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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-03373
LANDMARK SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
VIRGINIA 54-1221302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Towers Crescent Drive, Vienna, Virginia 22182-2700
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: 703-902-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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<S> <C>
Title of each class Name of each exchange on which registered
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Common Stock, par Nasdaq National Market
value $.01 per share
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of registrant's voting stock held by non-affiliates
as of March 3, 1999, was $59,778,070.
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The number of shares of the registrant's Common Stock outstanding as of March 3,
1999, was 11,900,065 shares.
The following document is hereby incorporated by reference into this Form
10-K:
Portions of the Registrant's 1999 Proxy Statement to be filed with the
Securities and Exchange Commission (Part III).
Some of the statements in this Annual Report on Form 10-K are "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are related to anticipated future operating results. Specifically, the following
may be impeded by events that have not been presently anticipated: the timing of
the release of new products, the sale of unbilled accounts receivable, the
upgrade of the Company's development environments, the Company's ability to sell
or issue equity or debt securities or to enter into credit facilities on
acceptable terms, the Company's ability to make its acquisitions accretive, the
ability of existing and planned hardware and software systems to accommodate
transition to the Euro without material effect on results of operations or
financial condition. Forward-looking statements are based on management's
current expectations and assumptions, which may be affected by a number of
factors, including, without limitation, competitive product introductions, price
competition, any failure or delay in the Company's ability to develop and
introduce new products, seasonal factors affecting the Company's sales, the
Company's ability to attract and retain qualified technical, sales, managerial
and other key personnel, the Company's ability to manage expenses effectively,
the recent introduction of the Euro currency, the "Year 2000" software and
systems issue, and other factors. Therefore, there can be no assurance that
actual future results will not differ materially from anticipated results.
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PART I
ITEM 1. BUSINESS.
GENERAL
Landmark Systems Corporation ("Landmark" or the "Company") 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(R) 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 provide performance
management capabilities for many leading hardware platforms; certain operating
systems from DEC, Hewlett-Packard, IBM, Microsoft, NCR and Sun; certain
databases consisting of DB2, IMS, Oracle, SQL Server and Sybase products; and
certain vendor applications such as IBM's CICS and MQSeries, as well as
proprietary customer applications. 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.
As of December 31, 1998, Landmark had licensed over 20,100 copies of its
products to over 3,800 customers worldwide.
Performance management software can provide early warning and facilitate
resolution of system problems by monitoring a system's key components, including
the central processing unit ("CPU"), memory and storage, input/output ("I/O"),
disk space, workload, operating system and network subsystems application.
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.
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.
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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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.
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, approximately 90% of Landmark's
customers have renewed their support and maintenance arrangements with the
Company.
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.
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.
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.
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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 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 95/98/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 the 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.
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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.
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 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.
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LANDMARK'S FAMILY OF PERFORMANCEWORKS PRODUCTS
MVS VSE UNIX Windows NT
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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 NCR
SQL/Capture Sun Solaris
MQSeries Oracle
IMS/DBCTL Sybase
Applications Response Monitor SmartWatch SmartWatch SmartWatch SmartWatch
Capacity Planning Interface to Interface to Predictor Predictor
third-party third-party
software software
User Interface NaviGraph NaviGraph SmartStation SmartStation
3270 3270
NaviPlex
Integrated Interfaces SNMP SNMP SNMP
NMVT ODBC ODBC
Vendor API's
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The Company derived 85.5%, 87.0% and 89.3% of its total revenues from mainframe
products and services in 1998, 1997 and 1996, respectively. For additional
information regarding the Company's financial performance by product group, see
Note 7 - Segment Information in the Company's Notes to Consolidated Financial
Statements contained elsewhere in this Form 10-K.
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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, The Monitor for MQSeries, NaviGraph and NaviPlex. Additionally, in June
1998, the Company began shipping the Monitor for IMS/DBCTL, addressing the
ongoing needs of customers coupling CICS transactions processing with IMS
databases. Landmark's family of MVS products provides 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.
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 alert
users to 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. Whether the
user sits in front of a UNIX/Motif workstation or a Windows 95/98/NT
workstation, the Java-based SmartStation can be used to manage all of
PerformanceWorks for UNIX and PerformanceWorks for NT from one desktop.
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,
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adding users, changing the server hardware configuration or changing the server
entirely. Predictor can be used to predict future behavior of UNIX and Windows
NT servers.
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, SmartAgent
for Sybase, SmartAgent for Oracle and SmartStation.
In December of 1998, the Company began shipping PerformanceWorks 3.0 for UNIX
and Windows NT environments. This latest version advances the Company's UNIX
and NT performance management capabilities and offers a scalable, integrated
end-to-end view of client/server performance management, including "what if"
analyses.
SmartWatch is a product that allows the measurement of application availability
and end-to-end response time on a user's Windows 95/98/NT desktop. Measurement
takes place, regardless of whether the application is developed in-house or
purchased off-the-shelf, using patented Landmark Systems technology.
RECENT DEVELOPMENTS
In January 1999, the Company signed an agreement to acquire certain rights and
related assets from Software Products Limited ("Software Products"), a former
international distributor of the Company's products. Under terms of the
agreement governing the distribution relationship, Software Products held
exclusive rights to market certain of the Company's products in the United
Kingdom. As a result of the 1999 agreement, the Company gained direct access to
its customers in the United Kingdom. As consideration for the acquisition of
these rights, the Company paid Software Products $4,000,000 in cash. As further
consideration, the Company issued to Software Products 91,586 shares of Company
common stock, with a fair value of $850,000 and subject to certain resale
restrictions and registration rights. Additionally, the Company granted Software
Products a warrant to purchase 150,000 shares of the Company's common stock at
the then fair market value of $10 per share, which vested upon issuance and
expires in January 2009. The Company will record the acquisition of the customer
base as an intangible asset representing the cash payment and the fair value of
the stock and warrant issued and will amortize the related intangible asset over
five years.
CUSTOMERS AND SERVICES
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.
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, support for new releases and upgrades as well as maintenance
information. Historically, approximately 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
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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.
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 has historically relied primarily on third-party distributors to market
and sell the Company's products internationally. Revenues from international
sales accounted for 32.0%, 33.6% and 32.5% of total revenues in 1998, 1997 and
1996, respectively. Of those amounts, 13.3%, 18.0% and 27.5%, respectively, were
attributable to third-party distributors. The Company reacquired certain
distribution rights from its former UK distributor in January 1999, and may seek
to reacquire similar rights from certain of its other international distributors
in the future. Landmark has established subsidiaries 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 nine sales offices located in suburbs of London, Dusseldorf and
Utrecht (Netherlands), and in Rugby (United Kingdom), Madrid, Bornem (Belgium),
Melbourne, Sydney and Hong Kong. For additional information regarding the
Company's revenues and long-lived assets by geographic region, see Note 7 -
Segment Information in the Company's Notes to Consolidated Financial Statements
contained elsewhere in this Form 10-K.
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 1998, 1997 and 1996, Landmark's
product development expenditures, including amounts capitalized, totaled $15.5
million, $13.5 million and $14.7 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
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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.
As of December 31, 1998, the Company had 101 employees engaged in product
development. 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.
INTELLECTUAL PROPERTY
Landmark relies on a combination of copyright, trademark, patent 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 misappropriations 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 infringe 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.
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 and/or
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. Boole and
Babbage, Inc. announced its intention to merge into BMC Software, Inc. in Spring
1999. The impact of this merger on the Company is not yet determinable. In the
client/server market, Landmark believes that its principal competitors include
BMC Software, Inc., Compuware Corporation and Platinum Technology International
Inc.
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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.
EMPLOYEES
As of December 31, 1998, the Company employed 267 full time personnel, including
101 in product development, 30 in technical support, 91 in sales and marketing,
and 45 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.
ITEM 2. PROPERTIES.
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 Oakbrook, Illinois under a lease expiring in April 2002.
In addition, Landmark leases office space in the suburbs of London, Dusseldorf
and Utrecht (Netherlands), and in Rugby (United Kingdom), Madrid, Bornem
(Belgium), Melbourne, Sydney and Hong Kong.
Landmark expects to move its corporate headquarters to Reston, Virginia in June
1999. It has entered into an agreement whereby it will lease an approximately
100,000 square foot building to be built. The lease is for a term of 12 years,
with two renewal options each for an additional five years. Landmark has
executed a sublease of its Vienna, Virginia office space, to be effective upon
the commencement of the new lease. Landmark
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<PAGE> 12
believes that its existing facilities and offices, along with the new lease
expected to commence in June 1999, are adequate to meet its requirements for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently engaged in any material legal procedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
There were no matters submitted to stockholders for vote during the fourth
quarter of 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Katherine K. Clark............. 41 Chief Executive Officer and Director
Ralph E. Alexander............. 53 President, Chief Operating Officer and Director
Daniel C. Carayiannis 42 Vice President, North American Sales
John D. Hunter................. 52 Vice President, Mainframe Products
Worth D. MacMurray 45 Vice President, Legal and Administration
Andrew L. McCasker............. 36 Vice President, Distributed Products
Roger A. Philips............... 53 Vice President, International
Frederick S. Rolandi, III 47 Vice President and Chief Financial Officer
</TABLE>
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.
