................................. 3,387,440 1,951,471 2,696,938
Deferred revenue.................................. 15,869,704 16,206,265 15,471,916
Income taxes payable.............................. -- 271,288 605,389
Debt due within one year.......................... 3,238,442 1,493,763 528,515
----------- ----------- -------------
Total current liabilities.................. 24,178,231 21,123,340 20,424,990
Long-term debt...................................... 1,083,676 591,750 190,588
Deferred revenue -- noncurrent...................... 2,677,856 2,498,482 2,654,347
Deferred income taxes............................... 472,210 -- --
Other liabilities................................... 1,067,717 583,250 891,278
----------- ----------- -------------
Total liabilities.......................... 29,479,690 24,796,822 24,161,203
----------- ----------- -------------
Commitments
Redeemable common stock
instruments, at redemption value.................. 1,049,043 703,930 1,512,002 --
Mandatorily redeemable Series A Cumulative Preferred
Stock, $.01 par value, 1,300,000 shares
authorized, 1,020,000, 1,020,000 and 910,109
shares issued and outstanding, actual; no shares
issued and outstanding, pro forma................. 5,865,000 5,865,000 6,211,494 --
Mandatorily redeemable Series B Cumulative Preferred
Stock, $.01 par value 1,580,779 shares authorized,
395,195 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma.......... -- -- 2,609,778 --
Stockholders' equity (deficit):
Common stock, $.01 par value, 30,000,000 shares
authorized, 7,331,895, 7,331,895 and 7,384,010
issued and outstanding, actual; 9,045,446 issued
and outstanding, pro forma...................... 73,320 73,320 73,840 $ 90,455
Additional paid-in capital........................ 432,300 432,300 993,981 10,935,647
Accumulated deficit............................... (5,415,609) (6,770,890) (6,952,847) (6,952,847)
Foreign currency translation...................... (4,536) (24,500) 25,483 25,483
----------- ----------- ------------- -------------
Total stockholders' equity (deficit)....... (4,914,525) (6,289,770) (5,859,543) $ 4,098,738
----------- ----------- ------------- -------------
$31,479,208 $25,075,982 $28,634,934
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 60
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
License revenues........... $11,267,792 $10,392,273 $11,268,496 $ 7,524,697 $10,548,607
Service revenues........... 21,406,308 24,067,551 25,287,902 18,675,458 19,828,584
----------- ----------- ----------- ----------- -----------
Total revenues........ 32,674,100 34,459,824 36,556,398 26,200,155 30,377,191
Cost of revenues
Cost of license revenues... 4,452,753 4,287,307 5,775,318 4,688,806 1,898,957
Cost of service revenues... 3,391,266 3,375,710 3,138,095 2,326,483 2,432,913
----------- ----------- ----------- ----------- -----------
Total cost of
revenues............ 7,844,019 7,663,017 8,913,413 7,015,289 4,331,870
----------- ----------- ----------- ----------- -----------
Gross profit............... 24,830,081 26,796,807 27,642,985 19,184,866 26,045,321
----------- ----------- ----------- ----------- -----------
Operating expenses
Sales and marketing........ 11,715,814 13,091,974 11,670,261 8,521,926 10,274,905
Product research and
development.............. 9,093,862 12,489,713 13,924,117 10,772,397 10,078,766
General and
administrative........... 7,800,452 6,872,697 4,776,282 3,500,902 3,969,666
----------- ----------- ----------- ----------- -----------
28,610,128 32,454,384 30,370,660 22,795,225 24,323,337
----------- ----------- ----------- ----------- -----------
Operating (loss) income......... (3,780,047) (5,657,577) (2,727,675) (3,610,359) 1,721,984
Interest and other income....... 919,286 761,022 1,077,558 887,261 559,827
Interest expense................ (218,391) (212,868) (364,676) (290,322) (243,559)
----------- ----------- ----------- ----------- -----------
(Loss) income before income
taxes......................... (3,079,152) (5,109,423) (2,014,793) (3,013,420) 2,038,252
(Benefit from) provision for
income taxes.................. (1,158,244) (940,413) (812,512) (1,117,978) 815,578
----------- ----------- ----------- ----------- -----------
Net (loss) income............... (1,920,908) (4,169,010) (1,202,281) (1,895,442) 1,222,674
Accretion and dividends on
preferred stock............... 153,000 627,300 153,000 76,500 1,404,631
----------- ----------- ----------- ----------- -----------
Net loss available to common
stockholders.................. $(2,073,908) $(4,796,310) $(1,355,281) $(1,971,942) $ (181,957)
========== ========== ========== ========== ==========
Pro forma (loss) income per
share......................... $ (0.13) $ (0.20) $ 0.12
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 61
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON SHARES
---------------------------------- RETAINED
ADDITIONAL EARNINGS/ FOREIGN
PAID-IN (ACCUMULATED CURRENCY
ISSUED PAR VALUE CAPITAL DEFICIT) TRANSLATION TOTAL
--------- --------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993......... 7,331,745 $73,318 $324,456 $ 1,454,609 $ -- $ 1,852,383
Net loss........................... -- -- -- (1,920,908) -- (1,920,908)
Compensation for non-qualified
stock options.................... -- -- 17,577 -- -- 17,577
Series A Preferred Stock
dividends........................ -- -- -- (153,000) -- (153,000)
--------- --------- ---------- ------------ ----------- -----------
Balance at December 31, 1994......... 7,331,745 73,318 342,033 (619,299) -- (203,948)
Net loss........................... -- -- -- (4,169,010) -- (4,169,010)
Series A Preferred Stock redemption
value adjustment................. -- -- -- (474,300) -- (474,300)
Compensation for non-qualified
stock options.................... -- -- 89,769 -- -- 89,769
Common stock issued upon exercise
of non-qualified stock options... 150 2 498 -- -- 500
Foreign currency translation....... -- -- -- -- (4,536) (4,536)
Series A Preferred Stock
dividends........................ -- -- -- (153,000) -- (153,000)
--------- --------- ---------- ------------ ----------- -----------
Balance at December 31, 1995......... 7,331,895 73,320 432,300 (5,415,609) (4,536) (4,914,525)
Net loss........................... -- -- -- (1,202,281) -- (1,202,281)
Foreign currency translation....... -- -- -- -- (19,964) (19,964)
Series A Preferred Stock
dividends........................ -- -- -- (153,000) -- (153,000)
--------- --------- ---------- ------------ ----------- -----------
Balance at December 31, 1996......... 7,331,895 73,320 432,300 (6,770,890) (24,500) (6,289,770)
Net income (unaudited)............. -- -- -- 1,222,674 -- 1,222,674
Series A Preferred Stock redemption
value adjustment (unaudited)..... -- -- -- (1,096,500) -- (1,096,500)
Series B Preferred Stock redemption
value adjustment (unaudited)..... -- -- -- (109,778) -- (109,778)
Common stock issued upon exercise
of non-qualified stock options
(unaudited)...................... 43,875 438 163,313 -- -- 163,751
Issuance costs (unaudited)......... -- -- (52,115) -- -- (52,115)
Issuance of warrants (unaudited)... -- -- 48,000 -- -- 48,000
Compensation expense for options
granted to non-employees
(unaudited)...................... -- -- 146,284 -- -- 146,284
Foreign currency translation
(unaudited)...................... -- -- -- -- 49,983 49,983
Waiver of rights to require
repurchase (unaudited)........... 8,240 82 237,026 -- -- 237,108
Series A Preferred Stock dividends
(unaudited)...................... -- -- -- (198,353) -- (198,353)
Tax impact of exercise of
non-qualified stock options
(unaudited)...................... -- -- 19,173 -- -- 19,173
--------- --------- ---------- ------------ ----------- -----------
Balance at September 30, 1997
(unaudited)........................ 7,384,010 $73,840 $993,981 $(6,952,847) $ 25,483 $(5,859,543)
========= ========= ========= ============ ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 62
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................... $(1,920,908) $(4,169,010) $(1,202,281) $(1,895,442) $ 1,222,674
Adjustments to reconcile net (loss)
income to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 4,185,694 3,957,189 5,865,608 4,823,936 2,311,760
Provision for (reduction in) losses on
accounts receivable................. 304,163 191,960 (73,436) 79,353 199,395
Provision (benefit) for loss on
leases.............................. 779,008 265,816 (351,257) (351,257) --
Stock compensation expense
(benefit)........................... 32,463 766,214 (96,381) (96,189) 567,933
Writeoff of capitalized software...... -- 513,655 -- -- --
Decrease (increase) in accounts
receivable.......................... 599,588 (899,203) (433,803) 2,640,959 1,704,177
(Increase) decrease in deferred income
taxes............................... (1,104,968) (897,868) (1,598,539) (1,455,371) (22,761)
(Increase) decrease in income taxes
receivable.......................... (1,838,508) (477,653) 3,158,371 3,159,057 541
(Increase) decrease in unbilled
accounts receivable................. (2,007,487) 568,816 564,018 682,112 (856,054)
(Decrease) increase in accounts
payable and accrued expenses........ (1,487,786) 580,219 (1,566,804) (1,424,800) (232,854)
Increase in income taxes payable...... -- -- 271,288 1,283 334,101
Increase (decrease) in deferred
revenue............................. 3,132,268 439,622 157,187 (2,188,842) (888,323)
Increase (decrease) in other, net..... 637,313 (1,201,576) (549,862) (531,679) (215,387)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities........... 1,310,840 (361,819) 4,144,109 3,443,120 4,125,202
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures.................... (543,928) (2,224,579) (728,494) (603,944) (1,266,575)
Capitalized software costs.............. (1,491,159) (1,112,121) (734,574) (615,825) --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (2,035,087) (3,336,700) (1,463,068) (1,219,769) (1,266,575)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Principal payments on loans............. (13,862) (3,704) (414,487) (259,885) (366,410)
Proceeds from loans..................... -- 1,500,000 -- -- --
Net proceeds from (payments on) line of
credit................................ 500,000 1,822,118 (1,822,118) (1,122,118) (1,000,000)
Issuances of common stock............... 205,612 196,736 952,456 930,291 880,648
Repurchases of common stock............. (212,214) (142,500) (1,201,188) (1,192,428) (93,366)
Issuance of Series B Preferred Stock.... -- -- -- -- 2,447,885
Redemption of Series A Preferred
Stock................................. -- -- -- -- (750,006)
Payment of Series A Preferred Stock
dividends............................. (153,000) (153,000) (153,000) (76,500) (198,353)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 326,536 3,219,650 (2,638,337) (1,720,640) 920,398
----------- ----------- ----------- ----------- -----------
Effect of exchange rate changes on cash... -- (4,536) (19,964) (22,032) 49,983
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents............................. (397,711) (483,405) 22,740 480,679 3,829,008
Cash and cash equivalents, beginning of
period.................................. 1,197,449 799,738 316,333 316,333 339,073
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of
period.................................. $ 799,738 $ 316,333 $ 339,073 $ 797,012 $ 4,168,081
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 63
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
NOTE 1 -- ORGANIZATION AND OPERATIONS
Landmark Systems Corporation ("the Company") was incorporated in the
Commonwealth of Virginia in November 1982 and commenced operations in 1983. The
Company is engaged in the development, marketing and distribution of computer
software products and the provision of related services. The Company is a
supplier of performance management software products which measure, analyze,
report and predict performance for both the mainframe and client/server
computing environments.
