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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-03373
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LANDMARK SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-1221302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Towers Crescent Drive, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703-902-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par Nasdaq National Market
value $.01 per
share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by non-affiliates
as of March 13, 1998, was $39,863,754.
The number of shares of the registrant's Common Stock outstanding as of March
13, 1998, was 11,273,252 shares.
The following documents are hereby incorporated by reference into this Form
10-K:
Portions of the Registrant's 1998 Proxy Statement to be filed with the
Securities and Exchange Commission (Part III).
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Certain statements made in this Annual Report on Form 10-K are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown
risks, uncertainties, and other factors that may cause actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the timing of revenues, the timing of
product releases and shipments, rapid technological change, the demand for
products and services for mainframe-based systems, the acceptance of the
Company's client/server based products, the timing and amount of capital
expenditures and other risks detailed herein and in the Company's other
Securities and Exchange Commission filings.
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 product family is distinct in its
ability to monitor the key components of a computing environment, provide
early warning of potential system problems and enable effective planning for
changes in the computing environment. The Company believes these
capabilities improve user productivity, reduce computing costs, increase
system availability and optimize use of system resources. Landmark's
products address performance management across leading hardware platforms,
operating systems from DEC, Hewlett-Packard, IBM, Microsoft, NCR and Sun and
databases consisting of DB2, Oracle, SQL Server and Sybase. Each of
Landmark's products has been developed to work with different configurations
of system components from multiple vendors while providing comparable
functionality across each platform. As of December 31, 1997, Landmark had
licensed over 16,400 copies of its products to over 3,900 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.
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
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model or predict system and application performance which improves the
acquisition, development and implementation of new or changed applications and
hardware.
Landmark's PerformanceWorks product family enables businesses to optimize
system performance and resource utilization while maintaining a high and
consistent level of user productivity. Landmark's products provide the
ability to transform raw data into useful information through an intelligent
aggregation and automatic summarization process, which collects data on a
continuous basis and generates summary information at prescribed intervals.
This data can be measured against a variety of performance thresholds and
easily formatted into understandable reports to facilitate the quick
identification and resolution of performance problems. In addition,
Landmark's products self-manage the collection, summarization and
distribution of performance data, and consequently require minimal computing
and personnel resources. As a result of this efficient gathering, storage
and presentation of performance data, Landmark's products are scalable to
accommodate system growth.
Landmark's solutions are based on its "lifecycle" view of performance
management and are designed to allow customers to address each stage of the
application lifecycle: planning, development and production. Landmark views
performance management as a continuous process in which each stage of the
application lifecycle provides input and feedback for the next.
Planning stage. Landmark's products are used to identify resource
requirements and to establish appropriate service levels through modeling,
trend analysis and load simulation (simulating use of computing resources
at different percentage levels of total capacity).
Development stage. Landmark's products perform application tuning
(adjusting applications to optimize performance), assist in stress testing
(simulation of maximum workloads on computing resources) and conduct
resource impact analysis to assess application performance prior to
deployment.
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, over 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
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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.
Data Management. The data management component manages the storage and
retention of performance data throughout the system and includes the
following functionalities:
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- 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/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
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Excel and Lotus 1-2-3, to be used to process, analyze, and report on Landmark's
performance data. In addition, SNMP integration modules allow PerformanceWorks
products to operate within leading systems management frameworks including IBM
Netview, Tivoli TME, Hewlett-Packard OpenView, Computer Associates Unicenter,
Cabletron Spectrum and Sun Solstice.
PRODUCTS. The ability to monitor performance metrics from each system
component in a complex, heterogeneous computing environment is a key feature
of Landmark's software, particularly because performance problems in these
environments can originate from any one or a combination of components.
If applications running in a distributed environment are experiencing slow
response time, the cause of the problem could be a memory problem on the
distributed application server, a disk contention problem (where two or more
applications are attempting to access the same data simultaneously) on the
mainframe database server, an overloaded network, a poorly written
application or any combination of these conditions. By monitoring
performance data from each of the system components, Landmark's products are
able to efficiently identify the source of the problem so a solution can be
implemented quickly or the potential problem can be anticipated and avoided
altogether by taking immediate corrective actions. The Company believes its
users benefit from the ease of use, depth of metrics and diagnostic tools it
provides, as well as the level of intelligent integration which allows
enhanced manageability in production environments.
Landmark's products are easily installed and implemented and generally do
not require additional customization before the products can be used by the
customer. The Company's products are also easily tailored so that the
performance metrics, data retention standards and data storage locations are
appropriate for each customer.