DANIEL E. CARAYIANNIS has served as Landmark's Vice President, North American
Sales since October 1998, with responsibility for sales and sales support within
the United States and Canada. Prior to joining Landmark, Mr. Carayiannis served
from July 1994 to October 1998 as Vice President of SPOT Image Corporation, a
satellite imagery and
12
<PAGE> 13
information data products firm. From April 1993 to July 1994, Mr. Carayiannis
served as Vice President of Sales for Falcon Microsystems, a federal computer
technology value-added reseller.
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.
ANDREW L. MCCASKER has served as Landmark's 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.
WORTH D. MACMURRAY has served as Landmark's Vice President, Legal and
Administration, since November 1998 with responsibility for legal and certain
administrative activities. Prior to joining Landmark, Mr. MacMurray served as
Vice President and General Counsel of Intersolv, Inc., a software tools
company, from October 1997 to October 1998. From February 1988 through
September 1997, Mr. MacMurray served in a variety of legal capacities for GTSI,
an information technology reseller, including General Counsel.
FREDERICK S. ROLANDI, III has served as Landmark's Vice President and Chief
Financial Officer since November 1998. Prior to his employment with Landmark,
Mr. Rolandi served as Vice President, Controller of Intersolv, Inc., a software
tools company, from November 1997 to October 1998. From 1991 to October 1997
Mr. Rolandi was employed with Honeywell Measurex DMC where he served as Vice
President and Chief Financial officer from May 1991 to Decmber 1995 and as Vice
President and General Manager from January 1996 to October 1997.
ROGER A. PHILIPS has served as Landmark's Vice President, International, 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.
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 of Directors (the "Board")
and serve at the Board's discretion.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Landmark's common stock (the "Common Stock") has been traded on the Nasdaq
National Market since the Company's initial public offering on November 18, 1997
under the symbol "LDMK." The following table sets forth the high and low
per-share closing sale price, as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
Fourth Quarter $12.25 $6.00
Third Quarter 10.75 7.375
Second Quarter 9.75 6.375
First Quarter 10.25 8.00
1997
Fourth Quarter (from November 18, 1997) $9.125 $7.00
</TABLE>
On March 3, 1999, the last reported sale price of the Company's Common Stock was
$10.00 per share and there were 170 holders of record of the Company's Common
Stock.
Landmark 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 may deem relevant.
ITEM 6. SELECTED 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 Results of
Operations and Financial Conditon included elsewhere in this Form 10-K. The
consolidated statements of operations data for the years ended December 31,
1996, 1997 and 1998, and the consolidated balance sheet data at December 31,
1997 and 1998 were derived, and are qualified by reference to, Consolidated
Financial Statements of the Company which were audited by
PricewaterhouseCoopers LLP and are included elsewhere in this Form 10-K. The
consolidated statements of operations data for the years ended December 31,
1994 and 1995 and the consolidated balance sheet data at December 31, 1994,
1995 and 1996 are derived from the Company's audited financial statements not
included in this Form 10-K.
14
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Total revenues $32,674 $34,460 $36,556 $43,362 $51,658
Gross profit 24,830 26,797 27,643 37,478 46,184
Operating expenses
Sales and marketing 11,716 13,092 11,671 14,310 17,125
Product research and development 9,094 12,490 13,924 13,478 15,247
General and administrative 7,800 6,872 4,776 5,258 5,560
------- ------- ------- ------- -------
Total operating expenses 28,610 32,454 30,371 33,046 37,932
------- ------- ------- ------- -------
Operating income (loss) (3,780) (5,657) (2,728) 4,432 8,252
Net income (loss) $(1,921) $(4,169) $(1,202) $ 3,006 $ 6,260
Historical net income (loss) per share (1)
Basic $ (0.28) $ (0.65) $ (0.18) $ 0.19 $ 0.54
Diluted $ (0.28) $ (0.65) $ (0.18) $ 0.17 $ 0.51
Pro forma net (loss) income per share (1)
Basic $ (0.13) $ 0.32
Diluted $ (0.13) $ 0.29
<CAPTION>
DECEMBER 31,
------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $800 $316 $339 $17,243 $28,322
Working capital (deficit) (1,544) (5,985) (4,138) 11,218 24,145
Total assets 33,172 31,479 25,076 44,508 59,307
Deferred revenue 18,108 18,548 18,705 20,392 24,799
Long-term debt (less current portion) - 1,084 592 51 -
Redeemable common stock instruments 319 1,049 704 - -
Mandatorily redeemable preferred stock 5,391 5,865 5,865 - -
Stockholders' equity (deficit) (204) (4,915) (6,290) 18,378 27,967
</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 basic and
diluted net income (loss) per share on both a historical basis and on a pro
forma basis.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS FOR 1998, 1997 AND 1996
The following table sets forth the Company's Consolidated Statements of
Operations expressed as percentages of total revenues for the periods indicated.
The Company's revenues are derived from licensing mainframe and client/server
computer software, and providing related maintenance and other services.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
License revenues 47.0% 38.7% 30.8%
Maintenance revenues 53.0 61.3 69.2
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues
Cost of license revenues 3.4 6.0 15.8
Cost of maintenance revenues 7.2 7.6 8.6
----- ----- -----
Total cost of revenues 10.6 13.6 24.4
----- ----- -----
Gross profit 89.4 86.4 75.6
----- ----- -----
Operating expenses
Sales and marketing 33.1 33.0 31.9
Product research and development 29.5 31.1 38.1
General and administrative 10.8 12.1 13.1
----- ----- -----
Total operating expenses 73.4 76.2 83.1
----- ----- -----
Operating income (loss) 16.0 10.2 (7.5)
Net interest and other income 3.4 1.1 2.0
----- ----- -----
Income (loss) before income taxes 19.4 11.3 (5.5)
Provision for (benefit from) income taxes 7.3 4.4 (2.2)
----- ----- -----
Net income (loss) 12.1% 6.9% (3.3)%
===== ===== =====
</TABLE>
Total revenues. Total revenues in 1998 were $51.7 million, an increase of 19.1%
from the prior year. Total revenues in 1997 were $43.4 million, an increase of
18.6% from 1996. Revenues in 1998 from mainframe products and services were
$44.2 million, an increase of 17.0% from the prior year, and revenues in 1998
from client/server products and services were $7.5 million, an increase of 33.3%
from the prior year. The increase in revenues from mainframe products and
services was primarily due to an increase in customer conversions to new or
modified license agreements, typically containing extended maintenance terms
with preferential pricing. The increase in client/server revenues was primarily
due to increased acceptance of the client/server products in international
markets.
License revenues. License revenues in 1998 were $24.3 million, an increase of
44.7% from the prior year. During 1997, license revenues were $16.8 million, an
increase of 48.9% from 1996. The increase in 1998 was primarily due to an
increase in the number of new customers, large dollar transactions (transactions
greater than $100,000) and customer conversions to new or modified license
agreements. During 1998, the Company
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<PAGE> 17
entered into over 40 license agreements which were large dollar transactions.
The increase in license revenues during 1997 as compared to 1996 reflected a
focusing of the Company's direct sales force on larger dollar transactions,
increased customer acceptance of existing products, 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.
Maintenance revenues. Maintenance revenues in 1998 were $27.4 million, an
increase of 3.0% from the prior year. During 1997, maintenance revenues were
$26.6 million, an increase of 5.1% from 1996. Maintenance revenues were
favorably impacted in 1998 by customer maintenance renewals and the increasing
license base. During 1998, maintenance revenues were adversely affected,
however, by an increase in conversions of license agreements, which include a
higher discount on maintenance fees. Maintenance renewal rates have historically
been approximately 90%, and management believes future maintenance renewal rates
will continue at this level.
Cost of license revenues. Cost of license revenues includes amortization of
capitalized software costs, amortization of international distribution rights
acquired, product royalties and materials and packaging expenses. Costs of
license revenues in 1998, 1997 and 1996 were $1.8 million, $2.6 million and $5.8
million, respectively, representing 7.3%, 15.4% and 51.3% of license revenues.
The $0.8 million reduction from 1997 to 1998 is primarily due to a decrease in
amortization of capitalized software costs. The $3.2 million reduction from 1996
to 1997 is primarily due to a $3.6 million decrease in amortization of
capitalized software costs, partially offset by $0.6 million of amortization of
intangible assets acquired from the Company's former distributor in Austria, the
Benelux countries, Germany and Switzerland.
Cost of maintenance revenues. Cost of maintenance revenues consists of personnel
and related costs for customer support, training and consulting services. Costs
of maintenance revenues in 1998, 1997 and 1996 were $3.7 million, $3.3 million
and $3.1 million, respectively, representing 13.5%, 12.4% and 12.4% of
maintenance revenues. The $0.4 million increase from 1997 to 1998 is primarily
due to an increase in the number of customer service employees. The increase of
$0.2 million from 1996 to 1997 is primarily due to the commencement of direct
operations in Austria, the Benelux countries, Germany and Switzerland.
