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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-023373
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LANDMARK SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-1221302
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
12700 SUNRISE VALLEY DRIVE 20191
RESTON, VIRGINIA (Zip Code)
(Address of principal executive offices)
703-464-1300
Registrant's telephone number, including area code:
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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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
<S> <C>
Common Stock, par value $.01 per share Nasdaq National Market
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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/A or any
amendment to this Form 10-K/A. [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates as of March 3, 1999, was $59,778,070.
The number of shares of the registrant's Common Stock outstanding as of
March 3, 1999, was 11,900,065 shares.
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The following document is hereby incorporated by reference into this Form
10-K/A:
Portions of the Registrant's 1999 Proxy Statement filed with the Securities
and Exchange Commission (Part III).
Some of the statements in this Annual Report on Form 10-K/A 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.
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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.
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.
CORE SERVICES LAYER. The core services layer is comprised of three key
components: data management, data brokering and network services.
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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.
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.
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Landmark's products are easily installed and implemented and generally do
not require additional customization before the products can be used by the
customer. The Company's products are also easily tailored so that the
performance metrics, data retention standards and data storage locations are
appropriate for each customer.
LANDMARK'S FAMILY OF PERFORMANCEWORKS PRODUCTS
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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 Interface to Predictor Predictor
to 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 85.0%, 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/A.
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.
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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, 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.
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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 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 33.1%, 33.6% and 32.5% of total revenues in
1998, 1997 and 1996, respectively. Of those amounts, 13.4%, 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/A.
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.
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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 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.
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
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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 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 proceedings.
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.
9
<PAGE> 10
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 C. 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 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 December 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.
10
<PAGE> 11
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.
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 Condition included elsewhere in this Form
10-K/A. 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/A. 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/A.
11
<PAGE> 12
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ----------- ----------- ---------- -------------
(RESTATED) (2)
-------------
(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 $ 49,832
Gross profit...................................... 24,830 26,797 27,643 37,478 44,359
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 5,561
---------- ---------- ---------- ---------- ----------
Total operating expenses................... 28,610 32,454 30,371 33,046 37,933
---------- ---------- ---------- ---------- ----------
Operating income (loss)........................... (3,780) (5,657) (2,728) 4,432 6,426
Net income (loss)................................. $ (1,921) $ (4,169) $ (1,202) $ 3,006 $ 5,122
Earnings (loss) per share (1)
Basic........................................... $ (0.28) $ (0.65) $ (0.18) $ 0.19 $ 0.45
Diluted......................................... $ (0.28) $ (0.65) $ (0.18) $ 0.17 $ 0.41
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ----------- ----------- ---------- ---------------
(RESTATED) (2)
---------------
(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 24,198
Total assets................................... 33,172 31,479 25,076 44,508 59,307
Deferred revenue............................... 18,108 18,548 18,705 20,392 26,625
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 26,829
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements, "Earnings Per
Share," for an explanation of the method used to determine the number of
shares used to compute basic and diluted earnings (loss) per share.
(2) See Note 2 of Notes to Consolidated Financial Statements, "Basis of
Presentation (Restated)" for an explanation of the restatement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR 1998, 1997 AND 1996
In late 1999 and early 2000, the Division of Corporation Finance of the
Securities and Exchange Commission ("SEC") conducted a review of the Company's
accounting policies. Concurrent with the SEC review, the Company concluded it
should restate 1998 and 1999 interim results to reclassify a portion of
previously reported license revenue to deferred maintenance revenue that will
be recognized over the term of the related maintenance agreement. As a result,
the aggregate deferred revenue will more closely approximate the estimated fair
value of the Company's maintenance obligation to its customers. The Company
believes this restatement demonstrates that recorded license revenues reflect
"vendor specific objective evidence." This reclassification resulted in a net
deferral at December 31, 1998 of approximately $1.8 million of total revenues
that had been previously recognized in 1998. The financial statements
contained herein reflect these adjustments. Of the total $2.0 million revenue
Landmark agreed to defer in 1998 and 1999, $1.1 million, $0.7 million, $0.1 and
$0.1 million will be recognized as maintenance revenues in fiscal years 2000,
2001, 2002 and 2003, respectively.
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.
