<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
Commission File Number 0-23373
LANDMARK SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1221302
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12700 SUNRISE VALLEY DRIVE, RESTON, VA 20191
(Address of principal executive offices) (Zip Code)
703-464-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
- ---------
Number of shares outstanding of the issuer's classes of common stock as of April
30, 1999:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, par value $.01 per share 12,337,592
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LANDMARK SYSTEMS CORPORATION
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 (restated and unaudited) and March 31,
1998 (restated and unaudited) 4
Condensed Consolidated Balance Sheets as of March 31,
1999 (restated and unaudited) and December 31, 1998 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 (restated and unaudited) and March 31, 1998
(restated and unaudited) 6
Notes to Condensed Consolidated Financial Statements (restated
and unaudited) 7-9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (restated) 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16-17
SIGNATURES 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements set forth below for the three-month
periods ended March 31, 1999 and 1998 are restated and unaudited, and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (see Note 1). Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. Landmark Systems Corporation believes that the
disclosures made are adequate to make the information presented not misleading.
The results for the three-month period ended March 31, 1999 are not necessarily
indicative of the results for the fiscal year.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all necessary adjustments (consisting only of
normal recurring adjustments) that are necessary for a fair presentation of
results for the periods presented. It is suggested that these financial
statements be read in conjunction with the latest audited consolidated financial
statements and notes thereto (included in the Annual Report on Form 10-K/A for
the year ended December 31, 1998).
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LANDMARK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(RESTATED AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues
License revenues $ 6,656,563 $ 3,273,829
Maintenance revenues 7,141,412 7,026,212
--------------- ---------------
Total revenues 13,797,975 10,300,041
Cost of revenues
Cost of license revenues 699,709 490,523
Cost of maintenance revenues 1,198,020 916,526
--------------- ---------------
Total cost of revenues 1,897,729 1,407,049
--------------- ---------------
Gross profit 11,900,246 8,892,992
--------------- ---------------
Operating expenses
Sales and marketing 4,523,865 3,473,607
Product research and development 4,162,631 3,599,519
General and administrative 1,441,868 1,139,640
--------------- ---------------
Total operating expenses 10,128,364 8,212,766
--------------- ---------------
Operating income 1,771,882 680,226
Interest and other income, net 579,111 439,830
--------------- ---------------
Income before taxes 2,350,993 1,120,056
Provision for income taxes 899,258 428,421
--------------- ---------------
Net income $ 1,451,735 $ 691,635
=============== ===============
Earnings per share
Basic $ 0.12 $ 0.06
Diluted $ 0.11 $ 0.06
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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LANDMARK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------------ -----------------
(RESTATED AND UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,420,135 $ 28,322,234
Accounts receivable, net of allowance for
doubtful accounts of $1,320,000 and
$1,323,000 9,427,276 10,902,168
Unbilled accounts receivable 7,938,271 5,728,250
Other current assets 2,393,228 2,498,564
--------------- ---------------
Total current assets 47,178,910 47,451,216
Unbilled accounts receivable - noncurrent 5,476,570 5,486,240
Fixed assets, net 4,566,661 4,121,290
Capitalized software costs, net 214,768 257,722
Intangible assets, net 5,582,500 616,000
Other assets 1,370,099 1,374,427
--------------- ---------------
Total assets $ 64,389,508 $ 59,306,895
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,407,332 $ 5,529,872
Deferred revenue 18,810,154 17,723,807
--------------- ---------------
Total current liabilities 23,217,486 23,253,679
Deferred revenue - noncurrent 9,560,603 8,900,963
Other liabilities 301,461 323,212
--------------- ---------------
Total liablities 33,079,550 32,477,854
--------------- ---------------
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000
Shares authorized, 12,237,536 and
11,782,585 issued and outstanding 122,375 117,826
Additional paid-in capital 29,933,995 26,692,818
Retained earnings (deficit) 1,333,201 (118,534)
Accumulated other comprehensive income (loss) (79,613) 136,931
--------------- ---------------
Total stockholders' equity 31,309,958 26,829,041