Sales and marketing. Sales and marketing expenses include personnel and related
costs for the Company's direct sales organization, marketing staff and
promotional expenses. Sales and marketing expenses were $17.1 million, $14.3
million and $11.7 million in 1998, 1997 and 1996, respectively, representing
33.1%, 33.0% and 31.9% of total revenues. The $2.8 million increase from 1997 to
1998 is primarily due to a continued growth of the North American direct sales
force and an increase in marketing personnel and programs. The $2.6 million
increase from 1996 to 1997 is primarily due to expansion of the North American
and international direct sales forces and the creation of the telesales
organization within the North American sales force.
Product research and development. Product research and development expenses
include personnel and related costs for the Company's development staff. Product
research and development expenses were $15.2 million, $13.5 million and $13.9
million in 1998, 1997 and 1996, respectively, representing 29.5%, 31.1% and
38.1% of total revenues. The $1.8 million increase from 1997 to 1998 is due to
the Company's continued investment in both mainframe and client/server products.
The $0.4 million decrease in expenses from 1996 to 1997 is comprised of a
reduction in the Company's investment in client/server product development,
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. The Company capitalized software development costs of $0.3
million and $0.7 million in 1998 and 1996, respectively, and did not capitalize
any software development costs in 1997 as any amounts eligible for
capitalization were not material.
General and administrative. General and administrative expenses include salaries
and related costs of administration, finance and management personnel, as well
as legal and accounting fees. General and administrative expenses were $5.6
million, $5.3 million and $4.8 million in 1998, 1997 and 1996, respectively,
representing 10.8%, 12.1% and 13.1% of total revenues. The increase from 1997 to
1998 includes increased
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<PAGE> 18
expenses for information systems personnel and bad debt reserves, partially
offset by a decrease in stock compensation expense. The increase from 1996 to
1997 includes $0.6 million of stock compensation expense recorded in 1997, and
$0.3 million of bad debt reserves for losses on receivables, partially offset by
the impact of the Company's cost containment efforts.
Net interest and other income. Net interest and other income includes interest
income recorded on installment receivables, interest income earned on cash
balances, interest expense incurred on term and revolving credit facilities and
exchange gains (losses) incurred by the Company on transactions denominated in
foreign currencies. Net interest and other income were $1.8 million, $0.5
million and $0.7 million for 1998, 1997 and 1996, respectively. The increase
from 1997 to 1998 is due to higher levels of interest income earned on the
Company's cash balances, which include the proceeds from the Company's initial
public offering in November 1997, and the reduction of interest expense, due to
the repayment of the Company's debt obligations during 1998. The decrease from
1996 to 1997 is due to foreign exchange losses of $0.3 million recorded during
1997, which resulted from the combination of a strengthened U.S. dollar and
additional direct international operations.
Provision for (benefit from) income taxes. The Company's effective rates were
37.7%, 39.1% and (40.3)% for 1998, 1997 and 1996, respectively. The effective
tax rates 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 relative likelihood that foreign
subsidiary net operating losses would not be recovered.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $28.3
million, an increase of 64.3% from the prior year and working capital of $24.1
million. During 1998, net cash provided by operating and financing activities
was $11.9 million and $1.7 million, respectively, while net cash used in
investing activities was $2.5 million. The Company invests its cash, which
includes the $12.0 million proceeds from the Company's initial public offering
in November 1997, in a money market fund. The Company had no debt as of December
31, 1998, other than normal trade payables and accrued liabilities.
Stockholders' equity at December 31, 1998 was $28.0 million.
The Company continues to finance its growth through funds generated from
operations. During 1998, 1997 and 1996, cash flow from operations was $11.9
million, $5.8 million and $4.1 million, respectively. Net cash flow from
operating activities is primarily composed of net income, depreciation and
amortization, and increases in deferred revenue, partially offset by increases
in accounts receivable and unbilled accounts receivable. During 1998, the
Company augmented operating cash flows with the sale of $7.8 million of unbilled
accounts receivable. The sale of the unbilled receivables resulted in an
immaterial gain for the Company. In the future, the Company may sell additional
unbilled accounts receivable from time to time depending on the Company's cash
flow requirements and whether the terms are financially favorable for the
Company.
The Company's investing activities primarily include expenditures for fixed
assets in support of the Company's product development activities and
infrastructure, and for capitalized software development costs. During 1998,
1997 and 1996, the Company invested $2.3 million, $1.6 million and $0.7 million,
respectively, in fixed assets, consisting primarily of computer equipment to
expand and upgrade the Company's development activities. The Company expects to
upgrade, on an ongoing basis, its development environments to meet changing
customer and market requirements. For 1999, the Company's investments in fixed
assets are expected to total $3.3 million, partially in connection with its
planned second quarter headquarters relocation.
The Company's investing activities also include amounts recorded as capitalized
software development costs. Of the total research and development expenditures
of $15.5 million, $13.5 million and $14.7 million during 1998, 1997 and 1996,
the Company capitalized costs of $0.3 million and $0.7 million in 1998 and 1996,
respectively. The Company did not capitalize any software development costs in
1997 as any amounts eligible
18
<PAGE> 19
for capitalization were not material.
In January 1999, the Company signed an agreement to acquire certain rights and
related assets from Software Products Limited ("Software Products"), a former
international distributor of the Company's products. As a result of the
agreement, the Company regained direct access to its customers in the United
Kingdom. As consideration for the acquisition of these rights, the Company paid
Software Products $4.0 million in cash. As further consideration, the Company
issued to Software Products 91,586 shares of Company common stock, with a fair
value of $850,000 and subject to certain resale restrictions and registration
rights. Additionally, the Company granted Software Products a warrant to
purchase 150,000 shares of the Company's common stock at the then fair market
value of $10 per share, which vested upon issuance and expires in January 2009.
The Company will record the acquisition of the customer base as an intangible
asset representing the cash payment and the fair value of the stock and warrant
issued, with the related intangible asset being amortized into cost of license
revenues over five years. Management believes the transaction will be accretive
beginning in 1999.
The Company believes that cash and cash equivalents at December 31, 1998 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 or issue additional equity or debt securities or use
credit facilities.
INTRODUCTION OF THE EURO CURRENCY
The Euro became the single currency for most European countries on January 1,
1999, and the transition from national currencies to the Euro will be phased in
over several years. The Company is assessing Euro issues related to its treasury
operations, product pricing, contracts and accounting systems. Although the
evaluation of these issues is still in process, management currently believes
that the Company's existing or planned hardware and software systems will
accommodate the transition to the Euro and any required operating changes will
not have a material effect on future results of operations or financial
condition.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9
modifies SOP 97-2 by requiring revenue to be recognized using the "residual
method" if certain conditions are met. SOP 98-9 will be effective for the
Company's 2000 financial statements. Management is assessing the impact that SOP
98-9 will have on the Company's results of operations.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 became effective
January 1, 1999. Management does not believe that SOP 98-1 will have a material
impact on the Company's results of operations or financial condition.
YEAR 2000 COMPLIANCE
The Company has conducted an evaluation of its computer systems and products in
an effort to determine the actions, if any, necessary to make them Year 2000
compliant. The term "Year 2000 compliant" (or similar terms) generally means
that information technology hardware and software are able to correctly
interpret and manipulate dates up to and through the year 2000, without
interruption as the result of the change to this date.
This evaluation has involved both testing its computer systems and requesting
certifications from its vendors. The Company has received vendor certification
that all of its business critical information technology systems, including
internal communication systems, accounting and finance systems, customer service
systems and sales and marketing tracking systems, are Year 2000 compliant. Based
upon its evaluation, the Company has determined that approximately eighty
percent of its information technology systems are Year 2000 compliant,
19
<PAGE> 20
but has also found that certain non-business critical software applications may
not be compliant. The Company is engaged in upgrading, replacing and testing
these applications, and this process is expected to be completed by the end of
the second quarter of 1999.
The Company also recognizes that there are risks with respect to embedded
systems that are not necessarily a part of the Company's information technology
systems but contain microprocessor chips, which may not function properly with
the change of date to the year 2000. The majority of the embedded systems on
which the Company relies in its day-to-day operations are owned and managed by
the lessors of the buildings in which the Company's offices are located, or by
agents of such lessors. During the second quarter of 1999, the Company will move
its headquarters to a new facility, presently under construction and containing
new mechanical systems, in Reston, Virginia. Additionally, the Company intends
to install a new telephone switch in the new facility. The Company is in the
process of determining whether such new mechanical and telephone switch systems
are Year 2000 compliant, and presently believes that they will be so, based on
its building construction manager's experience with other such systems, and the
claims made by the manufacturers of such systems. The Company intends to seek
certificates from these manufacturers that their systems are Year 2000
compliant.
Because the Company believes that its information technology and embedded
systems will be substantially Year 2000 compliant in advance of the year 2000
date change, the Company currently has no contingency plan to address
non-compliance. The Company expects that, as it completes testing of information
technology and embedded systems, it will develop contingency plans if it
determines that any business critical systems will not be Year 2000 compliant.
Disruptions with respect to the computer systems of vendors or customers, which
are outside the control of the Company, could impair the ability of the Company
to obtain services from or conduct business with its customers. The Company
believes that its primary exposure is with respect to public utilities and
telecommunications service providers. The Company is in the process of sending
letters to these providers requesting written certification of Year 2000
compliance. Disruptions of the Company's utilities or telecommunications systems
could have a material adverse effect upon the Company's financial condition and
results of operations. The Company believes that no other providers are material
to its business. Disruptions of customers' computer systems could interfere with
payments to the Company by such customers, and therefore with the Company's
ability to make timely payments on its accounts, and could otherwise cause
disruptions to the Company's operations. None of the Company's customers,
however, is individually material to the Company's business and the Company does
not presently intend to seek certifications from its customers that their
internal computer systems are Year 2000 compliant.