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
Sybase
Applications Response Monitor SmartWatch SmartWatch SmartWatch SmartWatch
Capacity Planning Interface to Interface to Predictor
third third
party software party software
User Interface NaviGraph NaviGraph SmartStation SmartStation
NaviPlex
Integrated Interfaces SNMP SNMP SNMP
Vendor API's ODBC ODBC
Number of licenses (as of
December 31, 1997) 6,700 1,900 6,100 1,700
Average transaction size (during
the year ended
December 31, 1997) $66,400 $14,400 $28,200 $34,800
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The Company derived 90.3%, 89.2% and 86.8% of its revenues from mainframe
products and services in fiscal years 1995, 1996 and 1997, respectively.
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.
Landmark's family of MVS products provide a complete solution for optimizing
and monitoring environments running the MVS operating system.
The Monitor products support data collection in the mainframe
environment for real-time, recent-past and historical performance
management monitoring. Each of these products incorporates Landmark's
Navigate technology which provides intelligent transfer of control from
one monitor to another, facilitating intuitive problem solving.
NaviGraph provides users with a graphical display of the performance of
key applications and system resources. NaviGraph is an easy-to-use,
Windows-based display providing a single point of access and control for
monitoring and analysis of the data collected by The Monitor products.
NaviPlex is designed for IBM's Parallel Sysplex technology which
introduces to mainframe environments performance complexities similar to
those of a distributed processing environment. NaviPlex consolidates
performance information from all MVS system environments into a single
workstation for managing performance issues, handling exception conditions
and trending information.
PerformanceWorks for VSE. PerformanceWorks for VSE is similar to
PerformanceWorks for MVS in terms of the performance management
functionality. PerformanceWorks for VSE includes The Monitor for VSE, The
Monitor for CICS, NaviGraph and VM Contention Monitor.
PerformanceWorks for UNIX. PerformanceWorks for UNIX is Landmark's
integrated set of performance management tools for use in the UNIX
environment and consists of SmartAgent for UNIX, SmartAgent for Oracle,
SmartAgent for Sybase, SmartStation and Predictor.
SmartAgent for UNIX, SmartAgent for Oracle and SmartAgent for Sybase
provide collection of performance metrics for each UNIX operating system
and database supported. Specific metrics collected vary with the
individual platforms. SmartAgents employ the Core Services features of
the PerformanceWorks architecture to manage, analyze and present
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performance data across tens or hundreds of locations operating with
hundreds or thousands of servers.
SmartStation provides a central control point to access performance
information collected by SmartAgents. Information is presented in
easy-to-understand charts, graphs, reports and gauges. Alarms warn of
potential system problems before they become serious. SmartStation
provides a complete set of pre-configured reports and graphics which can
be tailored to users' specific needs. Users can also define exception
conditions, and SmartStation will provide an alarm when performance
thresholds are exceeded. The alarms provide the user with an explanation
of the error, sending notifications through email systems, alphanumeric
pagers and management platforms. In addition, the alarms can be
configured to take corrective actions automatically.
Predictor is a capacity planning tool designed to help planners in
determining the types and quantities of new equipment and software
required to handle increased system utilization and performance
requirements. Based on the performance metrics stored for historical data
analysis, Predictor can predict the impact of adding new applications,
modifying an existing application, removing an application, adding users,
changing the server hardware configuration or changing the server entirely.
PerformanceWorks for Windows NT. PerformanceWorks for Windows NT is
similar to PerformanceWorks for UNIX in terms of the performance management
functionality of products currently available in the Windows NT environment.
PerformanceWorks for Windows NT includes SmartAgent for NT, SmartAgent for
SQL Server and SmartStation.
RECENT DEVELOPMENTS
In December 1997, the Company launched Performance Doctor, a Web-based
service that provides advice to customers and others from industry experts on
performance problems relating to applications and systems. Also in December
1997, the Company began shipping the Monitor for MQSeries, a new product
within the PerformanceWorks for MVS product family. This product runs in an
IBM MVS environment and allows users to monitor and manage the performance of
MQSeries environments throughout the enterprise, including MVS, UNIX and
Windows NT environments.
In January 1998, the Company announced PerformanceWorks SmartWatch, with
availability expected by the end of 1998. This new product allows the
measurement of performance metrics experienced by end-users at their
workstations using any application with a Windows 95 or Windows NT user
interface (no matter where that application is operating), including
off-the-shelf products and customer applications.
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.