--------------- ---------------
Total liabilities and stockholders' equity $ 64,389,508 $ 59,306,895
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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LANDMARK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(RESTATED AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,451,735 $ 691,635
Adjustments to reconcile net income to net
cash flows from operations:
Depreciation and amortization 865,502 705,713
Provision for deferred income taxes - (89,292)
Tax benefit for exercise of stock options 627,304 267,278
Sale of unbilled accounts receivable 2,960,292 -
Changes in working capital (2,753,311) 780,547
--------------- ---------------
Net cash provided by operating activities 3,151,522 2,355,881
--------------- ---------------
Cash flows from investing activities
Acquisition of distribution rights (4,221,080) (84,924)
Capital expenditures (844,419) (528,746)
--------------- ---------------
Net cash used in investing activities (5,065,499) (613,670)
--------------- ---------------
Cash flows from financing activities
Principal payments on loans - (130,724)
Proceeds from sale of common stock 1,228,422 515,010
--------------- ---------------
Net cash provided by financing activities 1,228,422 384,286
--------------- ---------------
Effect of exchange rate changes on cash (216,544) (209)
--------------- ---------------
Net (decrease) increase in cash and
cash equivalents (902,099) 2,126,288
Cash and cash equivalents, beginning of period 28,322,234 17,242,681
--------------- ---------------
Cash and cash equivalents, end of period $ 27,420,135 $ 19,368,969
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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LANDMARK SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED AND UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying restated and unaudited interim condensed consolidated
financial statements of Landmark Systems Corporation and its subsidiaries
(collectively, the "Company") reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results of the interim
periods presented in conformity with generally accepted accounting principles
for interim financial information. Such adjustments are of a normal recurring
nature. Intercompany balances and transactions have been eliminated in
consolidation.
The results of the interim periods presented are not necessarily indicative
of the results for the year. The Company's interim financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 1998, as filed with
the Securities and Exchange Commission on Form 10-K/A.
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 of approximately $1,826,000 and $391,000 of revenues that had been
previously recognized in 1998, and in the current period of 1999, respectively.
The financial statements contained herein reflect these adjustments. A summary
of the impact of the restatements follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Results of Operations
- ---------------------
License revenues $ 7,254,648 $ 6,656,563 $ 3,565,287 $ 3,273,829
Maintenance revenues 6,933,931 7,141,412 6,977,635 7,026,212
Total revenues 14,188,579 13,797,975 10,542,922 10,300,041
Income before taxes 2,741,597 2,350,993 1,362,937 1,120,056
Provision for income taxes 1,048,664 899,258 521,323 428,421
Net income 1,692,933 1,451,735 841,614 691,635
Diluted earnings per share $ 0.14 $ 0.11 $ 0.07 $ 0.06
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C> <C> <C>
Financial Position
- ------------------
Total assets $64,389,508 $64,389,508 $59,306,895 $59,306,895
Accounts payable and accrued expenses 5,244,307 4,407,332 6,217,441 5,529,872
Deferred revenue 18,039,299 18,810,154 17,088,814 17,723,807
Total current liabilities 23,283,606 23,217,486 23,306,255 23,253,679
Deferred revenue - noncurrent 8,115,248 9,560,603 7,710,350 8,900,963
Stockholders' equity 32,689,193 31,309,958 27,967,078 26,829,041
</TABLE>
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. In December 1998, the American Institute of
Certified Public Accountants issued SOP 98-9, "Modification of SOP 97-2,
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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 exist. SOP 98-9 will be effective for the
Company's 2000 financial statements. The adoption of SOP 97-2 did not have a
material impact on the Company's consolidated financial statements. The Company
is evaluating 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. The adoption of SOP 98-1 did not have a material
impact on the Company's results of operations or financial condition.
NOTE 3 - EARNINGS PER SHARE
The following reconciliation of the numerators and denominators is provided
for basic and diluted earnings per share for the three months ended March 31,
1999 and 1998. Basic earnings per share is computed by dividing the net income
available to common stockholders by the weighted-average number of common shares
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 and resulted in the
issuance of common stock.