With respect to the products sold by the Company, the Company has determined
that, to the extent that underlying hardware platforms, operating systems
applications and databases will accommodate the year 2000 date change, the
Company's performance management software products are Year 2000 compliant.
Notwithstanding its efforts to attempt to ensure that its products are Year 2000
compliant, the Company may experience future uncertainties and problems relating
to the year 2000 date change issue, including but not limited to possible
technical problems and/or customer claims.
The Company anticipates that virtually all of its customers and potential
customers will be required to evaluate their information technology systems with
respect to the year 2000 date change and that some of its customers and
potential customers may incur material costs in connection with this evaluation
and any necessary repairs and replacements. Customers and potential customers
may be required to devote material portions of their information technology
budgets to such evaluations, repairs and replacements, which could materially
reduce their other information technology purchases in 1999, including their
purchases of the Company's products, particularly as the year 2000 date change
draws closer. The Company does not have any information as to the degree to
which this issue will affect its customers or potential customers.
The Company has incurred to date approximately $0.3 million for Year 2000
remediation activities, of which
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<PAGE> 21
approximately $0.1 million was incurred in 1998. The Company currently expects
to incur approximately $0.1 million in 1999 for Year 2000 remediation
activities. There can be no assurance that the actions taken by the Company with
respect to its internal information technology systems, embedded systems or its
products will eliminate the numerous and varied risks associated with the year
2000 date change. Further, there can be no assurance that the Company will not
be adversely affected by any year 2000 related difficulties encountered by
vendors or customers or by any downturn in information technology purchases or
in the economy in general as the year 2000 date change draws nearer, or after
such date change. Additionally, the effects of any actual Year 2000
non-compliance problem directly or indirectly experienced by the Company could
be exacerbated by the fact that the Company normally experiences its largest
quarterly sales for a given calendar year in the fourth quarter of each year,
and invoices and receives payment for such sales in the first quarter of the
following calendar year. Accordingly, should a Year 2000 non-compliance problem
or problems affect the Company's customers, the potential impact on the
Company's operations could be greater than if the Company received these
payments at the time of sale or some time other than the calendar quarter
immediately after the date switch from 1999 to 2000. Any of these risks could
have a material adverse effect on the Company's financial condition and results
of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has subsidiaries in the United Kingdom, Spain, Australia, Hong
Kong, Germany and The Netherlands to act as distributors of its products.
Additionally, the Company uses third party distributors to market and
distribute its products in other international regions. Transactions conducted
by the subsidiaries are typically denominated in the local country currency,
while transactions conducted by the distributors are typically denominated in
U.S. dollars. As a result, the Company is primarily exposed to foreign exchange
rate fluctuations as the financial results of its subsidiaries are translated
into U.S. dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and impact overall expected
profitibility. However, through and as of December 31, 1998, the Company's
exposure was not material to the overall financial statements taken as a whole.
The Company has not entered into any foreign currency hedging transactions with
respect to its foreign currency market risk.
The Company does not have any financial instruments subject to material market
risk, except as discussed above. See Note 2 - Summary of Significant Accounting
Policies in the Company's Notes to Consolidated Financial Statements contained
elsewhere in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 15, 1999
21
<PAGE> 22
<TABLE>
<CAPTION>
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
License revenues $24,274,671 $16,781,122 $11,268,496
Maintenance revenues 27,383,169 26,581,373 25,287,902
----------- ----------- -----------
Total revenues 51,657,840 43,362,495 36,556,398
----------- ----------- -----------
Cost of revenues
Cost of license revenues 1,770,824 2,583,265 5,775,318
Cost of maintenance revenues 3,702,575 3,300,851 3,138,095
----------- ----------- -----------
Total cost of revenues 5,473,399 5,884,116 8,913,413
----------- ----------- -----------
Gross profit 46,184,441 37,478,379 27,642,985
----------- ----------- -----------
Operating expenses
Sales and marketing 17,124,823 14,309,460 11,670,261
Product research and development 15,247,055 13,478,173 13,924,117
General and administrative 5,560,788 5,258,230 4,776,282
----------- ----------- -----------
Total operating expenses 37,932,666 33,045,863 30,370,660
----------- ----------- -----------
Operating income (loss) 8,251,775 4,432,516 (2,727,675)
Interest and other income 1,832,310 776,321 1,077,558
Interest expense (41,668) (275,741) (364,676)
----------- ----------- -----------
Income (loss) before income taxes 10,042,417 4,933,096 (2,014,793)
Provision for (benefit from) income taxes 3,782,267 1,927,444 (812,512)
----------- ----------- -----------
Net income (loss) 6,260,150 3,005,652 (1,202,281)
Accretion and dividends on preferred stock - 1,475,409 153,000
----------- ----------- -----------
Net income (loss) available to common stockholders $ 6,260,150 $ 1,530,243 $(1,355,281)
=========== =========== ===========
Historical income (loss) per share
Basic $ 0.54 $ 0.19 $ (0.18)
Diluted $ 0.51 $ 0.17 $ (0.18)
Pro forma income (loss) per share
Basic $ 0.32 $ (0.13)
Diluted $ 0.29 $ (0.13)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
<TABLE>
<CAPTION>
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $28,322,234 $17,242,681
Accounts receivable, net of allowance for doubtful
accounts of $1,323,000 and $621,000 10,902,168 10,354,747
Unbilled accounts receivable 5,728,250 4,657,659
Deferred income taxes, net 1,644,482 1,264,501
Other current assets 854,082 242,644
----------- -----------
Total current assets 47,451,216 33,762,232
Unbilled accounts receivable - noncurrent 5,486,240 4,786,569
Fixed assets, net 4,121,290 3,249,241
Capitalized software costs, net 257,722 400,373
Deferred income taxes, net - noncurrent 1,094,397 946,517
Intangible assets, net 616,000 1,232,000
Other assets 280,030 131,332
----------- -----------
Total assets $59,306,895 $44,508,264
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,042,701 $ 709,653
Accrued expenses and other current liabilities 3,566,715 3,149,437
Deferred revenue 17,088,814 17,276,345
Income taxes payable 1,608,025 868,126
Debt due within one year - 540,771
----------- -----------
Total current liabilities 23,306,255 22,544,332
Long-term debt - 50,725
Deferred revenue - noncurrent 7,710,350 3,115,495
Other liabilities 323,212 419,528
----------- -----------
Total liabilities 31,339,817 26,130,080
----------- -----------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
authorized, 11,782,585 and 11,213,331 issued and
outstanding 117,826 112,133
Additional paid-in capital 26,692,818 23,413,955
Retained earnings (deficit) 1,019,503 (5,240,647)
Accumulated other comprehensive income 136,931 92,743
----------- -----------
Total stockholders' equity 27,967,078 18,378,184
----------- -----------
Total liabilities and stockholders' equity $59,306,895 $44,508,264
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 24
<TABLE>
<CAPTION>
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON SHARES
--------------------------- ACCUMULATED
ADDITIONAL OTHER
PAID-IN EARNINGS/ COMPREHENSIVE
ISSUED PAR VALUE CAPITAL (DEFICIT) INCOME TOTAL
------ --------- ------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,331,895 $73,320 $432,300 $(5,415,609) $ (4,536) $(4,914,525)
Comprehensive income (loss):
Net loss -- -- -- (1,202,281) -- --
Foreign currency translation (net
of tax of $13,492) -- -- -- -- (19,964) --
Total comprehensive income (loss) -- -- -- -- -- (1,222,245)
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)
Comprehensive income:
Net income -- -- -- 3,005,652 -- --
Foreign currency translation (net
of tax of $75,185) -- -- -- -- 117,243 --
Total comprehensive income -- -- -- -- -- 3,122,895
Issuance of warrants -- -- 48,000 -- -- 48,000
Series B Preferred Stock issuance
costs -- -- (52,115) -- -- (52,115)
Preferred stock redemption value
adjustment -- -- -- (1,232,579) -- (1,232,579)
Common stock issued upon exercise
of non-qualified stock options 317,177 3,171 1,115,358 -- -- 1,118,529
Tax benefit from exercise of
non-qualified stock options -- -- 265,446 -- -- 265,446
Compensation expense for options
granted to non-employees -- -- 169,268 -- -- 169,268
Common stock repurchased (136,209) (1,362) (871,156) -- -- (872,518)
Waiver of rights to require
repurchase 8,240 82 237,026 -- -- 237,108
Series A Preferred Stock dividends -- -- -- (242,830) - (242,830)
Issuance of common stock pursuant
to the initial public offering 2,000,000 20,000 13,000,000 -- -- 13,020,000
Initial public offering issuance costs -- -- (1,000,942) -- -- (1,000,942)
Lapse of rights to require repurchase 265,650 2,656 1,612,456 -- -- 1,615,112
Conversion of preferred stock
to common stock 1,426,578 14,266 8,458,314 -- -- 8,472,580
---------- -------- ----------- ----------- ------------ -----------
Balance at December 31, 1997 11,213,331 112,133 23,413,955 (5,240,647) 92,743 18,378,184
Comprehensive income:
Net income -- -- -- 6,260,150 -- --
Foreign currency translation (net
of tax of $26,698) -- -- -- -- 44,188 --
Total comprehensive income -- -- -- -- -- 6,304,338
Common stock issued upon exercise
of non-qualified stock options 529,742 5,298 2,099,515 -- -- 2,104,813
Tax benefit from exercise of
non-qualified stock options -- -- 904,852 -- -- 904,852
Issuance of common stock pursuant
to the 1998 SPP 39,512 395 274,496 -- -- 274,891
---------- -------- ----------- ----------- -------- -----------
Balance at December 31, 1998 11,782,585 $117,826 $26,692,818 $ 1,019,503 $136,931 $27,967,078
========== ======== =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 25
<TABLE>
<CAPTION>