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Landmark offers its customers a maintenance and support program which provides
telephone consultation, product maintenance and product upgrades. Customers can
communicate with Landmark technical support representatives 24 hours-per-day, 7
days-per-week. In addition, Landmark provides its customers and distributors
access to on-line maintenance information through an Internet-based application.
Landmark's maintenance and support program entitles participants to product
enhancements and upgrades as well as maintenance information. The first year of
maintenance and support is typically included in the license fee and thereafter
may be renewed for an annual fee. Historically, over 90% of Landmark's customers
have renewed their maintenance and support arrangements with the Company.
In January 1997, Landmark established a Professional Services organization
to offer consulting services to users of its products. These consulting
services are designed to support the effective deployment and implementation
of Landmark's products by assisting in the location of appropriate components
on which to run Landmark's software, identifying which performance metrics to
monitor, establishing rules concerning how to aggregate, retain and store
data, and customizing the presentation of reports generated from the
collected information. The demand for these consulting services has grown as
business-critical applications are increasingly deployed in complex,
heterogeneous computing environments. Moreover, many businesses lack
sufficient technical staff to fully implement Landmark's performance
management solution and require external assistance. The Professional
Services organization offers a variety of training programs to assist
customers in implementing Landmark's performance management tools, including
a number of standard programs and custom presentations to fulfill specific
requests. Training courses are held at Landmark's Vienna, Virginia training
center as well as on-site at customers' facilities.
SALES AND MARKETING
Landmark markets its products and services through its North American and
international sales organizations. The North American direct sales force,
which covers the United States and Canada, consists of field sales
representatives, mainframe and client/server system engineers and telesales
personnel. The telesales force was established in January 1997 to increase
the productivity of the field sales representatives by undertaking a variety
of support activities. These include generating and following up on leads,
handling and closing smaller transactions, maintaining a current database of
existing and potential customers and providing general assistance and account
management. Each telesales representative supports the efforts of two direct
sales representatives. The Company believes that the telesales force permits
the field sales force to focus on account opportunities with major businesses
involving larger dollar transactions, and on establishing and maintaining
relationships with these organizations. Landmark intends to establish
additional relationships with system integrators and OEMs to expand the
breath of its sales channel.
Landmark has historically relied primarily on third-party distributors to
market and sell the Company's products internationally. Revenues from
international sales accounted for 32.4%, 32.4% and 33.5% of total revenues in
1995, 1996 and 1997, respectively. Of those amounts,
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28.9%, 27.5% and 18.0%, respectively, were attributable to third party
distributors. Landmark has recently established a direct sales force in certain
strategic international markets to increase sales levels and gross margins on
products sold in such markets. To date, Landmark's international direct sales
efforts consist of six sales offices located in suburbs of London, Dusseldorf
and Utrecht (Netherlands), and in Madrid, Melbourne and Hong Kong.
The Company also maintains relationships with leading vendors including
DEC, Hewlett-Packard, IBM, Microsoft, Oracle, Sun, Sybase and Tivoli. These
relationships afford the Company opportunities to participate in joint
marketing programs with the vendors such as sales seminars, trade shows and
other promotional activities.
Revenues received from individual customers of the Company vary
significantly based on the size of the product installation. The sales cycle
for Landmark's products is lengthy and unpredictable, and may range from a
few months to over a year, depending upon the interest of the prospective
customer in the Company's products, the size of the order (which may involve
a significant commitment of capital by the customer), the decision-making and
acceptance procedures within the customer's organization and other factors.
PRODUCT DEVELOPMENT
Since its inception in 1983, Landmark has made substantial investments in
performance management software development. In 1995, 1996 and 1997,
Landmark's product development expenditures, including amounts capitalized,
totaled $13.6 million, $14.7 million and $13.5 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, 1997, the Company had 98 employees engaged in product
development. As it continues to implement its growth strategies, Landmark
intends to increase the size and depth of its product development operation.
However, competition for highly qualified technical employees is intense and
there can be no assurance that the Company will be successful in recruiting
or retaining product development employees.
INTELLECTUAL PROPERTY
Landmark relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. As part of its confidentiality procedures,
the Company generally enters into non-disclosure agreements with its
employees, distributors and corporate partners, and license agreements with
its customers, distributors and corporate partners with respect to its
software,
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product documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. Policing unauthorized use of the
Company's products is difficult, and Landmark is unable to determine the extent
to which piracy of its software products and misappropriation of its technology
occur. Software piracy and misappropriation may adversely affect the Company's
results of operations. Landmark currently relies on signed license agreements,
but may in the future rely on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, effective protection of intellectual property rights
is unavailable or limited in certain foreign countries. There can be no
assurance that the Company's protection of its proprietary rights, including any
patent that may be issued, will be adequate or that the Company's competitors
will not independently develop similar technology, duplicate the Company's
products or design around any patents issued to the Company or other
intellectual property rights.