<TABLE>
<CAPTION>
INCOME PER-SHARE
(NUMERATOR) SHARES AMOUNT
(RESTATED) (DENOMINATOR) (RESTATED)
-------------- ------------ ----------
<S> <C> <C> <C>
For the three months ended March 31, 1999
Basic earnings per share $ 1,451,735 11,946,760 $0.12
=====
Effect of dilutive securities
Stock options and warrants - 1,024,367
-------------- ------------
Diluted earnings per share $ 1,451,735 12,971,127 $0.11
============== ============ =====
For the three months ended March 31, 1998
Basic earnings per share $ 691,635 11,274,648 $0.06
=====
Effect of dilutive securities
Stock options and warrants - 994,450
-------------- ------------
Diluted earnings per share $ 691,635 12,269,098 $0.06
============== ============ =====
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
The Company's total comprehensive income is comprised of net income and
other comprehensive income, which consists of foreign currency translation
adjustments. Total comprehensive income for the three months ended March 31,
1999 and 1998 was $1,235,196 and $691,426, respectively.
NOTE 5 - SEGMENT REPORTING
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>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1999 1998
(RESTATED) (RESTATED)
--------------- ---------------
<S> <C> <C>
Mainframe $ 10,799,420 $ 8,909,930
Client/server 2,998,555 1,390,111
--------------- ---------------
Total revenues $ 13,797,975 $ 10,300,041
=============== ===============
</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 retained by the distributors. The
Company's revenues by country or geographic region are as follows:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1999 1998
(RESTATED) (RESTATED)
---------------- ----------------
<S> <C> <C>
United States $ 9,471,228 $ 6,799,860
Germany 1,001,448 725,074
United Kingdom 968,125 570,135
The Netherlands 671,964 385,532
Other European countries 367,805 403,690
Japan 349,150 466,342
Australia 370,410 278,127
Other 597,845 671,281
---------------- ----------------
Total revenues $ 13,797,975 $ 10,300,041
================ ================
</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>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
United States $ 10,085,410 $ 4,461,934
Europe 212,489 181,174
Other 66,030 61,539
--------------- --------------
Total long-lived assets $ 10,363,929 $ 4,704,647
=============== ==============
</TABLE>
NOTE 6 - ACQUISITION OF DISTRIBUTION RIGHTS
In January 1999, the Company signed an agreement to acquire certain rights
and related assets from Software Products Ltd. ("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 mainframe 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 fair value of the warrant was
$540,000. The Company recorded 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 intangible asset over a five-year
period.
NOTE 7 - SUBSEQUENT EVENTS
In April 1999, the Company established a subsidiary, Landmark Systems
Singapore Pte Ltd. to act as a distributor of the Company's products in
Singapore. In May 1999, the Company established a subsidiary, Landmark Systems
France, SarL, to act as a distributor of the Company's client/server products in
France. Additionally in May 1999, the Company established a subsidiary, Landmark
Systems Nordic, AB, to act as a distributor of the Company's products in the
Scandinavian countries.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
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 of approximately $1.8 million, $0.4 million of revenues that had been
previously recognized in 1998, and in the current period of 1999, respectively.
The financial statements contained herein reflect these adjustments.
The following table sets forth the Company's Condensed Consolidated
Statements of Operations expressed as percentages of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
(RESTATED) (RESTATED)
-----------------------------------
<S> <C> <C>
Revenues
License revenues 48.2% 31.8%
Maintenance revenues 51.8 68.2
----- -----
Total revenues 100.0 100.0
Cost of revenues
Cost of license revenues 5.1 4.8
Cost of maintenance revenues 8.7 8.9
----- -----
Total cost of revenues 13.8 13.7
----- -----
Gross profit 86.2 86.3
----- -----
Operating expenses
Sales and marketing 32.8 33.7
Product research and development 30.2 34.9
General and administrative 10.4 11.1
----- -----
Total operating expenses 73.4 79.7
Operating income 12.8 6.6
Net interest and other income 4.2 4.3
----- -----
Income before income taxes 17.0 10.9
Provision for income taxes (6.5) (4.2)
----- -----
Net income 10.5% 6.7%
===== =====
</TABLE>
Total revenues. Total revenues increased 34.0% from $10.3 million for the
three months ended March 31, 1998, to $13.8 million for the three months ended
March 31, 1999. Revenues for the first three months of 1999 from mainframe
products and services were $10.8 million, an increase of 21.2% from the same
period in the prior year; revenues for the first three months of 1999 from
client/server products and services were $3.0 million, an increase of 115.7%
from the same period in the prior year. The increase in revenues from mainframe
products and services was primarily due to the increase in the number of
conversions of existing customers to new or modified license agreements,
typically containing extended maintenance terms with preferential pricing. The
increase in client/server revenues was primarily due to increase product
acceptance of the client/server products. As license revenues increased 103.5%
while maintenance revenues remained constant during the three months ended March
31, 1999 as compared to the prior year period, license revenues represented a
greater proportion of the Company's total revenues compared to the prior year
period.