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,260,150 $ 3,005,652 $(1,202,281)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,396,549 3,066,826 5,865,608
Provision for (reduction in) losses on accounts
receivable 603,015 348,882 (73,436)
Benefit for loss on leases - - (351,257)
Stock compensation expense (benefit) 99,687 590,917 (96,381)
(Benefit from) provision for deferred income taxes (527,861) 269,370 (1,598,539)
Tax benefit from exercise of stock options 904,852 265,446 -
Increase in accounts receivable (1,150,436) (1,156,315) (433,803)
Decrease in income taxes receivable 2,080 13,981 3,158,371
Sale of unbilled accounts receivable 7,820,975 - -
(Increase) decrease in unbilled accounts receivable (9,591,237) (2,182,813) 564,018
Increase (decrease) in accounts payable and accrued
expenses and other current liabilities 750,326 (192,934) (1,566,804)
Increase in income taxes payable 739,899 596,838 271,288
Increase in deferred revenue 4,407,324 1,377,254 157,187
Increase in other, net (858,532) (240,614) (549,862)
----------- ----------- -----------
Net cash provided by operating activities 11,856,791 5,762,490 4,144,109
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (2,252,225) (1,553,874) (728,494)
Capitalized software costs (257,722) - (734,574)
----------- ----------- -----------
Net cash used in investing activities (2,509,947) (1,553,874) (1,463,068)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on loans (591,496) (494,017) (414,487)
Payments on line of credit - (1,000,000) (1,822,118)
Issuance of common stock in the initial public offering - 12,019,058 -
Issuance of common stock pursuant to exercise of
stock options 2,005,126 1,659,745 882,628
Issuance of common stock pursuant to employee
stock purchase plans 274,891 278,791 69,828
Repurchases of common stock - (965,884) (1,201,188)
Issuance of Series B Preferred Stock - 2,447,885 -
Redemptions of Series A Preferred Stock - (1,124,999) -
Payment of Series A Preferred Stock dividends - (242,830) (153,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,688,521 12,577,749 (2,638,337)
----------- ----------- -----------
Effect of exchange rate changes on cash 44,188 117,243 (19,964)
----------- ----------- -----------
Net increase in cash and cash equivalents 11,079,553 16,903,608 22,740
Cash and cash equivalents, beginning of period 17,242,681 339,073 316,333
----------- ----------- -----------
Cash and cash equivalents, end of period $28,322,234 $17,242,681 $ 339,073
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 26
LANDMARK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company has established subsidiaries in the United Kingdom, Spain,
Australia, Hong Kong, Germany and The Netherlands to act as distributors of its
products in Europe, the Middle East, Africa, Australia, New Zealand and
Southeast Asia. Additionally, the subsidiaries provide technical support,
marketing and distribution support in their geographic markets.
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.
The Company completed an initial public offering of its $.01 par value
common stock on November 18, 1997 (the "IPO"). In preparation for the IPO, on
October 22, 1997, the Company increased the number of authorized shares of
common stock from 15 million shares to 30 million shares. A three-for-two stock
split of the 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 reflect the effects
of the stock split and share authorization.
Cash and Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash
flows, the Company considers all highly liquid investment instruments with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenues are recognized in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition." Sales of perpetual software licenses are
recorded as revenues when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed and determinable and collectibility is probable.
Maintenance revenues 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. For transactions
involving both license and maintenance revenues, the Company allocates the
revenues based upon the relative vendor specific objective evidence of fair
values of the license and the maintenance services.
In certain circumstances, 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 maintenance fees over a
three-to-five- year period, generally in annual installments. If collectibility
by the Company is probable, the Company records the present value of the
contracted stream of payments as an unbilled account receivable in its
26
<PAGE> 27
financial statements. Of this amount, the Company recognizes the underlying
license fee as license revenue and defers the underlying maintenance fee. As
installments are invoiced to the licensee in accordance with the payment
arrangement, the Company reflects a reduction in its unbilled accounts
receivable and an increase in its accounts receivable. Historically, the Company
has not granted concessions nor experienced significant bad debts associated
with these long-term payment arrangements. At December 31, 1998 and 1997,
unbilled accounts receivable have been reduced by $1,599,000 and $1,463,000,
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
on 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. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives used to compute
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 term of the related lease.
Intangible Assets
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 a
significant customer base in these European countries (including 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 $400,000 was paid in 1998
and $900,000 was 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. Amortization
expense for each of the years ended December 31, 1998 and 1997 was $616,000.
Software Development Costs
The Company accounts for its software development activities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Cost of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company capitalizes 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 (i) the ratio of current gross revenues for a product to
the total current and anticipated future gross revenues for the product or (ii)
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
18 months. Amortization expense recorded in 1997 and 1996 would have been
$750,000 higher and $2.3 million lower, respectively, if
27
<PAGE> 28
this change had not been made. The effect of the change was to increase net
income for 1997 by $450,000 ($0.06 per basic share and $0.05 per diluted share
on a historical basis and $0.04 per basic and diluted share on a pro forma
basis) and decrease net income in 1996 by $1.5 million ($0.20 per basic and
diluted share on a historical basis and $0.16 per basic and diluted share on a
pro forma basis).
Impairment of Long-Lived Assets
Long-lived assets 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.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. Under
APB No. 25, compensation expense is measured as the excess, if any, of the
market price of the Company's stock at the date of grant over the exercise price
of the option granted. Compensation expense for stock options, if any, is
recognized ratably over the vesting period. The Company provides additional pro
forma disclosures as required under SFAS No. 123, "Accounting for Stock-Based
Compensation" (Note 11).
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.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components. The Company's total
comprehensive income is comprised of net income and other comprehensive income,
which consists of foreign currency translation adjustments, and is presented in
the Consolidated Statement of Changes in Stockholders' Equity (Deficit). Prior
year financial statements have-been reclassified to conform with these
requirements.
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 included in stockholders' equity as
other comprehensive income. The Company does not attempt to hedge its foreign
currency exposures. Foreign currency losses of $6,000, $253,000 and $9,600 in
1998, 1997 and 1996, respectively, are included in other income.
28
<PAGE> 29
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 their
fair value due to the short maturity of those instruments. The carrying amounts
of debt due within one year and long-term debt approximate their fair value.
The Company has $11,214,000 and $9,444,000 of unbilled accounts receivable
outstanding at December 31, 1998 and 1997, respectively; the estimated fair
values of these receivables are $12,095,000 and $10,474,000, 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. 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.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," for its financial
statements for the year ended December 31, 1997. SFAS No. 128 requires
restatement of earnings per share for all periods presented. The following
reconciliation of the numerators and denominators is provided for historical
basic and diluted net income (loss) per share for 1998, 1997 and 1996. Basic net
income (loss) per share is computed by dividing the net income (loss) available
to common stockholders by the weighted-average number of shares of common stock
outstanding. Diluted net income (loss) per share is computed by additionally
reflecting the potential dilution that could occur, using the treasury stock
method, if warrants and options to acquire common stock were exercised or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
29
<PAGE> 30
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
HISTORICAL BASIC EPS
Net income available to common stockholders $ 6,260,150 11,491,395 $ 0.54
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 881,634
----------- ----------
HISTORICAL DILUTED EPS $ 6,260,150 12,373,029 $ 0.51
=========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income $ 3,005,652
Less accretion and dividends on
Preferred stock (1,475,409)
-----------
HISTORICAL BASIC EPS
Net income available to common stockholders 1,530,243 7,876,208 $ 0.19
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- 889,056
----------- ----------
HISTORICAL DILUTED EPS $ 1,530,243 8,765,264 $ 0.17
=========== =========
FOR THE YEAR ENDED DECEMBER 31, 1996
Net loss $(1,202,281)
Less accretion and dividends on
Preferred stock (153,000)
-----------
HISTORICAL BASIC EPS
Net income available to common stockholders (1,355,281) 7,380,316 $(0.18)
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- --
----------- ------------
HISTORICAL DILUTED EPS $(1,355,281) 7,380,316 $(0.18)
=========== =========
</TABLE>
For the purposes of the historical diluted EPS calculations for 1996, common
stock options and warrants are excluded because their impact is anti-dilutive.