12
<PAGE> 13
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------- -------- ----------
(RESTATED)
----------
<S> <C> <C> <C>
REVENUES
License revenues............................... 44.3% 38.7% 30.8%
Maintenance revenues........................... 55.7 61.3 69.2
----- ----- -----
Total revenues......................... 100.0 100.0 100.0
----- ----- -----
COST OF REVENUES
Cost of license revenues....................... 3.6 6.0 15.8
Cost of maintenance revenues................... 7.4 7.6 8.6
----- ----- -----
Total cost of revenues................. 11.0 13.6 24.4
----- ----- -----
Gross profit................................... 89.0 86.4 75.6
----- ----- -----
OPERATING EXPENSES
Sales and marketing............................ 34.4 33.0 31.9
Product research and development............... 30.6 31.1 38.1
General and administrative..................... 11.1 12.1 13.1
----- ----- -----
Total operating expenses............... 76.1 76.2 83.1
----- ----- -----
Operating income (loss).......................... 12.9 10.2 (7.5)
Net interest and other income.................... 3.6 1.1 2.0
----- ----- -----
Income (loss) before income taxes................ 16.5 11.3 (5.5)
Provision for (benefit from) income taxes........ 6.2 4.4 (2.2)
----- ----- -----
Net income (loss)................................ 10.3% 6.9% (3.3)%
===== ===== =====
</TABLE>
TOTAL REVENUES. Total revenues in 1998 were $49.8 million, an increase of
14.9% 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 $42.3 million, an increase of 12.1% 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
as discussed below. 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 $22.1 million, an increase
of 31.6% 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 license agreements. A
conversion of a license agreement is, in effect, a migration from either a site
or CPU license to a MIPS (millions of instructions per second) or MSU (measured
service units) license. A site or CPU license allows the customer to use the
licensed software only in one designated location. A MIPS or MSU license,
however, allows the customer to use the licensed software in a multi-site
environment (these licenses are often selected by customers who can reasonably
anticipate their computing capacity needs, and this license is priced in
proportion to the computing capacity of the machine). If a customer elects to
convert to a MIPS or MSU license, the customer is required to pay the Company an
additional fee whenever the customer increases the size of their computing
environment. The list price of the new license and the associated maintenance
may be lower than that of the original license and maintenance because of
changes in fair values over time. During 1998, the Company 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 $27.7 million, an
increase of 4.4% 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 often may
result in lower maintenance fees. As discussed above, due to changes in fair
values over time, the new license and associated maintenance may be lower than
that of the original (pre-conversion) license and maintenance. Maintenance
renewal rates have historically been approximately 85 to 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 8.0%, 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 13.4%, 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.
13
<PAGE> 14
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
34.4%, 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
30.6%, 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 11.1%, 12.1% and 13.1% of total revenues. The
increase from 1997 to 1998 includes increased 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 earned on cash balances, interest income recorded on
installment receivables, 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 $24.2
million. During 1998, net cash provided by operating and financing activities
was $12.3 million and $1.7 million, respectively, while net cash used in
investing activities was $3.0 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 $26.8 million.
The Company continues to finance its growth through funds generated from
operations. During 1998, 1997 and 1996, cash flow from operations was $12.3
million, $6.6 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.
14
<PAGE> 15
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 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.
15
<PAGE> 16
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, 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 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
16
<PAGE> 17
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
profitability. 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/A.
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 accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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.
The consolidated financial statements as of and for the year ended December 31,
1998 have been restated as described in Note 2 under "Basis of Presentation
(Restated)".
/s/ PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 15, 1999, except for the information in Note 2 under "Basis of
Presentation (Restated)" to the consolidated financial statements, as to which
the date is February 29, 2000
17
<PAGE> 18
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998
(RESTATED) 1997 1996
----------- ------------- --------------
<S> <C> <C> <C>
Revenues
License revenues................................... $22,083,944 $ 16,781,122 $ 11,268,496
Maintenance revenues............................... 27,748,290 26,581,373 25,287,902
----------- ------------- --------------
Total revenues............................. 49,832,234 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....................................... 44,358,835 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).............................. 6,426,169 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.................... 8,216,811 4,933,096 (2,014,793)
Provision for (benefit from) income taxes.......... 3,094,698 1,927,444 (812,512)
----------- ------------- --------------
Net income (loss).................................... 5,122,113 3,005,652 (1,202,281)
Accretion and dividends on preferred stock......... -- 1,475,409 153,000
----------- ------------- --------------
Net income (loss) available to common
stockholders....................................... $ 5,122,113 $ 1,530,243 $ (1,355,281)
=========== ============= ==============
Earnings (loss) per share
Basic.............................................. $ 0.45 $ 0.19 $ (0.18)
Diluted............................................ $ 0.41 $ 0.17 $ (0.18)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 19
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
------------- --------------
(RESTATED)
-------------
<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..................................................... 17,723,807 17,276,345
Income taxes payable................................................. 920,456 868,126
Debt due within one year............................................. _ 540,771
------------- --------------
Total current liabilities.................................... 23,253,679 22,544,332
Long-term debt......................................................... -- 50,725
Deferred revenue -- noncurrent......................................... 8,900,963 3,115,495
Other liabilities...................................................... 323,212 419,528
------------- --------------
Total liabilities............................................ 32,477,854 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).......................................... (118,534) (5,240,647)
Accumulated other comprehensive income............................... 136,931 92,743
------------- --------------
Total stockholders' equity................................... 26,829,041 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.