License revenues. License revenues increased 103.3% from $3.3 million for
the three months ended March 31, 1998, to $6.7 million for the three months
ended March 31, 1999. The increase in license revenue is due to an increase in
sales to new customers and conversions of existing customers to new or modified
license agreements.
Maintenance revenues. Maintenance revenues grew slightly from $7.0 million
for the three months ended March 31, 1998 to $7.1 million in the 1999 period.
Maintenance revenues were favorably impacted by the volume of prior year's
license sales and the effects of increases in the Company's maintenance prices,
offset by an increase in conversions of license agreements, which include a
higher discount on maintenance fees. Maintenance renewals have historically been
approximately 90%, and management believes future
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maintenance renewal rates will continue at this level.
Total cost of revenues. Total cost of revenues during the three months
ended 1999 and 1998 were $1.9 million and $1.4 million, respectively,
representing 13.8% and 13.7% of total revenues. Based upon current customer
service activities and the expected amounts of amortization of capitalized
software costs and intangible assets, management believes the total cost of
revenues will continue to be approximately 12% to 14% of total revenues
throughout 1999, excluding the impact that acquisitions, if any, may have on
cost of revenues.
Cost of license revenues. Cost of license revenues includes amortization of
capitalized software costs, amortization of international distribution rights,
product royalties, materials and packaging expenses. Costs of license revenues
were $0.7 and $0.5 million for the three months ended March 31, 1999 and 1998,
respectively, representing 10.5% and 15.0% of license revenues in such periods.
The increase in cost of license revenues from 1998 to 1999 is primarily due to
the amortization of intangible assets acquired in January 1999 from the
Company's former distributor in the United Kingdom.
Cost of maintenance revenues. Cost of maintenance revenues consists of
personnel and related costs for customer support, training and consulting
services. Costs of service revenues were $1.2 million and $0.9 million for the
three months ended March 31, 1999 and 1998, respectively, representing 16.8% and
13.0% of service revenues in such periods. The increase in costs from 1998 to
1999 is a result of increased personnel in professional services for
client/server and additional support personnel in the United Kingdom subsidiary.
Sales and marketing. Sales and marketing includes personnel and related
costs for the Company's direct sales organization, marketing staff and
promotional expenses. Sales and marketing expenses were $4.5 million and $3.5
million for the three months ended March 31, 1999 and 1998, respectively,
representing 32.8% and 33.7% of total revenues in such periods. The increase in
sales and marketing expenses is primarily due to an increase in personnel in the
direct sales organization in the United Kingdom, an increase in marketing and
promotional expenses, and an increase in commission expenses to the Company's
direct sales forces as a result of increased sales.
Product research and development. Product research and development includes
personnel and related costs for the Company's development staff. Product
research and development expenses were $4.2 million and $3.6 million for the
three months ended March 31, 1999 and 1998, respectively, representing 30.2% and
34.9% of total revenues in such periods. The increase in product research and
development expenses from 1998 to 1999 reflects increased investments in both
mainframe and client/server products.
General and administrative. General and administrative includes salaries
and related costs of administration, finance and management personnel, as well
as legal and accounting fees. General and administrative expenses were $1.4
million and $1.1 million for the three months ended March 31, 1999 and 1998,
respectively, representing 10.4% and 11.1% of total revenues in such periods.
The increase in general and administrative expenses from 1998 to 1999 is due to
an increase in personnel in the Company's information systems department and
costs associated with the relocation of the Company's headquarters which will be
completed in June 1999.
Net interest and other income. Net interest and other income includes
interest recorded on installment receivables, interest income earned by the
Company on its excess cash balances, interest expense incurred on term and
revolving credit facilities, and exchange gains (losses) incurred by the Company
on foreign exchange transactions. Net interest and other income totaled $0.6
million and $0.4 million for the three months ended March 31, 1999 and 1998,
respectively. The increase from 1998 to 1999 reflects higher levels of interest
income earned by the Company on its cash balances and lower levels of interest
expense following repayment of the outstanding balance on the Company's debt
obligations during 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of $27.4
million and working capital of $24.0 million. During the three months ended
March 31, 1999, net cash provided by operating and financing activities were
$3.2 million and $1.2 million, respectively, while net cash used in investing
activities was $5.1 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 March 31, 1999,
other than normal trade payables and accrued liabilities. Stockholders' equity
at March 31, 1999 was $31.3 million.