In light of the changes in the capital structure of the Company which took
effect at the time of the IPO and in accordance with Staff Accounting Bulletin
No. 98, the Company calculated its basic and diluted net income (loss) per share
on a pro forma basis, assuming (i) conversion of the Series A Preferred Stock
into 833,785 shares of the Company's common stock, (ii) conversion of the Series
B Preferred Stock into 592,793 shares of the Company's common stock, and (iii)
lapse of the rights to require repurchase by holders of the redeemable common
stock instruments, all as of the beginning of the period. The following
reconciliation of the numerator and denominator is provided for pro forma basic
and diluted net income (loss) for 1997 and 1996:
30
<PAGE> 31
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income $ 3,005,652
Less accretion and dividends on
preferred stock (1,475,409)
-----------
Net income available to common stockholders 1,530,243 7,722,083
Assumed conversion of preferred stock
at the beginning of the period 1,475,409 1,426,578
Assumed conversion of redeemable common stock
instruments at the beginning of the period -- 273,890
----------- ----------
PRO FORMA BASIC EPS 3,005,652 9,422,551 $ 0.32
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- 889,382
----------- ----------
PRO FORMA DILUTED EPS $ 3,005,652 10,311,933 $ 0.29
=========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1996
Net loss $(1,202,281)
Less accretion and dividends on
preferred stock (153,000)
-----------
Net income available to common stockholders (1,355,281) 7,492,730
Assumed conversion of preferred stock
at the beginning of the period 153,000 1,426,578
Assumed conversion of redeemable common stock
instruments at the beginning of the period -- 273,890
----------- ----------
PRO FORMA BASIC EPS (1,202,281) 9,193,198 $ ( 0.13)
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- --
----------- ----------
PRO FORMA DILUTED EPS $(1,202,281) 9,193,198 $ (0.13)
=========== ==========
</TABLE>
For the purposes of the pro forma diluted EPS calculation for 1996, common
stock options and warrants are excluded because their impact is anti-dilutive.
NOTE 3 -- SALE OF UNBILLED ACCOUNTS RECEIVABLE
In December 1998, the Company sold, without recourse, unbilled accounts
receivables with a book value of $7,821,000 to augment the Company's cash flow.
The unbilled receivables sold were comprised of amounts greater than $100,000
from customers in the U.S., with remaining payments of up to four years. The
transaction was accounted for pursuant to SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
and resulted in an immaterial gain for the Company.
31
<PAGE> 32
NOTE 4 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Computer equipment $5,782,284 $ 4,305,632
Office equipment 5,409,056 4,881,920
Furniture and equipment 3,197,527 3,256,845
Leasehold improvements 1,572,812 1,259,912
---------- -----------
15,961,679 13,704,309
Less accumulated depreciation (11,840,389) (10,455,068)
----------- -----------
Fixed assets, net $4,121,290 $ 3,249,241
========== ===========
</TABLE>
Depreciation expense was approximately $1,385,000, $1,201,000 and $1,024,000
in 1998, 1997 and 1996, respectively.
NOTE 5 -- CAPITALIZED SOFTWARE COSTS
Capitalized software costs consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Capitalized software costs $ 20,163,698 $ 19,905,976
Less accumulated amortization (19,905,976) (19,505,603)
----------- -----------
Capitalized software, net $ 257,722 $ 400,373
============ ============
</TABLE>
The Company capitalized software development costs of approximately $258,000
and $735,000 during 1998 and 1996, respectively. The Company did not capitalize
any software development costs in 1997, as any amounts eligible for
capitalization were not material. Amortization expense of capitalized software
costs was approximately $400,000, $1,250,000 and $4,841,000 in 1998, 1997 and
1996, respectively.
NOTE 6 -- DEBT
At December 31, 1997, the Company's debt consisted of a note payable with a
balance of $591,496, of which $50,725 was long-term. The note, with an interest
rate of 9% and secured by fixed assets, was due in monthly installments from
February 1996 through January 1999. The Company paid the remaining balance of
the note in December 1998.
The Company paid interest of approximately $42,000, $278,000 and $414,000
in 1998, 1997 and 1996, respectively.
32
<PAGE> 33
NOTE 7 -- SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in 1998 which changes the way the Company
reports information about its operating segments. The information for 1997 and
1996 has been restated from the prior year's presentation to conform to the 1998
presentation.
The Company classifies its operations into one industry segment, software
development and related services. The Company categorizes its products and
services into two groups: mainframe and client/server. The Company's revenues by
product group consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mainframe $44,167,866 $37,741,852 $32,643,098
Client/server 7,489,974 5,620,643 3,913,300
----------- ----------- -----------
Total revenues $51,657,840 $43,362,495 $36,556,398
=========== =========== ===========
</TABLE>
The Company sells its products outside the United States through its
subsidiaries and international distributors. Revenues from international
distributors are presented net of royalties paid to the distributors. The
Company's revenues by country or geographic region are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $35,142,411 $28,786,077 $24,685,933
Germany 4,165,628 2,666,617 1,908,442
United Kingdom 2,391,301 1,697,749 1,451,827
The Netherlands 2,126,476 1,359,219 427,169
Japan 1,813,372 2,439,068 2,001,001
Australia 1,553,149 1,512,141 1,544,511
Other European countries 1,733,645 2,000,492 2,932,862
Rest of world 2,731,858 2,901,132 1,604,653
----------- ----------- -----------
Total revenue $51,657,840 $43,362,495 $36,556,398
=========== =========== ===========
</TABLE>
The Company's long-lived assets, which consist of fixed assets, capitalized
software and intangible assets, by country or geographic region are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $4,760,777 $4,630,314 $4,440,419
Europe 185,372 193,744 23,094
Australia and Southeast Asia 48,863 57,556 83,051
---------- ---------- ----------
Long-lived assets $4,995,012 $4,881,614 $4,546,564
========== ========== ==========
</TABLE>
33
<PAGE> 34
NOTE 8 -- INCOME TAXES
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $ 9,674,188 $5,560,340 $(1,559,453)
International subsidiaries 368,229 (627,244) (455,340)
------------ ---------- -----------
Income (loss) before taxes $10,042,417 $4,933,096 $(2,014,793)
=========== ========== ===========
</TABLE>
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current taxes payable:
U.S. Federal $ 3,305,390 $ 994,371 $ 226,835
Foreign 762,284 520,103 518,599
State and local 242,454 143,600 40,593
--------- --------- ---------
4,310,128 1,658,074 786,027
--------- --------- ---------
Deferred tax provision (benefit):
U.S. Federal (527,255) 333,311 (1,534,972)
Foreign 44,587 (89,822) -
State and local (45,193) 25,881 (63,567)
---------- ----------- ------------
(527,861) 269,370 (1,598,539)
----------- ---------- -----------
Provision for (benefit from) income taxes $3,782,267 $1,927,444 $ (812,512)
========== ========== ===========
</TABLE>
The Company paid income taxes of approximately $2,795,000, $1,334,000 and
$527,000 in 1998, 1997 and 1996, respectively. Foreign taxes paid relate
primarily to taxes withheld from revenues remitted by international
distributors.
34
<PAGE> 35
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 net deferred tax assets
at December 31, 1998 and 1997 are attributable to the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred revenue $ 938,515 $ 869,567
Stock incentive plan 37,881 235,826
Allowance for doubtful accounts 490,107 190,911
Tax credit carryforwards 319,491 320,664
Sublease and general sales tax accrual 70,290 86,590
Capitalized software development costs 306,812 159,018
Losses from subsidiaries not utilized 365,235 414,822
Depreciation and amortization 519,687 332,444
Other 215,861 55,176
Valuation allowance (449,000) (454,000)
---------- ----------
2,814,879 2,211,018
Deferred tax liabilities:
Depreciation and amortization (76,000) -
----------- -----------
Net deferred tax assets $2,738,879 $2,211,018
========== ==========
Current deferred tax assets $1,644,482 $1,264,501
Non-current deferred tax assets 1,094,397 946,517
---------- -----------
Net deferred tax assets $2,738,879 $2,211,018
========== ==========
</TABLE>
As of December 31, 1998 and 1997, the Company had a valuation allowance of
$129,000 to reflect foreign tax credit carryforwards that, in the Company's
estimation, would more likely than not expire prior to utilization. The Company
also recorded a decrease to the valuation allowance of $5,000 in 1998 to reflect
the tax effect of estimated international subsidiary net operating losses.
At December 31, 1998, the Company had foreign net operating loss
carryforwards of approximately $1,057,000, of which $182,000 expires in years
2001 and 2002. The remaining $875,000 carries forward indefinitely and is
available to offset future foreign taxable income.
The provision for (benefit from) income taxes differs from the amount of
taxes determined by applying the U.S. Federal statutory rate to income (loss)
before income taxes as a result of the following:
35
<PAGE> 36
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computation of U.S. Federal income
taxes at the statutory rate 35.0% 34.0% (34.0)%
State and local taxes, net of Federal
income tax benefit 1.6 1.9 (2.5)
Change in valuation allowance (0.1) 2.8 (13.9)
Change in provision for competent
authority - (1.9) 7.4
Other 1.2 2.3 2.7
---- ---- -----
Provision for (benefit from)
income taxes 37.7% 39.1% (40.3)%
==== ==== =====
</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 9 -- EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan. During 1998, 1997 and
1996, 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 approximately
$228,000, $217,000 and $205,000 during 1998, 1997 and 1996, respectively.