In 1985, the Company formed a wholly-owned subsidiary, Landmark Systems
International, Inc. (Landmark International), which was an interest charge
domestic international sales corporation (DISC) under the Tax Reform Act of
1984. In March 1989, Landmark International revoked its election to be treated
as a DISC effective for the period beginning January 1, 1989. All tax benefits
of the DISC were fully utilized at December 31, 1995.
In January 1995, the Company established a wholly-owned subsidiary,
Landmark Systems Pacific Pty. Ltd. ("LSPPL"). LSPPL acts as its distributor in
Australia and New Zealand. LSPPL also provides technical support for Australia,
New Zealand and Southeast Asia.
In May 1995, the Company activated a subsidiary, SSG (Europe) Limited. The
subsidiary's name was subsequently changed to Landmark Systems (EMEA) Limited
("EMEA"). EMEA distributes the Company's products in the United Kingdom and
Spain. EMEA also provides marketing and distribution assistance in Europe, the
Middle East and Africa under a management agreement.
In May 1996, the Company established a wholly-owned subsidiary, Landmark
Systems (HK) Ltd., to act as its distributor of products in the Southeast Asian
market.
In January 1997, the Company established a wholly-owned subsidiary,
Landmark Systems GmbH, to act as its distributor in Germany, Switzerland and
Austria. Also in January 1997, the Company established a wholly-owned
subsidiary, Landmark Systems Benelux BV, to act as its distributor in the
Benelux countries (Note 12).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances have
been eliminated.
Pro forma stockholders' equity
The Company plans to file an initial registration statement with the
Securities and Exchange Commission. If the contemplated offering is consummated
under terms presently anticipated, the following changes to the redeemable
common stock instruments and preferred stock will occur upon the closing of this
offering: (i) the conversion of the Series A Preferred Stock into 833,785 shares
of the Company's common stock so that a holder of the Series A Preferred Stock
may participate in the offering as a selling stockholder, (ii) the automatic
conversion of the Series B Preferred Stock into 592,793 shares of the Company's
common stock, and (iii) the lapse of the rights of certain holders of 234,858
shares of Common Stock and options to purchase 194,820 shares of Common Stock to
require the Company to repurchase such shares. The September 30, 1997 pro forma
stockholders' equity reflects the foregoing anticipated changes to the
redeemable common stock instruments and preferred stock, as well as the
mandatory redemption on November 1, 1997 of 54,944 shares of Series A Preferred
Stock for consideration of $375,000.
F-7
<PAGE> 64
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
Cash and cash equivalents
For purposes of the consolidated balance sheets and statements of cash
flows, the Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
Revenue recognition
Revenues are recognized in accordance with AICPA Statement of Position
91-1, "Software Revenue Recognition." Sales of perpetual software licenses are
recorded as license revenues when performance under the related contract is
completed, collection is probable and no significant vendor obligations remain.
Service revenues, which consist primarily of maintenance fees, generally are
collected prior to the performance of the related services and are recorded as
deferred revenue and recognized ratably over the period during which the
services are performed, generally twelve months except as noted below. For
transactions involving both license and service revenues, the Company generally
allocates maintenance fees based upon the list price for such fees.
In certain circumstances, primarily where the Company is replacing its
mainframe competitors' products, the Company enters into a long-term payment
arrangement with a licensee. Under these types of arrangements, the Company
allows the licensee to pay the license fees plus service fees over a three to
five year period, generally in annual installments. If collectibility by the
Company is probable, the Company recognizes the present value of the contracted
stream of payments as an unbilled receivable in its financial statements. Of
this amount, the Company recognizes the underlying license fee as license
revenues and defers the underlying service fees. As installments are invoiced to
the licensee in accordance with the payment arrangement, the Company reflects a
reduction in its unbilled receivable and an increase in its accounts receivable.
Historically, the Company has not granted concessions nor experienced any
significant bad debts associated with these long-term arrangements. At December
31, 1995 and 1996 and September 30, 1997, unbilled receivables have been reduced
by $1,226,000, $1,200,000 and $1,291,000, respectively, to reflect such amounts
at their present values.
The Company has relationships with a number of third party distributors to
market and distribute its products internationally. Under such arrangements, the
distributors report to, are invoiced by and remit payments to the Company based
upon transactions with the ultimate customer. The Company records license
revenues and service revenues based upon transactions reported to the Company.
The Company records an accrual for estimated sales returns. Historically,
such amounts have not been material.
Fixed assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Capital lease obligations are recorded at the present value of the
future lease obligations discounted at the interest rate implicit in each lease.
A corresponding amount is capitalized and depreciated over the term of the
lease. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives for computing
depreciation are generally five years for computer equipment, office equipment
and furniture. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related lease.
F-8
<PAGE> 65
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
Impairment of long-lived assets
Long-lived assets subject to the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", are evaluated for possible
impairment through a review of undiscounted expected future cash flows. If the
sum of the undiscounted expected future cash flows is less than the carrying
amount of the asset or if changes in facts and circumstances indicate, an
impairment loss is recognized.
Foreign currency translations
The functional currency for the Company's international subsidiaries is the
applicable local currency. The financial statements of international
subsidiaries are translated into U.S. dollars using exchange rates in effect at
period end for assets and liabilities and average exchange rates during each
reporting period for results of operations. Adjustments resulting from
translation of financial statements are reflected as a separate component of
stockholders' equity (deficit). The Company does not attempt to hedge its
foreign currency exposures. Foreign currency gains (losses) of $17,000,
$(102,000), $(9,600) and $(129,000) in 1994, 1995 and 1996 and for the nine
months ended September 30, 1997, respectively, are included in other income.
Software development costs
The Company accounts for its software development activities in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed." The Company
capitalizes significant development costs incurred subsequent to the point of
demonstrated technological feasibility and up to the time the product is
available for release to customers. Amortization is computed on an individual
product basis and is the greater of (a) the ratio of current gross revenues for
a product to the total current and anticipated future gross revenues for the
product, or (b) the straight-line method over the estimated economic life of the
product. Effective January 1, 1996, the Company prospectively decreased the
estimated economic life of its capitalized software products from three to five
years to eighteen months. This reduction in estimated economic life is
considered by management to be necessary in light of (i) the increasingly rapid
pace of change in technology in the market, (ii) changes implemented by
management in early 1996 regarding the Company's pace of development efforts and
product enhancements and introductions, (iii) the fact that shortened
development cycles do not provide the opportunity to use a detail program
design, and (iv) the increased need for the Company to update its products for
the latest technological innovations. Amortization expense recorded in 1996 and
the nine months ended September 30, 1997 would have been $2.3 million lower and
$610,000 higher, respectively, if this change had not been made. The effect of
the change was to decrease net income in 1996 by $1.5 million ($0.16 per share)
and increase net income for the nine months ended September 30, 1997 by $370,000
($0.04 per share). The Company periodically evaluates its capitalized software
costs for recoverability against anticipated future revenues, and writes down or
writes off capitalized software costs if recoverability is in question.
Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB No. 25) and related Interpretations. Under APB
No. 25, compensation cost is measured as the excess, if any, of the market price
of the Company's stock, as established by the Company's Board of Directors ("the
Board"), at the date of grant over the exercise price of the option granted.
Compensation cost for stock options, if any, is recognized ratably over the
vesting period. The Company provides additional pro forma disclosures as
required
F-9
<PAGE> 66
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation"(SFAS No. 123) (Note 10).
Transactions for which non-employees are issued equity instruments for
goods or services received are recorded by the Company based upon the fair value
of the equity instruments issued or the fair value of the goods or services
received, whichever is more reliably measured.
Income taxes
The Company provides for income taxes using the asset and liability
approach. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of the assets and
liabilities. A valuation allowance is recorded if, based on the evidence
available, it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short maturity of those instruments. The carrying amounts of
notes payable to banks, which includes short-term borrowings at market rates and
long-term debt, and preferred stock approximate their fair value.
The Company has $7,825,000, $7,261,000 and $8,117,000 of unbilled
receivables outstanding at December 31, 1995 and 1996 and September 30, 1997,
respectively; the estimated fair values of these receivables are $8,116,000,
$7,486,000 and $8,340,000, respectively, calculated using discounted cash flows.
Concentrations of credit risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of accounts receivable and unbilled receivables. Credit
risk is limited due to the large number and geographic dispersion of customers
comprising the Company's customer base. At December 31, 1996, one international
distributor accounted for approximately 7% of the Company's total receivables.
No other distributor or customer accounted for more than 5% of the Company's
total outstanding receivables. At September 30, 1997 no distributor or customer
accounted for more than 5% of the Company's total outstanding receivables.
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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.
Unaudited interim financial statements
The accompanying unaudited interim financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information and substantially in the form prescribed by the
Securities and Exchange Commission in instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the September
30, 1996 and 1997 unaudited interim financial statements include all
adjustments,
F-10
<PAGE> 67
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
consisting of only normal recurring adjustments, necessary for a fair
presentation of results for these interim periods. The results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year or for any future period.
Pro forma earnings per share
In light of the contemplated changes in the capital structure of the
Company, historical net (loss) income per share is not considered relevant as it
would differ materially from pro forma net (loss) income per share. Except as
noted below, pro forma net (loss) income per share is computed by dividing net
(loss) income by the pro forma weighted average number of shares of common stock
outstanding, assuming (i) the conversion of the Series A Preferred Stock into
833,785 shares of the Company's common stock, and (ii) the conversion of
dilutive common stock equivalent shares from common stock options. Common stock
equivalent shares are calculated using the treasury stock method. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83),
the pro forma earnings per share computations include all common stock and
common stock equivalent shares issued within the twelve months preceding the
initial filing date of the Company's contemplated registration statement as if
they were outstanding for all periods presented, using the treasury stock method
for common stock options and warrants at the initial public offering price and
the as if converted method for the Series B Preferred Stock.
The pro forma weighted average shares outstanding used for the calculation
of the pro forma earnings per share for the year ended December 31, 1996 and the
nine months ended September 30, 1996 was 9,577,844. The weighted average shares
outstanding used for the calculation of the pro forma earnings per share for the
nine months ended September 30, 1997 was 10,148,257.
New accounting standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128) entitled "Earnings Per
Share". This statement establishes standards for computing and presenting
earnings per share (EPS), simplifying previous standards for computing EPS and
making them comparable to international standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS, and requires dual
presentation of basic and diluted EPS on the face of the statement of operations
for all entities with complex capital structures. Basic EPS excludes dilution
and is computed by dividing income available for common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. SFAS 128 requires restatement of all prior period earnings per share
presented, and is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Early application of SFAS
128 is not permitted.
F-11
<PAGE> 68
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
The Company will adopt SFAS 128 for its December 31, 1997 financial
statements and will restate all prior period EPS data. To illustrate the effect
of adoption, the pro forma basic and diluted EPS, taking into consideration the
requirements of SAB 83, in 1996 and for the nine months ended September 30, 1996
and 1997 are set forth below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED --------------
DECEMBER 31, 1996 1996 1997
----------------- ------ -----
<S> <C> <C> <C>
Pro forma basic (loss) earnings per share.............. $ (0.13) $(0.20) $0.13
Pro forma diluted (loss) earnings per share............ $ (0.13) $(0.20) $0.12
</TABLE>
NOTE 3 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment............................. $ 2,423,536 $ 3,173,420 $ 4,214,739
Office equipment............................... 4,748,086 4,685,196 4,772,432
Furniture and fixtures......................... 3,051,404 3,092,399 3,192,081
Leasehold improvements......................... 1,226,080 1,226,080 1,259,912
----------- ----------- -------------
11,449,106 12,177,095 13,439,164
Less accumulated depreciation.................. (8,257,254) (9,280,870) (10,143,949)
----------- ----------- -------------
$ 3,191,852 $ 2,896,225 $ 3,295,215
========== ========== ===========
</TABLE>
Depreciation expense totaled $1,018,000, $876,000, $1,024,000 and $868,000
in 1994, 1995, 1996 and for the nine months ended September 30, 1997,
respectively.
NOTE 4 -- CAPITALIZED SOFTWARE COSTS
Capitalized software costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized software costs................... $ 19,171,402 $ 19,905,976 $ 19,905,976
Less accumulated amortization................ (13,414,150) (18,255,637) (19,237,810)
------------ ------------ -------------
$ 5,757,252 $ 1,650,339 $ 668,166
=========== =========== ===========
</TABLE>
The Company capitalized software development costs of $1,491,000,
$1,112,000 and $735,000 during 1994, 1995 and 1996, respectively. Amortization
expense of capitalized software costs was $3,168,000, $3,081,000, $4,841,000 and
$982,000 in 1994, 1995, 1996 and for the nine months ended September 30, 1997,
respectively.
F-12
<PAGE> 69
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
NOTE 5 -- DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Bank line of credit, at prime plus 1.5% (9.75%
at December 31, 1996) secured by all
assets....................................... $ 2,822,118 $ 1,000,000 $ --
Note payable at 9%, due in monthly installments
of $47,700, beginning in February 1996
through January 1999, secured by fixed
assets....................................... 1,500,000 1,085,513 719,103
----------- ----------- -------------
Total debt........................... 4,322,118 2,085,513 719,103
Less amounts due within one year............... (3,238,442) (1,493,763) (528,515)
----------- ----------- -------------
Long-term debt....................... $ 1,083,676 $ 591,750 $ 190,588
========== ========== ==========
</TABLE>
The Company had available credit of $1,000,000 at December 31, 1996 under
its $2,000,000 revolving line of credit agreement. The line of credit expired on
June 30, 1997 (Note 13). The terms of the Company's line of credit agreement
contain a fee, payable quarterly, equal to 1/2% of the average daily unused
portion of the line of credit.
The Company also had available credit of $500,000 at December 31, 1996
under its $1,000,000 restricted line of credit. The restricted line of credit,
which is secured by all assets, requires bank approval prior to utilization. The
amount available under this credit facility had been reduced by a $500,000
standby letter of credit issued to the Company's landlord in the event the
Company defaults on its lease obligations. Interest on any outstanding balance
is charged on this facility at prime plus 2%. The restricted line of credit
expired on June 30, 1997 (Note 13).
At December 31, 1996, the agreements governing the Company's lines of
credit and note payable contained covenants including the maintenance of
profitability levels and debt service coverage ratios and certain restrictions
on the payment of dividends. The Company was in violation of certain of these
covenants at December 31, 1996. On April 30, 1997, the Company received waivers
of these violations.
The Company paid interest of $155,000, $180,000, $414,000 and $244,000 in
1994, 1995, 1996 and for the nine months ended September 30, 1997, respectively.