In March 1999, the Company obtained a revolving line of credit in the
amount of $10.0 million. The line of credit, which was
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<PAGE> 12
granted on an unsecured basis, has a floating interest rate of LIBOR plus 1.35%
and expires June 30, 2000. No advances have been made on the line of credit.
The Company continues to finance its growth through funds generated from
operations. For the three months ended March 31, 1999, cash flow from operations
was $3.2 million. Beginning in December 1998 and continuing in 1999, the Company
has sold unbilled accounts receivable, on a non-recourse basis, to augment its
operating cash flows. In March 1999, the Company sold $3.0 million of unbilled
accounts receivable. The sale of the unbilled receivables resulted in an
immaterial gain for the Company. In the future, the Company may sell additional
unbilled accounts receivable from time to time depending on the Company's cash
flow requirements and whether the terms are financially favorable for the
Company.
The Company's investing activities primarily include expenditures for fixed
assets in support of the Company's product development activities and
infrastructure, and for capitalized software development costs. During the three
months ended March 31, 1999, the Company invested $0.8 million in fixed assets,
consisting primarily of computer equipment to expand and upgrade the Company's
development activities.
Additionally, in January 1999, the Company signed an agreement to acquire
certain rights and related assets from Software Products Ltd. ("Software
Products"), a former international distributor of the Company's products. As a
result of the agreement, the Company regained direct access to its mainframe
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 recorded 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 Company will amortize the intangible asset
into cost of license revenues over five years. Management believes the
transaction will be accretive in 1999.
The Company believes that cash and cash equivalents at March 31, 1999, cash
flow generated from operations and the line of credit 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.
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 exist. 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. The adoption of SOP 98-1 did not have a material
impact on the Company's results of operations or financial condition.
YEAR 2000 COMPLIANCE
The Company has conducted periodic evaluations 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.
These evaluations have involved both testing the Company's 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
12
<PAGE> 13
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 during the third 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 final construction and
containing new mechanical systems, in Reston, Virginia. The Company believes
that the new mechanical systems will be Year 2000 compliant, based on its
building construction manager's experience with other such systems, and certain
representations made by the manufacturers of such systems. The Company intends
to seek certificates from these manufacturers that their systems are Year 2000
compliant. Additionally, the Company is installing a new telephone switch in the
new facility, and a Year 2000 compliancy certificate has been received from the
switch's manufacturer.
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, with certain exceptions described below, 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. The Company is specifically aware
that CICS Version 2, Release 1.2, an operating system developed and marketed by
the IBM Corporation is not presently Year 2000 compliant, according to IBM, and
that the Company's The Monitor for CICS/MVS Version 8.3 product, since it
operates with such non-compliant IBM product, is therefore also non-compliant.
The Company has been communicating this non-compliancy situation to its
customers by written, oral and electronic (e-mail and the Company's web site)
communications since 1997. The expected reduced sales of this product are not
expected to have a material adverse effect on the Company's results of
operations or financial condition.
The other exceptions to the Company's general condition of Year 2000
product compliance are: (1) some Company product customers may be operating
older, non-compliant versions of certain of the Company's products, and also may
not be active participants in product maintenance programs that periodically
provide in the normal course of business (at no additional charge beyond the
on-going costs of program participation) newer product versions or product
modifications that address Year 2000 non-compliancy issues and specifically make
such products Year 2000 compliant (the "Older Product Scenario"); and (2) the
Company recently discovered that its NaviGraph product, version 1.3 requires a
product addition to make it Year 2000 compliant (the "NaviGraph Scenario").
With respect to the Older Product Scenario, the majority (on an absolute
basis) of the Company's products were made Year 2000 compliant during 1997.
Certain other Company products, specifically The Monitor for DB Control, The
Monitor for MQ Series and NaviPlex products, were made Year 2000 compliant
during 1998. Additionally, those customers on active product maintenance
programs (and approximately 90% of the Company's customers participate in such
programs) receive regular product upgrades or modifications that include
software that addresses Year 2000 compliancy issues. The Company encourages all
its customers to participate in active maintenance programs. The Company has
been communicating this Older Product Scenario issue to customers through
written, oral and electronic (e-mail and the Company's web site) communications
and will continue to do so past the Year 2000 date change.