NOTE 10 -- MANDATORILY REDEEMABLE PREFERRED STOCK
Prior to the IPO, the Company had issued two classes of preferred stock:
Series A Preferred Stock and Series B Preferred Stock. All shares of preferred
stock outstanding were converted to common stock at the time of the IPO.
Mandatorily Redeemable Series A Preferred Stock
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 Company was required to redeem $1,500,000 of Series A Preferred Stock
each year ("redemption year") plus accumulated dividends, beginning May 1, 1997,
at a redemption price equal to $5.00 per share plus 75% of the amount, if any,
by which the lesser of (i) 1.5 multiplied by the fair market value per share of
the common stock as determined by the Board of Directors (the "Board") at the
beginning of the redemption year or (ii) $7.4333 per share, exceeds $5.00 per
share.
The holders of Series A Preferred Stock could convert all, but not less than
all, of the preferred shares into common stock at the time of the IPO based upon
the relationship between the redemption price and the IPO price of the Company's
common stock. At the time of the IPO, the 855,165 shares of Series A Preferred
Stock then outstanding were converted into 833,785 shares of common stock.
Mandatorily Redeemable Series B Preferred Stock
In March 1997, 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.
36
<PAGE> 37
The Series B Preferred Stock was 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 was 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.
Each outstanding share of Series B Preferred Stock was automatically
convertible into 1.5 shares of the Company's common stock immediately upon the
closing of a qualified public offering, as defined. Accordingly, at the time of
the IPO, the 395,195 shares of Series B Preferred Stock then outstanding were
converted into 592,793 shares of common stock.
The following table summarizes the activity with respect to the Series A
Preferred Stock and Series B Preferred Stock:
<TABLE>
<CAPTION>
Series A Preferred Stock Series B Preferred Stock
------------------------ ------------------------
Redemption Redemption
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
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 -- -- 395,195 $ 2,500,000
Redemption of Series A preferred
stock (164,835) (1,124,999)
Adjustment to redemption value 1,096,500 136,079
Conversion to common stock (855,165) (5,836,501) (395,195) (2,636,079)
-------- ----------- -------- -----------
Balance at December 31, 1997 -- $ -- -- $ --
======== =========== ======== ===========
</TABLE>
NOTE 11 -- COMMON STOCK INSTRUMENTS AND STOCKHOLDERS' EQUITY
Stock Purchase Plans
During 1998, the Company adopted the 1998 Stock Purchase Plan ("1998 SPP")
which replaced the 1991 Employee Stock Purchase Plan ("1991 ESPP"). Under the
1998 SPP, eligible employees may use up to 10 percent of their gross cash
compensation to purchase shares of the Company's common stock at a purchase
price equal to 90 percent of the fair value of the stock as of the last day of
the previous quarter or the day before the last day of the current quarter,
whichever is lower. For the plan years ended April 30, 1998 and 1997, the Board
made 75,000 shares available for purchase under the 1991 ESPP. Under the 1991
ESPP, eligible employees could purchase shares valued at up to 10 percent of
their gross cash compensation at fair value as determined by the Board. During
1998, 1997 and 1996, 39,512, 64,716 and 11,576 shares, respectively, were
purchased under the stock purchase plans.
Prior to the IPO, the shares employees purchased under the 1991 ESPP were
subject to certain transfer restrictions. Without the prior written consent of
the Company, an employee could not sell, assign or transfer any common stock
purchased under this plan to any person or entity other than the Company,
another stockholder or employee. Under certain conditions, the employee could
require the Company to repurchase his shares at fair value. At any time
following the termination of an individual's employment, the Company had the
right to repurchase the employee's shares acquired through the 1991 ESPP at fair
value. These rights and restrictions lapsed at the time of the IPO.
Stock Incentive Plans
The Company has three stock incentive plans that provide for the granting of
stock options to employees and executives of the Company: the 1994 Stock
Incentive Plan ("1994 SIP"), the 1989 Stock Incentive Plan ("1989
37
<PAGE> 38
SIP") and the 1992 Executive Stock Incentive Plan ("1992 ESIP"). Options under
these plans are granted at the fair market value of the Company's common stock
at the date of grant, vest over a four-year period and expire ten years after
the grant date. The 1994 SIP replaced the 1989 SIP and the 1992 ESIP and no
additional grants will be made under the 1989 SIP or the 1992 ESIP. Options
outstanding under the 1989 SIP and the 1992 ESIP will remain outstanding until
the options terminate or are exercised.
Prior to the IPO, while employed by the Company, a holder of options granted
under the 1989 SIP and the 1992 ESIP had 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 provided that certain
of the conditions had been met. The Company also had 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. These repurchase rights lapsed at the
time of the IPO.
As of December 31, 1998, 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 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 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.
1996 Advisory Board Plan
In 1996, the Company granted, pursuant to the 1996 Advisory Board Stock
Incentive Plan ("1996 ABP"), 120,000 options, which vest over a four-year period
at an exercise price of $4.00 per share. The Company recorded the fair value of
the options as stock compensation expense ratably over the vesting period. 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 canceled 36,000 unvested options granted pursuant to
the 1996 ABP.
Other Stock Options
In 1997 and 1996, the Company issued 128,002 and 24,750 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 expired
unexercised concurrent with or subsequent to separation from the Company. The
terms of the options granted were similar to, but not identical to, the terms of
the options they replaced. The Company recorded compensation expense associated
with these options of $60,000 in 1997. The Company did not record compensation
expense for these options in 1996 because the amount was not material.
38
<PAGE> 39
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, 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 (490,435) 3.00--4.00 3.38
Stock options canceled (348,821) 3.33--4.00 3.88
Stock options expired (48,875) 3.59--4.00 3.95
----------
Balance at December 31, 1997 2,498,953 3.00--4.97 3.76
Stock options granted 803,875 6.13--10.75 8.27
Stock options exercised (529,742) 3.17--8.63 3.79
Stock options canceled (344,103) 3.33--8.63 5.45
---------
Balance at December 31, 1998 2,428,983 $3.00--$10.75 $5.01
=========
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998 by plan:
<TABLE>
<CAPTION>
TOTAL OPTIONS TOTAL OPTIONS TOTAL OPTIONS
OUTSTANDING EXERCISABLE AVAILABLE
----------- ----------- FOR FUTURE GRANT
----------------
<S> <C> <C> <C>
1989 SIP 93 93 --
1992 ESIP 304,687 304,687 --
1994 SIP 1,934,203 729,179 637,805
1996 ABP 48,000 36,000 240,000
Other stock options 142,000 142,000 --
--------- --------- -------
Totals 2,428,983 1,211,959 877,805
========= ========= =======
</TABLE>
At December 31, 1998, the average exercise price per share of exercisable
options was $3.63. The unvested options vest primarily over a four-year period
and will be fully vested in the year 2002. The remaining average option life is
6.9 years.
39
<PAGE> 40
For stock options granted prior to the IPO, the Company estimated the fair
value of each employee option grant 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 5 5 5
Risk-free interest rate 4-6% 5-6% 6-7%
Volatility 60% 0% 0%
Dividend yield 0% 0% 0%
</TABLE>
The weighted-average fair value of stock options granted under the employee
stock option plans during 1998, 1997 and 1996 was $4.64, $1.05 and $1.08,
respectively. Had the Company determined compensation costs for these option
plans and the stock purchase plans in accordance with SFAS No. 123 (Note 2), the
Company's net income for 1998 would have been approximately $5,556,000 or $0.48
per basic share and $0.45 per diluted share. The Company's net income for 1997
would have been approximately $2,645,000, or $0.15 per basic share and $0.13 per
diluted share on a historical basis and $0.26 per basic share and $0.23 per
diluted share on a pro forma basis. The Company's net loss for 1996 would have
been approximately $(1,391,000), or $(0.21) per basic and diluted share on a
historical basis and $(0.15) basic and diluted per share on a pro forma basis.
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 future amounts.
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. Prior to the IPO, the Company
also recorded stock compensation expense for shares and options outstanding
under the 1989 SIP, the 1992 ESIP and the 1991 ESPP to reflect any increase in
the amount at which the holders could 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 approximately $100,000, $591,000 and $(96,000) in 1998,
1997 and 1996, respectively. Prior to the IPO, the Board determined the fair
value of the Company's common stock. The fair value of the Company's common
stock effective May 1, 1997 and 1996 was $4.97 and $4.00, respectively.
Redeemable Common Stock Instruments
The redeemable common stock instruments represent the shares of common stock
and stock options issued by the Company to certain employees pursuant to the
1989 SIP, the 1992 ESIP, the 1991 ESPP and other agreements whereby the holder
had the right to require the Company to repurchase such shares at their current
fair market value. The rights of holders of redeemable common stock instruments
to require the Company to repurchase such shares automatically lapsed at the
time of the IPO.