19
<PAGE> 20
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON SHARES ADDITIONAL RETAINED COMPRE-
------------- PAID-IN EARNINGS/ HENSIVE
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..... -- -- -- -- (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..... -- -- -- -- 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 (Restated)........... -- -- -- 5,122,113 -- --
Foreign currency translation..... -- -- -- -- 44,188 --
Total comprehensive income........... -- -- -- -- -- 5,166,301
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 $ (118,534) $ 136,931 $26,829,041
=========== =========== ============ ============ ========= ============
(Restated).............................
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 21
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(RESTATED)
----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 5,122,113 $ 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...... 1,238,408 622,142 (1,566,804)
Increase in income taxes payable...................... 52,330 596,838 271,288
Increase in deferred revenue.......................... 6,232,930 1,377,254 157,187
Increase in other, net................................ (858,532) (240,614) (549,862)
----------- ----------- ------------
Net cash provided by operating
Activities.................................... 12,344,873 6,577,566 4,144,109
----------- ----------- ------------
Cash flows from investing activities:
Acquisition of distribution rights (488,082) (815,076) --
Capital expenditures..................................... (2,252,225) (1,553,874) (728,494)
Capitalized software costs............................... (257,722) -- (734,574)
----------- ----------- ------------
Net cash used in investing activities............ (2,998,029) (2,368,950) (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.
21
<PAGE> 22
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 (Restated)
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.
In late 1999 and early 2000, the Division of Corporation Finance of the
Securities and Exchange Commission ("SEC") conducted a review of the Company's
accounting policies. Concurrent with the SEC review, the Company concluded it
should restate 1998 and 1999 interim results to reclassify a portion of
previously reported license revenue to deferred maintenance revenue that will
be recognized over the term of the related maintenance agreement. As a result,
the aggregate deferred revenue will more closely approximate the estimated fair
value of the Company's maintenance obligation to its customers. The Company
believes this restatement demonstrates that recorded license revenues reflect
"vendor specific objective evidence." The reclassification resulted in a net
deferral at December 31, 1998 of approximately $1,826,000 of total revenues
that had been previously recognized in 1998. The financial statements
contained herein reflect these adjustments. A summary of the impact of the
restatement follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
Previously Reported As Restated
------------------- -----------
<S> <C> <C>
Results of Operations
---------------------
License revenues $24,274,671 $22,083,944
Maintenance revenues 27,383,169 27,748,290
Total revenues 51,657,840 49,832,234
Income before taxes 10,042,417 8,216,811
Provision for income taxes 3,782,267 3,094,698
Net income 6,260,150 5,122,113
Diluted earnings per share $0.51 $0.41
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Previously Reported As Restated
------------------- -----------
<S> <C> <C>
Financial Position
------------------
Total assets $59,306,895 $59,306,895
Income taxes payable 1,608,025 920,456
Deferred revenue 17,088,814 17,723,807
Total current liabilities 23,306,255 23,253,679
Deferred revenue - noncurrent 7,710,350 8,900,963
Stockholders' equity 27,967,078 26,829,041
</TABLE>
22
<PAGE> 23
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 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
$488,000 was paid in 1998 and $815,000 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 is being
amortized over three years. Amortization expense for each of the years ended
December 31, 1998 and 1997 was $616,000.
23
<PAGE> 24
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 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) and decrease net
income in 1996 by $1.5 million ($0.20 per basic and diluted share).