13
<PAGE> 14
With respect to the NaviGraph Scenario, the product addition required to
make this product Year 2000 compliant was made generally available to all
NaviGraph customers participating in active maintenance programs during late
April 1999. The Company had previously communicated to its customers and to
third parties, beginning in 1997, that NaviGraph 1.3 was Year 2000 compliant. Of
the approximately 46 domestic NaviGraph 1.3 customers, 41 of such customers
participate in the maintenance program for the product, and 4 of the remaining 5
customers no longer use the product. Of the approximately 142 international
NaviGraph customers (version 1.3 and prior versions, which prior versions have
consistently been described by the Company as not Year 2000 compliant) 113 of
such customers participate in the maintenance program for the products. The
Company does not know how many of those international NaviGraph product
customers not participating in an active maintenance program are no longer using
the product. Accordingly, the large majority of domestic NaviGraph 1.3 and
international NaviGraph 1.3 (and previous version) customers who have elected to
participate in active maintenance programs are, or will be made, Year 2000
compliant with respect to such products in the normal course of business,
assuming they accept and implement such normal product maintenance.
Additionally, NaviGraph 2.0, which is Year 2000 compliant, is targeted to be
released in June 1999, and will be made available to NaviGraph 1.3 customers
that are on, or wish to join, active maintenance programs. The Company intends
to contact all NaviGraph 1.3 product customers to alert them that Year 2000
compliancy issues may be present and to inform them of their options.
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 intends to
conduct a further cycle of tests for its mainframe products, and is also aware
that certain of its customers have been and will be conducting additional Year
2000 Company product compliancy tests, and it is possible that additional
Company product Year 2000 compliancy issues could be discovered in the future,
including during the course of such tests.
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 approximately $0.1 million, $0.1 million and $0.2
million in the three months ended March 31, 1999 and the years ended December
31, 1998 and 1997, respectively, for Year 2000 remediation activites. The
Company currently expects to incur approximately $0.1 million during the
remainder of 1999 for Year 2000 remediation activities. There can be no
assurance that the actions taken by the Company with respect to its internal
information technology systems, embedded systems or its products will eliminate
the numerous and varied risks associated with the year 2000 date change.
Further, there can be no assurance that the Company will not be adversely
affected by any year 2000 related difficulties encountered by vendors or
customers or by any downturn in information technology purchases or in the
economy in general as the year 2000 date change draws nearer, or after such date
change. Additionally, the effects of any actual Year 2000 non-compliance problem
directly or indirectly experienced by the Company could be exacerbated by the
fact that the Company normally experiences its largest quarterly sales for a
given calendar year in the fourth quarter of each year, and invoices and
receives payment for such sales in the first quarter of the following calendar
year. Accordingly, should a Year 2000 non-compliance problem or problems affect
the Company's customers, the potential impact on the Company's operations could
be greater than if the Company received these payments at the time of sale or
some time other than the calendar quarter immediately after the date switch from
1999 to 2000. Any of these risks could have a material adverse effect on the
Company's financial condition and results of operations.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE LITIGATION REFORM ACT OF 1995
Some of the statements in this Form 10-Q/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 sale of unbilled
accounts receivable, the Company's ability to make its acquisitions accretive,
the Company's ability to sell or issue equity or debt securities or to enter
into credit facilities on acceptable terms and the Company's ability to increase
license revenues, maintain the level of maintenance renewal rates and limit
total cost of sales. 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, the Company's ability to consummate license transactions as
anticipated, any failure or delay in the Company's ability to develop and
introduce new products, seasonal factors
14
<PAGE> 15
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 detailed
herein and in the Company's other filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1998. Therefore, there can be no assurance that actual future
results will not differ materially from anticipated results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has subsidiaries in the United Kingdom, Germany, France, The
Netherlands, Sweden, Spain, Australia, Hong Kong and Singapore that 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 royalty payments from 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 March 31,
1999, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(c) In January 1999, the Company issued 91,586 unregistered shares of
Company common stock to Software Products Ltd. as partial
consideration for the acquisition of certain distribution rights. A
description of such transaction can be found in Part I, Item 2 -
"Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources" contained
herein.