40
<PAGE> 41
The following table summarizes the activity with respect to the redeemable
common stock instruments:
<TABLE>
<CAPTION>
Shares of
Common Redemption
Stock Shares of Value of
Underlying Redeemable Common
Redeemable Common Stock
Stock Options Stock Instruments
------------- ----- -----------
<S> <C> <C> <C>
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 options (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 (173,265) 242,963 820,007
Redeemable common stock repurchased by the
Company -- (19,433) (93,366)
Cancellation of redeemable stock options (20,967) -- (4,185)
Waiver of rights to require repurchase (213,750) (8,240) (237,108)
Lapse of rights to require repurchase (164,028) (265,650) (1,615,112)
---------- --------- ----------
Balance at December 31, 1997 -- -- $ --
========== ========= ===========
</TABLE>
NOTE 12 -- 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, 1998 are approximately $87,000 and $305,000, respectively, and have been
included in accrued expenses or other liabilities, as appropriate.
During 1998, the Company entered into a lease for office space for the
Company's new headquarters facility, and concurrently subleased the Company's
existing headquarters facility at terms which are comparable to those contained
within the Company's existing lease. The Company expects to occupy the new
facility by mid 1999 and will turn its existing premises over to the subleasee
at that time. The lease for the new facility has a twelve-year term.
The Company is committed for the payment of minimum rentals, exclusive of
escalation charges and renewal options and net of sublease income, under office
space, computer and other equipment operating lease agreements through 2003 for
the following amounts:
Year ending December 31,
- ------------------------
1999 $ 2,900,000
2000 900,000
2001 900,000
2002 900,000
2003 1,100,000
Thereafter 9,600,000
------------
Total $16,300,000
============
41
<PAGE> 42
Additionally, the Company leases certain equipment under cancelable
operating leases. The total rental expense under all equipment and office space
operating leases was approximately $3,200,000, $2,700,000 and $3,500,000 in
1998, 1997 and 1996, respectively.
NOTE 13 -- SUBSEQUENT EVENTS
In January 1999, the Company signed an agreement to acquire certain rights
and related assets from Software Products Limited ("Software Products"), a
former international distributor of the Company's products. Under terms of the
agreement governing the distribution relationship, Software Products held
exclusive rights to market certain of the Company's products in the United
Kingdom. As a result of the 1999 agreement, the Company gained direct access to
its customers in the United Kingdom. As consideration for the acquisition of
these rights, the Company paid Software Products $4,000,000 in cash. As further
consideration, the Company issued to Software Products 91,586 shares of Company
common stock, with a fair value of $850,000 and subject to certain resale
restrictions and registration rights. Additionally, the Company granted Software
Products a warrant to purchase 150,000 shares of the Company's common stock at
the then fair market value of $10 per share, which vested upon issuance and
expires in January 2009. The Company will record the acquisition of the customer
base as an intangible asset representing the cash payment and the fair value of
the stock and warrant issued. The related intangible asset will be amortized
over five years.
42
<PAGE> 43
NOTE 14 - UNAUDITED QUARTERLY RESULTS
The following table sets forth unaudited quarterly consolidated statements
of operations data for the years ended December 31, 1998, 1997 and 1996 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Mar 31, Jun 30, Sep 30, Dec 31,
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Total revenues $10,543 $12,574 $12,812 $15,729
Gross profit 9,136 11,070 11,668 14,310
Net income 842 1,220 1,697 2,502
Historical earnings per share
Basic 0.07 0.11 0.15 0.21
Diluted 0.07 0.10 0.14 0.20
1997
Total revenues 9,995 9,960 10,422 12,985
Gross profit 8,573 8,475 8,997 11,433
Net income 357 170 695 1,783
Historical earnings per share
Basic 0.04 (0.14) 0.07 0.19
Diluted 0.04 (0.14) 0.07 0.16
Pro forma earnings per share
Basic 0.04 0.02 0.08 0.18
Diluted 0.04 0.02 0.07 0.16
1996
Total revenues 8,048 9,233 8,919 10,356
Gross profit 5,616 6,869 6,700 8,458
Net income (1,189) (386) (322) 695
Historical earnings per share
Basic (0.17) (0.06) (0.05) 0.09
Diluted (0.17) (0.06) (0.05) 0.08
Pro forma earnings per share
Basic (0.13) (0.04) (0.04) 0.08
Diluted (0.13) (0.04) (0.04) 0.07
</TABLE>
43
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information with respect to directors required by this item is incorporated
by reference from the Company's 1999 Proxy Statement to be filed with the
Securities and Exchange Commission by April 30, 1999.
The information with respect to officers required by this item is included at
the end of Part I of this document under the heading "Executive Officers of the
Company."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Company's 1999 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
Company's 1999 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Company's 1999 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 1999.
44
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Listed below are the documents filed as a part of this report:
1. Financial Statements and the Independent Auditors' Reports:
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits:
3.1 Articles of Incorporation (incorporated by
reference to Exhibit 3.1 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
3.2 Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen certificate of Common Stock (incorporated
by reference to Exhibit 4.2 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
10.1* Employment agreement between the Company and Ralph
E. Alexander dated April 9, 1997 (incorporated by
reference to Exhibit 10.1 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
10.2* 1989 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
45
<PAGE> 46
10.3* 1991 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.3 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
10.4* 1992 Executive Stock Incentive Plan (incorporated
by reference to Exhibit 10.4 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
10.5* 1994 Stock Incentive Plan (incorporated by
reference to Exhibit 10.5 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
10.6* 1996 Advisory Board and directors Stock Incentive
Plan (incorporated by reference to Exhibit 10.6
forming a part of the Company's registration
statement on Form S-1 (File No. 333-35629) filed
with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.)
10.7* 1998 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 99 forming a part of the
Company's registration statement on Form S-8 (File
No. 333-61161) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
22.1 Subsidiaries of the Company (incorporated by
reference to Exhibit 22.1 forming a part of the
Company's registration statement on Form S-1 (File
No. 333-35629) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended.)
23.1+ Consent of PricewaterhouseCoopers LLP
27.1+ Financial Data Schedule
* Reflects management contract or other compensatory
arrangement required to be filed as an exhibit pursuant to
Item 14 (c) of this Form 10-K.
+ Filed herewith.
(b) Reports on Form 8-K:
None.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LANDMARK SYSTEMS CORPORATION
Date: March 30, 1999 By: /s/ KATHERINE K. CLARK
-------------- -----------------------------
Katherine K. Clark
Chief Executive Officer and Director
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 30, 1999.
<TABLE>
<CAPTION>
<S> <C>
Signature Title
/s/ PATRICK H. MCGETTIGAN
- ------------------------------------------------- Chairman of the Board
Patrick H. McGettigan
/s/ KATHERINE K. CLARK Chief Executive Officer and Director
- ------------------------------------------------- (Principal Executive Officer)
Katherine K. Clark
/s/ RALPH E. ALEXANDER President, Chief Operating Officer
- ------------------------------------------------- and Director
Ralph E. Alexander
/s/ JEFFREY H. BERGMAN
- ------------------------------------------------- Director
Jeffrey H. Bergman
/s/ T. EUGENE BLANCHARD
- ------------------------------------------------- Director
T. Eugene Blanchard
/s/ PATRICK W. GROSS
- ------------------------------------------------- Director
Patrick W. Gross
/s/ FREDERICK S. ROLANDI, III Vice President and Chief Financial Officer
- ------------------------------------------------- (Principal Accounting Officer)
Frederick S. Rolandi, III
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
LANDMARK SYSTEMS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
BALANCE AT
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION PERIOD OPERATIONS DEDUCTIONS END OF PERIOD
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
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
Year Ended December 31, 1997
Allowance for uncollectible accounts $382,044 $775,623 $(536,968) (A) $620,699
Deferred tax asset valuation allowance $410,000 $44,000 -- $454,000
Year Ended December 31, 1998
Allowance for uncollectible accounts $620,699 $1,315,193 $(612,673) (A) $1,323,219
Deferred tax asset valuation allowance $454,000 $(5,000) -- $449,000
</TABLE>
(A) Uncollectible accounts written off
(B) Reduction in the tax valuation allowance
48
<PAGE> 49
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
--------
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
49
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-46417 and 333-61161) of Landmark Systems
Corporation of our report dated February 15, 1999, appearing in this Form 10-K.
PricewaterhouseCoopers LLC
McLean, Virginia
March 29, 1999
50
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,322,234
<SECURITIES> 0
<RECEIVABLES> 12,225,387
<ALLOWANCES> 1,323,219
<INVENTORY> 0
<CURRENT-ASSETS> 47,451,216
<PP&E> 15,961,679
<DEPRECIATION> 11,840,389
<TOTAL-ASSETS> 59,306,895
<CURRENT-LIABILITIES> 23,306,255
<BONDS> 0
0
0
<COMMON> 117,826
<OTHER-SE> 27,849,252
<TOTAL-LIABILITY-AND-EQUITY> 59,306,895
<SALES> 24,274,671
<TOTAL-REVENUES> 51,657,840
<CGS> 1,770,824
<TOTAL-COSTS> 5,473,399
<OTHER-EXPENSES> 37,932,666
<LOSS-PROVISION> 603,015
<INTEREST-EXPENSE> 41,668
<INCOME-PRETAX> 10,042,417
<INCOME-TAX> 3,782,267
<INCOME-CONTINUING> 6,260,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,260,150
<EPS-PRIMARY> 0.54<F1>
<EPS-DILUTED> 0.51
<FN>
<F1>This amount is reported as EPS BASIC.
</FN>
</TABLE>