F-13
<PAGE> 70
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
NOTE 6 -- SEGMENT INFORMATION
The Company classifies its operations into one industry segment, software
development and related services. The Company reports international license and
service revenues net of distributor commissions. Distributor commissions were
$11,342,000, $11,581,000, $11,649,000 and $6,159,000 in 1994, 1995, 1996 and for
the nine months ended September 30, 1997, respectively. Export sales, which
represent sales through international distributors, by geographic area consist
of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------
1994 1995 1996 1997
---------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Europe................................ $6,079,268 $6,903,732 $ 7,121,934 $ 3,092,395
Far East.............................. 1,755,302 2,193,173 2,183,904 1,851,342
Latin America......................... 729,671 858,777 734,287 829,287
Australia and Southeast Asia.......... 462,124 -- -- --
---------- ---------- ----------- -------------
$9,026,365 $9,955,682 $10,040,125 $ 5,773,024
========= ========= ========== ==========
</TABLE>
The Company did not have any international operations in 1994. A summary of
the Company's operations by geographic region in 1995, 1996 and for the nine
months ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
United States................................. $33,853,964 $35,618,743 $ 28,343,040
Europe........................................ 163,682 544,220 1,544,955
Australia and Southeast Asia.................. 605,860 837,224 793,850
Eliminations.................................. (163,682) (443,789) (304,654)
----------- ----------- -------------
Consolidated.......................... $34,459,824 $36,556,398 $ 30,377,191
========== ========== ==========
Operating (loss) income:
United States................................. $(5,360,185) $(2,262,628) $ 2,096,995
Europe........................................ (17,677) (47,173) (351,532)
Australia and Southeast Asia.................. (279,715) (417,874) (23,479)
Eliminations.................................. -- -- --
----------- ----------- -------------
Consolidated.......................... $(5,657,577) $(2,727,675) $ 1,721,984
========== ========== ==========
Assets at end of period:
United States................................. $31,053,058 $25,195,178 $ 28,161,068
Europe........................................ 53,758 403,348 1,913,174
Australia and Southeast Asia.................. 815,221 807,677 1,064,806
Eliminations.................................. (442,829) (1,330,221) (2,504,114)
----------- ----------- -------------
Consolidated.......................... $31,479,208 $25,075,982 $ 28,634,934
========== ========== ==========
</TABLE>
F-14
<PAGE> 71
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
NOTE 7 -- INCOME TAXES
The (loss) income before income taxes consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- SEPTEMBER 30,
1994 1995 1996 -------------
----------- ----------- ----------- 1997
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S................................. $(3,079,152) $(4,806,941) $(1,559,453) $ 2,530,204
International subsidiaries.......... -- (302,482) (455,340) (491,952)
----------- ----------- ----------- -------------
(Loss) income before taxes.......... $(3,079,152) $(5,109,423) $(2,014,793) $ 2,038,252
========== ========== ========== ==========
</TABLE>
The (benefit from) provision for income taxes consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- SEPTEMBER 30,
1994 1995 1996 -------------
----------- --------- ----------- 1997
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current taxes (receivable) payable:
U.S. Federal....................... $ (448,086) $(566,102) $ 226,835 $ 342,663
Foreign............................ 460,739 433,608 518,599 374,819
State and local.................... (65,929) 89,949 40,593 56,162
----------- --------- ----------- -------------
(53,276) (42,545) 786,027 773,644
----------- --------- ----------- -------------
Deferred tax (benefit) provision:
U.S. Federal....................... (1,054,108) (812,133) (1,534,972) 38,789
State and local.................... (50,860) (85,735) (63,567) 3,145
----------- --------- ----------- -------------
(1,104,968) (897,868) (1,598,539) 41,934
----------- --------- ----------- -------------
(Benefit from) provision
for income taxes......... $(1,158,244) $(940,413) $ (812,512) $ 815,578
========== ========= ========== ==========
</TABLE>
The Company paid income taxes of $1,128,000, $436,000, $527,000 and
$504,000 in 1994, 1995, 1996 and for the nine months ended September 30, 1997,
respectively. Foreign taxes paid relate primarily to taxes withheld from
revenues remitted by international distributors.
F-15
<PAGE> 72
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
The Company provides deferred taxes for temporary differences between the
bases of assets and liabilities for financial reporting purposes and the bases
of assets and liabilities for tax return purposes. The deferred tax
asset/(liability) at December 31, 1995 and 1996 and September 30, 1997 is
attributable to the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1995 1996 1997
----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred Tax Assets:
Deferred revenue.............................. $ 842,780 $ 827,289 $ 812,590
Stock incentive plan.......................... 385,581 252,906 511,564
Allowance for doubtful accounts............... 265,398 139,981 198,607
Tax credit carryforwards...................... 874,122 1,221,719 1,221,719
Sublease and general sales tax accrual........ 598,490 260,689 158,932
Capitalized software development costs........ 204,451 181,734 173,600
Losses from international subsidiaries not
utilized................................... -- 185,000 381,694
Other......................................... 202,510 120,303 --
Valuation allowance........................... (690,885) (410,000) (410,000)
----------- ---------- -------------
2,682,447 2,779,621 3,048,706
----------- ---------- -------------
Deferred Tax Liabilities:
Depreciation and amortization................. (1,800,598) (288,059) (300,000)
Other......................................... -- (11,174) (226,384)
----------- ---------- -------------
(1,800,598) (299,233) (526,384)
----------- ---------- -------------
Net deferred tax asset................ $ 881,849 $2,480,388 $ 2,522,322
========== ========= ==========
Current deferred tax asset...................... $ 1,354,059 $2,065,460 $ 1,402,022
Non-current deferred tax (liability) asset...... (472,210) 414,928 1,120,300
----------- ---------- -------------
Net deferred tax asset................ $ 881,849 $2,480,388 $ 2,522,322
========== ========= ==========
</TABLE>
During 1995, the Company recorded a valuation allowance of $690,885 to
reflect foreign tax credit carryforwards that, in the Company's estimation,
would more likely than not expire prior to utilization. During 1996, the Company
reduced the tax credit carryforward valuation allowance to $225,000 to reflect
the increased likelihood that certain of the foreign tax credits would be
realized. The Company also recorded in 1996 a valuation allowance of $185,000 to
reflect the tax effect of estimated international subsidiary net operating
losses that, in the Company's estimation, will more likely than not result in no
future tax benefit to the Company.
At December 31, 1996, the Company had foreign net operating loss
carryforwards of approximately $500,000, of which $100,000 expire in 2001 and
the remaining $400,000 carryforward indefinitely, and are available to offset
future foreign taxable income. In addition, the Company had foreign tax credit
carryforwards of $814,000 which expire in years 2000 through 2001, research and
development tax credit carryforwards of $241,000 which expire in years 2003
through 2004 and a minimum tax credit carryforward of $81,000 which
carryforwards indefinitely, which are available to offset future U.S. tax
liabilities.
F-16
<PAGE> 73
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
The (benefit from) provision for income taxes differs from the amount of
taxes determined by applying the U.S. Federal statutory rate of 34% to income
(loss) before income taxes as a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------
1994 1995 1996 1997
----------- ----------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computation of U.S. Federal income taxes at
34%........................................ $(1,046,912) $(1,634,359) $(685,030) $ 693,079
State and local taxes, net of Federal income
tax benefit................................ (81,290) 21,769 (49,750) 73,996
Change in valuation allowance................ -- 690,885 (280,885) --
Provision for competent authority............ -- -- 148,386 --
Other........................................ (30,042) (18,708) 54,767 48,503
----------- ----------- --------- -------------
Benefit from income taxes............... $(1,158,244) $ (940,413) $(812,512) $ 815,578
========== ========== ========= ==========
</TABLE>
Competent authority is a process to resolve unintended results between the
U.S. and foreign taxing jurisdictions. The provision for competent authority was
established in 1996 to reflect management's belief that the outcome of this
process would likely result in a liability.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The Company has a profit incentive plan ("PIP") which is a defined
contribution plan with a cash (or non-qualified) component covering all
employees with one year of service and providing for annual discretionary
contributions of up to 15% of eligible compensation. Employees are 100% vested
in all contributions to the PIP. The Company did not make contributions to the
PIP in 1994, 1995 or 1996.
The Company also has a 401(k) defined contribution plan. During 1994, 1995,
1996 and the nine months ended September 30, 1997, the Company matched 50% of
the first 3% of employees' deferred contributions. Employees are fully vested in
all Company contributions. The Company recorded expense for its matching
contributions of $169,000, $192,000, $205,000 and $176,000 during 1994, 1995,
1996 and for the nine months ended September 30, 1997, respectively.
NOTE 9 -- MANDATORILY REDEEMABLE PREFERRED STOCK
The Board has the authority to issue up to 8,000,000 shares of preferred
stock, and to determine the price, rights, preferences and privileges of those
shares without further vote or action by the stockholders, subject to the
consent of the holders of outstanding preferred stock, if any.
The Company's Series A Preferred Stock paid cumulative dividends effective
May 1, 1992 at an annual rate of $0.15 per share until April 30, 1997, and
thereafter at an annual rate of $0.375 per share. The holders of Series A
Preferred Stock may not sell, assign or transfer any of the stock without the
Company's prior written consent.