No underwriter was involved in the foregoing transaction. The issuance
was deemed exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act.
(d) The net proceeds to the Company from the initial public offering (SEC
File No. 333-35629 effective November 18, 1997) were approximately $12
million and have been deposited by the Company in a money market fund
investing solely in short-term U.S. government obligations.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Stockholders was held on May 11, 1999 at the
Company's headquarters, 8000 Towers Crescent Drive, Vienna, Virginia.
15
<PAGE> 16
1. PROPOSAL ONE - Election of directors
<TABLE>
<CAPTION>
NOMINEES: FOR WITHHELD
--------- ------------ --------------
<S> <C> <C>
Patrick H. McGettigan 10,740,318 8,500
Katherine K. Clark 10,740,318 8,500
Ralph E. Alexander 10,740,318 8,500
Jeffrey H. Bergman 10,740,318 8,500
T. Eugene Blanchard 10,740,318 8,500
Patrick W. Gross 10,740,318 8,500
Sudhakar V. Shenoy 10,740,318 8,500
</TABLE>
2. PROPOSAL TWO - Approval of an amendment to the 1994 Stock
Incentive Plan to increase by 1,500,000 the number of shares
authorized for issuance thereunder
<TABLE>
<S> <C>
For 8,519,564
Against 969,754
Abstain 14,058
</TABLE>
3. PROPOSAL THREE - Ratification of selection of
PricewaterhouseCoopers LLP as independent accountants
<TABLE>
<S> <C>
For 10,745,474
Against 2,255
Abstain 1,088
</TABLE>
ITEM 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference to
Exhibit 3.1 forming a part of the Company's registration
statement on Form S-1 (File No. 333-35629) filed with the
Securities and Exchange Commission under the Securities Act
of 1933, as amended.)
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 forming a part of the Company's registration
statement on Form S-1 (File No. 333-35629) filed with the
Securities and Exchange Commission under the Securities Act
of 1933, as amended.)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen certificate of Common Stock (incorporated by
reference to Exhibit 4.2 forming a part of the Company's
registration statement on Form S-1 (File No. 333-35629)
filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.)
10.1 Employment agreement between the Company and Ralph E.
Alexander dated April 9, 1997 (incorporated by reference to
Exhibit 10.1 forming a part of the Company's registration
statement on Form S-1 (File No. 333-35629) filed with the
Securities and Exchange Commission under the Securities Act
of 1933, as amended.)
10.2 1989 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 forming a part of the Company's registration
statement on Form S-1 (File No. 333-35629) filed with the
Securities and Exchange Commission under the Securities Act
of 1933, as amended.)
16
<PAGE> 17
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, 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, as amended.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the first
quarter of 1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANDMARK SYSTEMS CORPORATION
Date: March 30, 2000 By: /s/ Katherine K. Clark
----
Katherine K. Clark
President and Chief Executive Officer (Duly
Authorized Officer)
Date: March 30, 2000 By: /s/ Frederick S. Rolandi, III
-----------------------------
Frederick S. Rolandi, III
Vice President and Chief Financial Officer
(Chief Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 27,420,135
<SECURITIES> 0
<RECEIVABLES> 10,746,811
<ALLOWANCES> 1,319,535
<INVENTORY> 0
<CURRENT-ASSETS> 47,178,910
<PP&E> 16,798,611
<DEPRECIATION> 12,231,950
<TOTAL-ASSETS> 64,389,508
<CURRENT-LIABILITIES> 23,217,486
<BONDS> 0
0
0
<COMMON> 122,375
<OTHER-SE> 31,187,583
<TOTAL-LIABILITY-AND-EQUITY> 64,389,508
<SALES> 6,656,563
<TOTAL-REVENUES> 13,797,975
<CGS> 699,709
<TOTAL-COSTS> 1,897,729
<OTHER-EXPENSES> 10,128,364
<LOSS-PROVISION> 155,756
<INTEREST-EXPENSE> 3,568
<INCOME-PRETAX> 2,350,993
<INCOME-TAX> 899,258
<INCOME-CONTINUING> 1,451,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,451,735
<EPS-BASIC> 0.12<F1>
<EPS-DILUTED> 0.11
<FN>
<F1>This amount is reported as EPS BASIC.
</FN>
</TABLE>