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" ("SFAS 121"). SFAS No. 121 prescribes that an
impairment loss is recognized in the event that facts and circumstances
indicate that the carrying amount of an asset may not be recoverable, and an
estimate of future undiscounted cash flows is less than the carrying amount of
the asset. Impairment is recorded based on an estimate of future discounted
cash flows.
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.
24
<PAGE> 25
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. The Company imputes interest based
only on that portion of the receivable allocated to the license element as (a)
the license is delivered immediately but paid for over an extended period and
(b) the license revenue is the only portion of the fee that is recognized at
the time the license agreement is entered. Imputed interest income on
long-term receivables is reported within "Interest and Other Income" on the
Consolidated Statements of Operations.
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 10% of either the Company's total outstanding
receivables or revenues for any years presented herein.
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 basic and
diluted earnings (loss) per share for 1998, 1997 and 1996. Basic earnings 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 earnings 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.
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
BASIC EPS
Net income available to common
stockholders (restated)...................... $ 5,122,113 11,491,395 $ 0.45
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants.............. -- 881,634
------------- ------------
DILUTED EPS......................................... $ 5,122,113 12,373,029 $ 0.41
============= ============
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income........................................ $ 3,005,652
Less accretion and dividends on preferred
stock.......................................... (1,475,409)
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
------------- ------------
DILUTED EPS......................................... $ 1,530,243 8,765,264 $ 0.17
============= ============
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Net loss.......................................... $ (1,202,281)
Less accretion and dividends on preferred
stock.......................................... (153,000)
--------------
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............ -- --
-------------- ------------
DILUTED EPS......................................... $ (1,355,281) 7,380,316 $ (0.18)
============== ============
</TABLE>
For the purposes of the diluted earnings per share calculations 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.
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.
26
<PAGE> 27
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, $276,000 and $365,000
in 1998, 1997 and 1996, respectively.
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>
DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(RESTATED)
<S> <C> <C> <C>
Mainframe........ $ 42,342,260 $ 37,741,852 $ 32,643,098
Client/server.... 7,489,974 5,620,643 3,913,300
------------- ------------- -------------
Total revenues $ 49,832,234 $ 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>
DECEMBER 31,
----------------------------------------------------
1998 1997 1996
---- ---- ----
(RESTATED)
----------
<S> <C> <C> <C>
United States........ $33,316,805 $ 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
Benelux.............. 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
Other............... 2,731,858 2,901,132 1,604,653
----------- -------------- -------------
Total revenue... $49,832,234 $ 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
Other.................. 48,863 57,556 83,051
------------ ------------- -------------
Long-lived assets.... $ 4,995,012 $ 4,881,614 $ 4,546,564
============ ============= =============
</TABLE>
27
<PAGE> 28
NOTE 8 -- INCOME TAXES
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
------------- ----------- -----------
(RESTATED)
----------
<S> <C> <C> <C>
United States............ $7,848,582 $5,560,340 $(1,559,453)
International subsidiaries 368,229 (627,244) (455,340)
-------- ---------- -----------
Income (loss) before taxes $8,216,811 $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
---------- ---------- ----------
(RESTATED)
----------
<S> <C> <C> <C>
Current taxes payable:
U.S. Federal........................ $2,664,377 $ 994,371 $ 226,835
Foreign............................. 762,284 520,103 518,599
State and local..................... 195,898 143,600 40,593
---------- ---------- ----------
3,622,559 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 $3,094,698 $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.
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
$320,000 and $325,000, respectively, 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.
28
<PAGE> 29
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:
<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. In 1996 a provision of $129,000 for
competent authority was established 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.
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.
29
<PAGE> 30
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 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.
30
<PAGE> 31
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.
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.... 605,452 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 2,510,953 3.00 -- 4.97 3.76
Stock options granted.... 839,875 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 2,476,983 $3.00 -- $10.75 $ 5.01
========== =================== ======
</TABLE>
31
<PAGE> 32
The following table summarizes information about options outstanding at
December 31, 1998 by plan:
<TABLE>
<CAPTION>
TOTAL OPTIONS
TOTAL OPTIONS TOTAL OPTIONS AVAILABLE FOR
OUTSTANDING EXERCISABLE 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.
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 $4,418,000 or
$0.38 per basic share and $0.36 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. The Company's net loss for 1996 would have been
approximately $(1,391,000), or $(0.21) per basic and diluted share. 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.