The Company is required to redeem $1,500,000 of Series A Preferred Stock
each year ("redemption year") plus accumulated dividends, beginning May 1, 1997.
Additionally, the Company may redeem all or a portion of the outstanding Series
A Preferred Stock at any time. If the Company redeems all of the outstanding
shares, the Company may pay the redemption amount by any combination of cash and
promissory note. The redemption price will equal $5.00 per share plus 75% of the
amount, if any, by which the lesser (i) of the 1.5 multiplied by the fair market
value per share of the common stock as determined by the Board at
F-17
<PAGE> 74
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
the beginning of the redemption year or (ii) $7.4333 per share, exceeds $5.00
per share. Accordingly, the redemption price per share cannot exceed $6.825 per
share.
The holders of Series A Preferred Stock may convert all, but not less than
all, of the preferred shares into common stock at the time of an initial public
offering ("IPO") of the Company's common stock based upon the relationship
between the redemption price and the IPO price of the Company's common stock. In
addition, the holders of Series A Preferred Stock are entitled to convert all,
but not less than all, of the preferred shares into common stock if the Company
fails to make any dividend or redemption payment or, if applicable, any other
payments due to the holders. Under the terms of the Series A Preferred Stock,
each share of Series A Preferred Stock is convertible into that number (or
fraction) of common stock equal to the ratio of the then-current redemption
price to the then-current fair market value of the Company's common stock, as
determined by the Board, by appraisal, or by reference to the IPO price of the
Company's common stock, as applicable. See Notes 11 and 12.
In 1995, the redemption price of the Series A Preferred Stock was adjusted
based upon the fair market value of the Company's common stock of $4.00 per
share. In April 1997, the Board approved an adjustment in the fair market value
of the Company's common stock to $4.97 to be effective May 1, 1997, which
resulted in an increase in the redemption price of the Series A Preferred Stock.
As described in Note 12, subsequent to December 31, 1996, the Company
issued 395,195 shares of mandatorily redeemable Series B Preferred Stock.
The following table summarizes the activity with respect to the Series A
Preferred Stock and Series B Preferred Stock:
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK
---------------------- --------------------
REDEMPTION REDEMPTION
SHARES VALUE SHARES VALUE
--------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993....................... 1,020,000 $5,390,700 -- $ --
Adjustment to redemption value..................... -- -- -- --
--------- ---------- ------- ----------
Balance at December 31, 1994....................... 1,020,000 5,390,700 -- --
Adjustment to redemption value..................... -- 474,300 -- --
--------- ---------- ------- ----------
Balance at December 31, 1995....................... 1,020,000 5,865,000 -- --
Adjustment to redemption value..................... -- -- -- --
--------- ---------- ------- ----------
Balance at December 31, 1996....................... 1,020,000 5,865,000 -- --
Issuance of Series B preferred stock (unaudited)... -- -- 395,195 2,500,000
Redemption of Series A preferred stock
(unaudited)...................................... (109,891) (750,006) -- --
Adjustment to redemption value (unaudited)......... -- 1,096,500 -- 109,778
--------- ---------- ------- ----------
Balance at September 30, 1997 (unaudited).......... 910,109 $6,211,494 395,195 $2,609,778
======== ========= ======= =========
</TABLE>
NOTE 10 -- REDEEMABLE COMMON STOCK INSTRUMENTS AND STOCKHOLDERS' EQUITY
1994 Stock Incentive Plan
During 1994, the Company adopted the 1994 Stock Incentive Plan ("1994 SIP")
under which employees may acquire shares of the Company's common stock via stock
option grants, restricted stock awards and/or stock bonuses. The 1994 SIP is
administered by the Board, which has the sole discretion to grant options and
restricted stock awards. The 1994 SIP replaced the 1989 Stock Incentive Plan
("1989 SIP") and the 1992
F-18
<PAGE> 75
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
Executive Stock Incentive Plan ("1992 ESIP"). Options outstanding under the 1989
SIP and the 1992 ESIP will remain outstanding until the options either expire or
are exercised.
As of September 30, 1997, a total of 3,000,000 shares of common stock can
be issued under the 1994 SIP through (i) qualified stock options, which qualify
as incentive stock options and have an exercise price equal to or greater than
the fair market value of the common stock, as determined by the Board, at the
date of grant, (ii) non-qualified stock options, which have an exercise price
equal to or greater than 85% of the fair market value of the common stock, as
determined by the Board, on the date of grant, (iii) restricted stock awards for
common stock at a price determined by the Board, but not less than 85% of the
fair market value of the stock at the date of grant, which is non transferable
and subject to repurchase at the holder's cost until Board designated conditions
have been met, or (iv) stock bonuses. See Note 13.
The Company has the right to repurchase at the fair market value, as
determined by the Board, at any time following the termination of a grantee's
employment with the Company for any reason (including retirement, death or
disability), all or any portion of the option shares, restricted stock or bonus
shares then held by the grantee. A grantee does not have the right to require
the Company to repurchase shares issued pursuant to the 1994 SIP.
1992 Executive Stock Incentive Plan
During 1992, the Company adopted the 1992 Executive Stock Incentive Plan
("1992 ESIP") under which key executives were granted options to purchase shares
of the Company's common stock.
While employed by the Company and for a period of ninety days thereafter, a
grantee has the right to require the Company to repurchase at the fair market
value, as established by the Board, all or any portion of the employee's option
shares. The grantee's right to require the Company to repurchase at the fair
market value expires upon an IPO of the Company's common stock. The Company also
has the right to repurchase at the fair market value, at any time following the
termination of a grantee's employment with the Company, all or any portion of
the option shares then held by the grantee.
In 1994, the 1992 ESIP was replaced by the 1994 SIP. No additional grants
will be made under the 1992 ESIP. Options outstanding under the 1992 ESIP will
remain outstanding until the options either terminate or are exercised.
1989 Stock Incentive Plan
During 1989, the Company adopted the 1989 Stock Incentive Plan ("1989 SIP")
under which certain employees were granted options to purchase shares of
Company's common stock and/or restricted stock awards. The 1989 SIP is
administered by the Board, which has the sole discretion to grant options and
restricted stock awards.
While employed by the Company, a grantee has the right to require the
Company to repurchase at the fair market value, as established by the Board, all
or any portion of his (i) option shares and (ii) restricted stock with respect
to which all of the conditions have been met. The Company also has the right to
repurchase at the fair market value, at any time following the termination of a
grantee's employment with the Company, all or any portion of the option shares
or restricted stock then held by the grantee. To the extent that the number of
shares that the Company becomes obligated to purchase under the 1989 SIP during
any twelve-month period exceeds 2% of the outstanding common stock of the
Company, the Company has the right to pay the purchase price for the shares in
excess of the 2% threshold in twelve equal quarterly installments of principal,
with interest at the lesser of 9% or the "applicable Federal rate" applied to
installment purchases under Section 483 of the Internal Revenue Code.
F-19
<PAGE> 76
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
In 1994, the 1989 SIP was replaced by the 1994 SIP. No additional grants
will be made under the 1989 SIP. Options outstanding under the 1989 SIP will
remain outstanding until the options either terminate or are exercised.
1996 Advisory Board Plan
In December 1996, the Company established the 1996 Advisory Board Stock
Incentive Plan ("1996 ABP"). As of September 30, 1997 pursuant to the 1996 ABP,
the Company can issue up to 300,000 options to members of the Company's Advisory
Board. In 1996, the Company granted 120,000 options, which vest over a four year
period at an exercise price of $4.00 per share. The Company will record the fair
value of the options as stock compensation expense ratably over the vesting
period. See Note 13.
Other Stock Options
In 1994, 1995, 1996 and for the nine months ended September 30, 1997, the
Company issued 42,525, 107,799, 24,750 and 85,335 options, respectively, to
former employees of the Company to replace options previously issued under the
1989 SIP, the 1992 ESIP and the 1994 SIP which unexpired unexercised concurrent
with or subsequent to separation from the Company. The terms of the options
granted were similar, but not identical to, the terms of the options they
replaced. The Company recorded compensation expense associated with these
options of $215,000, $90,000 and $60,000 in 1994, 1995 and for the nine months
ended September 30, 1997. The Company did not record compensation expense for
these options in 1996 because such amount was not material.
Options Outstanding and Exercisable
The following table summarizes information about options outstanding for
all stock option plans:
<TABLE>
<CAPTION>
SHARES PRICE PER WEIGHTED AVERAGE
OUTSTANDING SHARE EXERCISE PRICE
UNDER OPTION UNDER OPTION PER SHARE
------------ ------------ ----------------
<S> <C> <C> <C>
Balance at December 31, 1994.................. 2,150,564 $3.00-3.59 $ 3.29
Stock options granted....................... 618,537 3.00-4.00 3.81
Stock options exercised..................... (34,389) 3.33-3.59 3.43
Stock options canceled...................... (385,101) 3.00-4.00 3.35
Stock options expired....................... (29,691) 3.33 3.33
------------
Balance at December 31, 1995.................. 2,319,920 3.00-4.00 3.42
Stock options granted....................... 1,166,010 3.59-4.00 3.99
Stock options exercised..................... (286,083) 3.00-3.59 3.09
Stock options canceled...................... (406,215) 3.00-4.00 3.61
------------
Balance at December 31, 1996.................. 2,793,632 3.00-4.00 3.67
Stock options granted....................... 593,452 3.33-4.97 3.97
Stock options exercised..................... (186,348) 3.00-4.00 3.23
Stock options canceled...................... (285,477) 3.33-4.00 3.85
------------
Balance at September 30, 1997................. 2,915,259 $3.00-4.97 $ 3.74
==========
</TABLE>
F-20
<PAGE> 77
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
The following table summarizes information about options outstanding at
September 30, 1997 by plan:
<TABLE>
<CAPTION>
TOTAL OPTIONS TOTAL OPTIONS TOTAL OPTIONS
OUTSTANDING EXERCISABLE AVAILABLE FOR FUTURE GRANT
------------- ------------- --------------------------
<S> <C> <C> <C>
1989 Stock Incentive Plan............... 72,818 72,724 --
1992 Executive Stock Incentive Plan..... 304,687 304,687 --
1994 Stock Incentive Plan............... 1,909,237 579,129 1,052,363
1996 Advisory Board Plan................ 120,000 30,000 180,000
Other stock options..................... 508,517 284,305 --
------------- ------------- ------------
Total at September 30, 1997............. 2,915,259 1,270,845 1,232,363
========== ========== ===================
</TABLE>
At September 30, 1997, the average exercise price per share of exercisable
options is $3.54. The unvested options vest primarily over a four year period
and will be fully vested in the year 2001. The remaining average option life is
5.6 years.
The fair value of each employee option grant is estimated on the date of
grant using a minimum value model. The weighted-average assumptions included in
the Company's fair value calculations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Expected life (years)............................ 5 5 5
Risk-free interest rate.......................... 5-6% 6-7 % 6-7 %
Volatility....................................... 0 0 0
Dividend yield................................... 0% 0 % 0 %
</TABLE>
The weighted-average fair value of stock options granted under the employee
stock option plans during 1995, 1996 and for the nine months ended September 30,
1997 was $1.01, $1.08 and $1.05, respectively. Had the Company determined
compensation costs for these plans in accordance with SFAS No. 123 (Note 2), the
Company's pro forma net (loss) income would have been $(4,210,000) in 1995,
$(1,391,000) or $(0.15) per share in 1996 and $862,000 or $0.08 for the nine
months ended September 30, 1997. The SFAS No. 123 method of accounting does not
apply to options granted prior to January 1, 1995 and, accordingly, the
resulting pro forma compensation cost may not be representative of that to be
expected in the future.
Stock Bonuses
During 1994 and 1995, the Board approved stock bonuses of 1,200 and 750
shares, respectively, of common stock to be given to employees. The shares
issued were recorded as compensation expense of $4,304 and $3,000, respectively.
This stock was issued with the same restrictions as stock issued under the 1989
SIP. During 1996, the Board did not approve any stock bonuses.
Employee Stock Purchase Plan
During 1991, the Company adopted an Employee Stock Purchase Plan ("ESPP")
under which employees may purchase shares of the Company's common stock. The
Board will determine the number of shares of common stock made available under
this plan for each purchase year. For each of the plan years ended April 30,
1995, 1996 and 1997, 75,000 shares were made available for purchase. For the
plan year ended April 30, 1998, the Board did not make any shares of common
stock available for purchase. For the plan years ended April 30, 1995 and 1996,
4,557 and 20,817 shares, respectively, were purchased. For the plan year ended
April 30, 1997, 5,192 shares were purchased as of December 31, 1996 and the
remaining 69,808 shares were
F-21
<PAGE> 78
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
subsequently purchased. Shares are purchased at their fair market value as
determined by the Board. Eligible employees can purchase shares valued at up to
10% of their gross cash compensation.
The shares employees purchase under this plan are subject to certain
transfer restrictions. Without the prior written consent of the Company, an
employee cannot sell, assign or transfer any common stock purchased under this
plan to any person or entity other than the Company, another shareholder or
employee. Under certain conditions, the employee can elect to require the
Company to repurchase their shares at fair market value. At any time following
the termination of an individual's employment, the Company has the right to
repurchase the employee's shares acquired through this plan at fair market
value.
Stock Compensation Expense
The Company records stock compensation expense for the amount, if any, by
which the fair market value of the Company's common stock exceeds the option
exercise price at the date of the option grant. The Company also records stock
compensation expense for shares and options outstanding under the 1989 SIP, the
1992 ESIP and the ESPP to reflect any increase in the amount at which the
holders may require the Company to repurchase such shares. The Company records
stock compensation benefit to reflect any forfeitures of unvested stock options.
The Company recorded stock compensation expense (benefit) of $28,000, $763,000,
$(96,000) and $568,000 in 1994, 1995, 1996 and for the nine months ended
September 30, 1997, respectively. The fair market value of the Company's common
stock, as determined by the Board effective as of May 1 of each year, was $3.59,
$4.00, $4.00 and $4.97 for 1994, 1995, 1996 and 1997, respectively.
Redeemable Common Stock Instruments
The redeemable common stock instruments represent shares of common stock
and options to acquire common stock issued by the Company to certain employees
pursuant to the 1989 SIP, the 1992 ESIP, the ESPP and other agreements whereby
the holder has the right to require the Company to repurchase such shares at
their current fair market value as determined by the Company's Board. The rights
of holders of Redeemable Common Stock Instruments to require the Company to
repurchase such shares automatically lapses on the effective date of an initial
public offering of the Company's common stock.
F-22
<PAGE> 79
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
The following table summarizes the activity with respect to the redeemable
common stock instruments:
<TABLE>
<CAPTION>
SHARES OF COMMON REDEMPTION
STOCK UNDERLYING SHARES OF VALUE OF
REDEEMABLE REDEEMABLE COMMON STOCK
STOCK OPTIONS COMMON STOCK INSTRUMENTS
---------------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1993....................... 715,470 25,005 $ 310,578
Compensation for non-qualified redeemable stock
options....................................... -- -- 10,582
Redeemable common stock issued................... (57,080) 62,837 209,916
Redeemable common stock repurchased by the
Company....................................... -- (59,168) (212,214)
Redeemable stock option grants................... 698,941 -- --
Expiration of redeemable stock option grants..... (13,032) -- --
Cancellation of redeemable stock option grants... (162,525) -- --
--------- -------- ----------
Balance at December 31, 1994....................... 1,181,774 28,674 318,862
Compensation for non-qualified redeemable stock
options....................................... -- -- 673,445
Redeemable common stock issued................... (34,239) 55,806 199,236
Redeemable common stock repurchased by the
Company....................................... -- (37,363) (142,500)
Cancellation of redeemable stock option grants... (223,097) -- --
--------- -------- ----------
Balance at December 31, 1995....................... 924,438 47,117 1,049,043
Redeemable common stock issued................... (286,083) 303,540 952,456
Redeemable common stock repurchased by the
Company....................................... (300,297) (1,201,188)
Cancellation of redeemable stock option grants... (66,345) -- --
Forfeiture of unvested redeemable stock
options....................................... -- -- (96,381)
--------- -------- ----------
Balance at December 31, 1996....................... 572,010 50,360 703,930
Adjustment to redemption value................... -- -- 425,834
Redeemable common stock issued................... (142,473) 212,171 716,897
Redeemable common stock repurchased by the
Company....................................... -- (19,433) (93,366)
Cancellation of redeemable stock option grants... (20,967) -- (4,185)
Waiver of rights to require repurchase........... (213,750) (8,240) (237,108)
--------- -------- ----------
Balance at September 30, 1997...................... 194,820 234,858 $1,512,002
========= ======== ==========
</TABLE>
F-23
<PAGE> 80
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
NOTE 11 -- COMMITMENTS
During 1988, the Company entered into a ten-year lease for office space
which included a rent abatement for one and one-half years. Rental expense has
been calculated as total rental payments spread ratably over the life of the
lease. An accrued rent expense is created in years when rent expense exceeds
cash payments. In 1996, the Company extended the lease commitment by five years.
The current and long-term portions of the deferred rent abatement at December
31, 1996 are $87,000 and $479,000, and at September 30, 1997 are $87,000 and
$413,000, respectively, and have been included in accrued expenses or other
liabilities, as appropriate.