32
<PAGE> 33
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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER
--------------------
<S> <C>
1999............. $ 2,600,000
2000............. 1,500,000
2001............. 1,500,000
2002............. 1,500,000
2003............. 1,600,000
Thereafter....... 13,000,000
-----------
Total...... $21,700,000
===========
</TABLE>
Additionally, the Company leases certain equipment under cancelable
operating leases. The total rental expense under all equipment and office space
operating leases was approximately $3,200,000, $2,700,000 and $3,500,000 in
1998, 1997 and 1996, respectively.
33
<PAGE> 34
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 warrants had a fair value of
$540,000. 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.
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 (Restated)
Total revenues............... $10,300 $ 12,144 $12,369 $ 15,019
Gross profit................. 8,893 10,642 11,225 13,599
Net income................... 692 954 1,423 2,053
Earnings per share
Basic...................... 0.06 0.08 0.12 0.18
Diluted.................... 0.06 0.08 0.11 0.16
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
Earnings (loss) per share
Basic................... 0.04 (0.14) 0.07 0.19
Diluted................. 0.04 (0.14) 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 (loss)............ (1,189) (386) (322) 695
Earnings (loss) per share
Basic................... (0.17) (0.06) (0.05) 0.09
Diluted................. (0.17) (0.06) (0.05) 0.08
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE> 35
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 filed with
the Securities and Exchange Commission in April 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 filed with the Securities and Exchange
Commission in April 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 filed with the Securities and Exchange
Commission in April 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 filed with the Securities and Exchange
Commission in April 1999.
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:
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
35
<PAGE> 36
3.Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- ---------------------------
<S> <C>
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.)
*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
</TABLE>
* Reflects management contract or other compensatory arrangement required to be
filed as an exhibit pursuant to Item 14 (c) of this Form 10-K/A.
+ Filed herewith.
(b) Reports on Form 8-K: None.
36
<PAGE> 37
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
By: /s/ KATHERINE K. CLARK
----------------------------------------------
KATHERINE K. CLARK
CHIEF EXECUTIVE OFFICER AND DIRECTOR
(DULY AUTHORIZED OFFICER)
Dated: March 30, 2000
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.
NAME TITLE
----------------------------- -------------------------
/s/ PATRICK H. MCGETTIGAN Chairman of the Board
-------------------------
PATRICK H. MCGETTIGAN
/s/ KATHERINE K. CLARK President, Chief Executive Officer
---------------------- and Director
KATHERINE K. CLARK (Principal Executive Officer)
/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
FREDERICK S. ROLANDI, III (Principal Accounting Officer)
37
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Landmark Systems Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 15, 1999, except for the information in Note 2 under "Basis of
Presentation (Restated)" to the consolidated financial statements, as to which
the date is February 29, 2000, relating to the financial statements, appearing
in Landmark Systems Corporation's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1998 also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K, as amended. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 29, 2000
<PAGE> 39
LANDMARK SYSTEMS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------------------- ----------- ----------- ---------- ------------
BALANCE AT
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF 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
38
<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, except for the information in
Note 2 under "Basis of Presentation (Restated)" to the consolidated financial
statements, as to which the date is February 29, 2000, relating to the
consolidated financial statements, appearing in Landmark Systems Corporation's
Annual Report on Form 10-K, as amended for the year ended December 31, 1998. We
also consent to the incorporation by reference of our report dated February 29,
2000, relating to the financial statement schedule, which appears in this Form
10-K, as amended. We also consent to the reference to us under the heading
"Selected Financial Data" which appears in this Form 10-K, as amended.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 29, 2000
<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> 23,253,679
<BONDS> 0
0
0
<COMMON> 117,826
<OTHER-SE> 26,711,215
<TOTAL-LIABILITY-AND-EQUITY> 59,306,895
<SALES> 22,083,944
<TOTAL-REVENUES> 49,832,234
<CGS> 1,770,824
<TOTAL-COSTS> 5,473,399
<OTHER-EXPENSES> 37,932,666
<LOSS-PROVISION> 603,015
<INTEREST-EXPENSE> 41,668
<INCOME-PRETAX> 8,216,811
<INCOME-TAX> 3,094,698
<INCOME-CONTINUING> 5,122,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,122,113
<EPS-BASIC> 0.45<F1>
<EPS-DILUTED> 0.41
<FN>
<F1>This amount is reported as EPS BASIC.
</FN>
</TABLE>