The Company is committed for the payment of minimum rentals, exclusive of
escalation charges and renewal options, under office space, computer and other
equipment operating lease agreements through 2003 in the following amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
------------------------------------------------------------ -----------
<S> <C>
1997................................................. $ 2,267,000
1998................................................. 2,538,000
1999................................................. 2,649,000
2000................................................. 2,313,000
2001................................................. 2,379,000
Thereafter........................................... 3,687,000
-----------
$15,833,000
==========
</TABLE>
Additionally, the Company leases certain equipment under cancelable
operating leases. The total rental expense under all equipment and office space
operating leases was approximately $3,700,000, $3,600,000, $3,500,000 and
$2,100,000 in 1994, 1995, 1996 and the nine months ended September 30, 1997,
respectively.
During 1994, the Company subleased office space for rates below the
Company's then current lease rates and recognized expenses of $651,000 for the
sublease rate differential. Additionally, during 1994 and 1995, the Company
attempted to sublease additional office space below market rates and recorded
expenses of $128,000 and $266,000 in 1994 and 1995, respectively, for the
anticipated rate differential. During 1996, the Company was able to terminate
its lease for the office space it was attempting to sublease and reversed a
reserve of $351,000.
In June 1992, the Company entered into a five-year non-compete agreement
with a former officer who is also a common stockholder and a Series A Preferred
stockholder pursuant to which the Company paid the former officer $22,917 per
month from May 1992 through January 1993 and $20,000 per month from February
1993 through April 1997. In addition, the former officer received $50,000 per
year from May 1992 through January 1993 and $15,000 per year from February 1993
through April 1997 for services rendered as a member of the Board.
NOTE 12 -- SUBSEQUENT EVENTS
Infarmedica Transaction
In January 1997, the Company signed an agreement to acquire certain rights
and related assets from Infarmedica Holding AG ("Infarmedica"), a former
distributor of the Company's products. Under the terms of the agreement
governing this relationship, Infarmedica held exclusive rights to market certain
of the Company's products in Austria, the Benelux countries, Germany and
Switzerland. As a result of the 1997 agreement, the Company gained access to its
significant customer base in these European countries (including
F-24
<PAGE> 81
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
an assignment of license and maintenance agreements) and established
subsidiaries in Germany and The Netherlands to support these customers directly.
In consideration for the acquisition of these rights, the Company will pay
Infarmedica $1,800,000 in installment payments from 1997 through 1999, of which
a minimum of $900,000 is required to be paid in 1997. In addition, the Company
granted Infarmedica a warrant to purchase 225,000 shares of the Company's common
stock at $4.00 per share, which was fully vested upon issuance, expires on
January 1, 2007 and is transferable only with the Company's consent. The Company
recorded the acquisition of the customer base as an intangible asset
representing the present value of the cash payments plus the fair value of the
warrant issued. The related intangible asset will be amortized over three years.
Mandatorily Redeemable Series B Preferred Stock
In March 1997, the Company amended its articles to designate 1,580,779
shares of Series B Preferred Stock and authorized the sale and issuance of such
shares. The Series B Preferred Stock is convertible, at the option of the
holder, into the Company's common stock based on a ratio of $6.326 to a
conversion price. Additionally, the Series B Preferred Stock is redeemable at
the holder's option at the earlier of December 31, 2000 or six months after an
IPO of the Company's common stock. The conversion price is initially established
at $6.326, but may be adjusted downward in the event that the Company issues
additional shares of common stock (or other securities convertible into common
stock) at a price less than the conversion price. The redemption price of the
Series B Preferred Stock is the sum of (i) $6.326 per share, plus interest of 8%
per annum, (ii) dividends declared but unpaid thereon, and (iii) interest of 8%
per annum on dividends declared but unpaid. Each outstanding share of Series B
Preferred Stock will be automatically converted into 1.5 shares of the Company's
common stock immediately upon the closing of a qualified public offering, as
defined. If a conversion does not occur, each holder of Series B Preferred Stock
may require the Company to redeem all or part of such holder's outstanding
Series B Preferred Stock at any time after the earliest of December 31, 2000 or
six months following the filing by the Company of a registration of its shares
with the Securities and Exchange Commission.
Concurrent with the authorization of Series B Preferred Stock, the Company
issued 316,156 shares of Series B Preferred Stock at a price of $6.326 per share
and, in April 1997, an additional 79,039 shares of Series B Preferred Stock at a
price of $6.326 per share. Based on these issuances, the purchaser is entitled
to elect a representative to the Board.
NOTE 13 -- EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF ACCOUNTANTS' REPORT
In July 1997, the Company amended its 1996 ABP to allow the Company to
issue options to designated outside members of the Company's Board and to rename
the 1996 ABP to the 1996 Advisory Board and Directors Stock Incentive Plan. At
the same time, the Company amended the 1996 ABP to increase the maximum options
issuable for grant from 150,000 to 300,000.
In July 1997, the Company amended its 1994 SIP to increase the maximum
number of options issuable from 2,250,000 to 3,000,000.
The revolving line of credit expired on June 30, 1997. The Company has
received a letter offering a commitment for a new facility.
In October 1997, the Company terminated the Advisory Board, accelerated the
vesting of 18,000 options granted pursuant to the 1996 ABP which were scheduled
to vest on December 31, 1997, and cancelled 36,000 unvested options granted
pursuant to the 1996 ABP.
F-25
<PAGE> 82
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED
NOTE 14 -- RECAPITALIZATION
The number of authorized shares of Common Stock was increased from 15
million shares to 30 million shares effective on October 22, 1997. A
three-for-two stock split of the Company's Common Stock took effect on November
17, 1997. All references to the number of shares authorized, issued and
outstanding and per share information for all periods presented have been
adjusted to give effect to the aforementioned stock split and share
authorization.
F-26
<PAGE> 83
(This page intentionally left blank)
<PAGE> 84
(This page intentionally left blank)
<PAGE> 85
=========================================================
NO UNDERWRITER, DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR A
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 26
Management............................ 37
Certain Transactions.................. 45
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 50
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 54
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL DECEMBER 12, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=========================================================
=========================================================
3,200,000 SHARES
[LANDMARK LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
C.E. UNTERBERG, TOWBIN
WHEAT FIRST
BUTCHER SINGER
NOVEMBER 17, 1997
=========================================================
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
--------
<S> <C>
Securities and Exchange Commission Filing Fee..................... $ 11,153
NASD Filing Fee................................................... 4,180
Nasdaq National Market Listing Fee................................ 43,402
Accounting Fees and Expenses...................................... 250,000
Blue Sky Fees and Expenses........................................ 5,000
Legal Fees and Expenses........................................... 200,000
Transfer Agent and Registrar Fees and Expenses.................... 15,000
Printing Expenses................................................. 150,000
Miscellaneous Expenses............................................ 206,265
--------
Total................................................... $885,000
========
</TABLE>
- ---------------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 13.1-697 of the Virginia Stock Corporation Act, as amended,
authorizes a corporation to indemnify an individual made a party to a proceeding
because he is or was a director against liability incurred in the proceeding if
such individual has conducted himself in good faith and if, in the course of
conduct in his official capacity, he believed that his conduct was in the best
interest of the corporation, and in all other cases, he believed that his
conduct was at least not opposed to the corporation's best interest. A
corporation is also authorized to indemnify a director in the case of any
criminal proceeding if the director had no reasonable cause to believe his
conduct was unlawful. The termination of the proceeding by judgment, order,
settlement or conviction is not, of itself, determinative that the director did
not meet the prescribed standard of conduct. A corporation may not indemnify a
director in connection with a proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation or in connection
with any other proceeding charging the director whether or not involving action
in his official capacity in which the director was adjudged liable on the basis
that personal benefit was improperly received by him.
Sections 13.1-698 and 13.1-702 of the VSCA provide that unless limited by
its articles of incorporation, a corporation shall indemnify each director,
officer, employee or agent who entirely prevails in the defense of any
proceeding to which he was a party because he is or was a director, officer,
employee or agent of the corporation against reasonable expenses incurred by him
in connection with the proceeding.
Section 13.1-704(B) of the VSCA provides that any corporation shall have
the power to make any further indemnity, including indemnity with respect to a
proceeding by or in the right of the corporation, and to make additional
provisions for advances and reimbursement of expenses to any director, officer,
employee or agent that may be authorized by the articles of incorporation or by
any bylaw made by the shareholders or any resolution adopted, before or after
the event, by the shareholders except an indemnity against willful misconduct or
a knowing violation of criminal law.
Article Ninth of the Registrant's Articles of Incorporation provides for
indemnification of officers and directors in the situations authorized by the
VSCA. In addition, the Underwriting Agreement provides for certain
indemnification of officers, directors and controlling persons of the
Registrant.
II-1
<PAGE> 87
The Registrant intends to obtain prior to the effective date of the
Registration Statement a policy of directors' and officers' liability insurance
that insures the Company's directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liability arising under the Securities
Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information concerning sales of unregistered securities
by the Company from October 1, 1994 to September 30, 1997 on an actual basis
(without regard to the pro forma adjustments appearing in the Prospectus):
(i) The Company granted stock options to employees and advisors
pursuant to the Stock Incentive Plans covering an aggregate of 1,523,832
shares of Common Stock exercisable at prices ranging from $4.50 to $7.45
per share.
(ii) The Company issued and sold an aggregate of 338,655 shares of
Common Stock to employees and advisors for an aggregate cash consideration
of $1,606,441 pursuant to exercises of stock options granted under the
Stock Incentive Plans.
(iii) The Company issued and sold an aggregate of 73,563 shares of
Common Stock to employees for an aggregate cash consideration of $433,095
pursuant to the Stock Purchase Plan.
(iv) On January 1, 1997, the Company issued warrants to purchase an
aggregate of 150,000 shares of Common Stock at $6.00 per share.
(v) On March 7, 1997 and April 1, 1997, the Company issued an
aggregate of 395,195 shares of Series B Preferred Stock to an accredited
investor for an aggregate cash consideration of $2,500,000.
No underwriters were involved in any of the foregoing transactions. The
issuances described in Items 15(i), (ii) and (iii) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 and were granted
in compensatory arrangements pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation. The issuance described
in Item 15(iv) was deemed exempt from registration under the Securities Act in
reliance on Section 4(2). The issuance described in Item 15(v) was deemed exempt
from registration under the Securities Act in reliance on Rule 506. In addition,
the recipients of securities described in the transactions described in Items
15(i) to (v) represented their intentions to acquire securities for investment
only and not with a view to or for sale in connection with any distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Articles of Incorporation
3.2* Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2* Specimen certificate of Common Stock
5.1* Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality of the Common
Stock
10.1* Employment agreement between the Company and Ralph E. Alexander dated April
9, 1997
10.2* 1989 Stock Incentive Plan
10.3* 1991 Employee Stock Purchase Plan
10.4* 1992 Executive Stock Incentive Plan
10.5* 1994 Stock Incentive Plan
</TABLE>
II-2
<PAGE> 88
<TABLE>
<C> <S>
10.6* 1996 Advisory Board and Directors Stock Incentive Plan
10.7* Registration Rights Agreement, dated as of March 7, 1997, among the Company,
certain Purchasers, Patrick H. McGettigan, Katherine K. Clark and Jeffrey H.
Bergman
11.1 Statement regarding calculation of net (loss) income per share
22.1* Subsidiaries of the Company
23.1* Consent of Shaw, Pittman, Potts & Trowbridge (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
24.1* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ---------------
* Filed previously.
(b) Financial Statement Schedules
The following financial statement schedule is submitted under Item 16(b):
Schedule II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are
not required or are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the issuer pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Vienna,
State of Virginia on the 18th day of November, 1997.
LANDMARK SYSTEMS CORPORATION
(Registrant)
By: /s/ KATHERINE K. CLARK
------------------------------------
Katherine K. Clark
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<C> <S> <C>
/s/ PATRICK H. MCGETTIGAN* Chairman of the Board November 18, 1997
- -------------------------------------
Patrick H. McGettigan
/s/ KATHERINE K. CLARK Chief Executive Officer and November 18, 1997
- ------------------------------------- Director (Principal Executive
Katherine K. Clark Officer)
/s/ RALPH E. ALEXANDER President, Chief Operating November 18, 1997
- ------------------------------------- Officer, Chief Financial
Ralph E. Alexander Officer, Secretary, Treasurer
and Director (Principal
Financial Officer)
/s/ HENRY D. BARRATT, JR.* Director November 18, 1997
- -------------------------------------
Henry D. Barratt, Jr.
/s/ JEFFREY H. BERGMAN* Director November 18, 1997
- -------------------------------------
Jeffrey H. Bergman
/s/ T. EUGENE BLANCHARD* Director November 18, 1997
- -------------------------------------
T. Eugene Blanchard
/s/ PATRICK W. GROSS* Director November 18, 1997
- -------------------------------------
Patrick W. Gross
/s/ LESLIE J. COLLINS Vice President, Finance November 18, 1997
- ------------------------------------- (Principal Accounting Officer)
Leslie J. Collins
</TABLE>
* By Ralph E. Alexander by power of attorney.
II-4
<PAGE> 90
LANDMARK SYSTEMS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COL. B
------------ COL. E
COL. C ----------
COL. A BALANCE AT ---------- COL. D BALANCE AT
- ---------------------------------------------- BEGINNING OF CHARGED TO ---------- END OF
DESCRIPTION PERIOD OPERATIONS DEDUCTIONS PERIOD
- ---------------------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
Allowance for uncollectible accounts $297,961 $855,249 $ (539,394)(A) $ 613,816
Deferred tax asset valuation allowance $ -- $ -- $ -- $ --
Year Ended December 31, 1995
Allowance for uncollectible accounts $613,816 $761,425 $ (650,902)(A) $ 724,339
Deferred tax asset valuation allowance $ -- $690,885 $ -- $ 690,885
Year Ended December 31, 1996
Allowance for uncollectible accounts $724,339 $303,913 $ (646,208)(A) $ 382,044
Deferred tax asset valuation allowance $690,885 $ -- $ (280,885)(B) $ 410,000
Nine Months Ended September 30, 1997
Allowances for uncollectible accounts $382,044 $501,813 $ (387,340)(A) $ 496,517
Deferred tax asset valuation allowance $410,000 -- -- $ 410,000
</TABLE>
(A) Uncollectible accounts written off
(B) Reduction in the tax valuation allowance
S-1
<PAGE> 91
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------ ------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1* Articles of Incorporation
3.2* Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2* Specimen certificate of Common Stock
5.1* Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality of the
Common Stock
10.1* Employment agreement between the Company and Ralph E. Alexander dated
April 9, 1997
10.2* 1989 Stock Incentive Plan
10.3* 1991 Employee Stock Purchase Plan
10.4* 1992 Executive Stock Incentive Plan
10.5* 1994 Stock Incentive Plan
10.6* 1996 Advisory Board and Directors Stock Incentive Plan
10.7* Registration Rights Agreement, dated as of March 7, 1997, among the
Company, certain Purchasers, Patrick H. McGettigan, Katherine K. Clark
and Jeffrey H. Bergman
11.1 Statement regarding calculation of net (loss) income per share
22.1* Subsidiaries of the Company
23.1* Consent of Shaw, Pittman, Potts & Trowbridge (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
24.1* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ---------------
* Filed previously.
<PAGE> 1
EXHIBIT 11.1
LANDMARK SYSTEMS CORPORATION
COMPUTATION OF PRO FORMA NET (LOSS) INCOME PER SHARE
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DEC 31, SEPT 30, SEPT 30,
1996 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE
Weighted average common shares outstanding (1) 7,735,707 7,735,707 7,710,025
Conversion of mandatorily redeemable Series A Preferred Stock 833,785 833,785 833,785
Conversion of SAB 83 shares:
Mandatorily redeemable Series B Preferred Stock (as if
converted method) 592,793 592,793 592,793
Common stock options and warrants (treasury stock method) 415,560 415,560 415,560
Conversion of common stock options and warrants (treasury
stock method) (1) - - 596,094
----------------- ----------------- -----------------
Total weighted average common and common equivalent shares 9,577,844 9,577,844 10,148,257
Net Income $ (1,202,281) $ (1,895,442) $ 1,222,675
----------------- ----------------- -----------------
Pro forma primary net (loss) income per share $ (0.13) $ (0.20) $ 0.12
================= ================= =================
FULLY DILUTED NET (LOSS) INCOME PER SHARE
Weighted average common shares outstanding (1) 7,735,707 7,735,707 7,710,025
Conversion of mandatorily redeemable Series A Preferred Stock 833,785 833,785 833,785
Conversion of SAB 83 shares:
Mandatorily redeemable Series B Preferred Stock (as if
converted method) 592,793 592,793 592,793
Common stock options and warrants (treasury stock method) 415,560 415,560 415,560
Conversion of common stock options and warrants
(treasury stock method) (1) - - 1,037,105
----------------- ----------------- -----------------
Total weighted average common and common equivalent shares 9,577,844 9,577,844 10,589,268
Net Income $ (1,202,281) $ (1,895,442) $ 1,222,675
----------------- ----------------- -----------------
Pro forma fully diluted net (loss) income per share $ (0.13) $ (0.20) $ 0.12
================= ================= =================
</TABLE>
Note: All items reflect a 3 for 2 split of the Company's common stock on which
took effect on November 17, 1997.
(1) Includes redeemable common stock instruments.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 (No.
333-35629) of our report dated April 30, 1997 except as to the recapitalization
described in Note 14 which is as of November 17, 1997 relating to the
consolidated financial statements of Landmark Systems Corporation, which appears
in such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended December 31, 1996 listed
under Item 16(b) of this Registration Statement when such schedule is read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included such schedule. We also consent to the
references to us under the headings "Experts" and "Selected Consolidated
Financial Data" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Consolidated
Financial Data."
PRICE WATERHOUSE LLP
Falls Church, Virginia
November 18, 1997