Landmark is not aware that any of its products infringes the proprietary
rights of third parties. There can be no assurance, however, that third
parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that software product
developers will increasingly be subject to such claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in the industry segment overlaps. Any such claims,
with or without merit, could result in costly litigation that could absorb
significant management time, which could have a material adverse effect on
Landmark's business, financial condition and results of operations. Such
claims might require the Company to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to Landmark or at all, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
COMPETITION
The market for performance management software is intensely competitive,
fragmented and characterized by increasingly rapid technological
developments, evolving standards and rapid changes in customer requirements.
To maintain and improve its position in this market, Landmark is enhancing
current products and the inter-operability of its products with one another
and developing new products. Landmark competes primarily with vendors that
provide mainframe performance management software and vendors that provide
client/server performance management software. The Company believes that
principal competitors with respect to mainframe performance management
software products include Candle Corporation and Boole and Babbage, Inc. In
the client/server market, Landmark believes that its principal competitors
include BMC Software, Inc., Compuware Corporation, BGS Systems Inc. and
Platinum technologies, inc. BGS Systems, Inc. has announced its intention to
merge into BMC Software, Inc. The impact of this merger on the Company is not
yet determinable. The Company believes that no single principal competitor
currently offers products in each of the mainframe, UNIX and Windows NT
operating environments.
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Some of the Company's competitors have longer operating histories and
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than those of the Company. The Company's current and future competitors
could introduce products with more features, greater scalability, increased
functionality and lower prices than the Company's products. These
competitors could also bundle existing or new products with other, more
established products in order to compete with the Company. The Company's
focus on performance management software may be a disadvantage competing with
vendors that offer a broader range of products. Moreover, as the
client/server performance management software market develops, a number of
companies with significantly greater resources than those of the Company
could increase their presence in this market by acquiring or forming
strategic alliances with competitors or business partners of the Company. In
addition, due to potentially lower barriers to entry for platform-specific
niche products in the performance management software market, the Company
believes that emerging companies may enter this market, particularly in the
client/server environment. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of
which could materially and adversely affect the Company's business, financial
condition and results of operations. Any material reduction in the price of
the Company's products would negatively affect gross margins and would
require the Company to increase software unit sales in order to maintain
gross profits. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure
to do so would have a material adverse effect upon the Company's business,
financial condition and results of operation.
The principal competitive factors affecting the market for Landmark's
products are functionality and features (including breadth of data
collection, data management, integration and modeling), product quality,
platform coverage, product architecture, price, customer support and name
recognition. Based on these factors, the Company believes that it has
competed effectively to date. In the future, Landmark will be required to
respond promptly and effectively to the challenges of technological change,
its competitors' innovations and customer requirements. There can be no
assurance that Landmark will be able to provide products that compare
favorably with the products of the Company's competitors or that competitive
pressures will not require the Company to reduce its prices.
EMPLOYEES
As of December 31, 1997, the Company employed 252 full time personnel,
including 98 in product development, 28 in technical support, 86 in sales and
marketing, and 40 in finance and administration. The Company's employees are
not represented by any collective bargaining organization, and the Company
has never experienced a work stoppage. The Company believes its success will
depend in part on its continued ability to attract and retain highly
qualified personnel in an intensely competitive market for experienced and
talented software engineers and sales and marketing personnel. The Company
believes that its relationship with its employees is satisfactory.
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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 1999.
In addition, Landmark leases office space in the suburbs of London, Dusseldorf
and Utrecht (Netherlands), and in Madrid, Melbourne and Hong Kong.
Landmark expects to move its headquarters to Reston, Virginia beginning
July 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 July 1999, are adequate to meet its requirements for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
Landmark held a special meeting of stockholders on October 21, 1997.
Listed below are the matters voted on at the special meeting, the number of
votes cast for, against, withheld, and the number of abstentions for each
matter.
1. an increase in the authorized Common Stock to 30,000,000 shares:
6,298,266 for; 0 against; 2 abstentions.
2. 3-for-2 stock split, effective immediately prior to the Company's
initial public offering: 6,298,266 for; 0 against; 2 abstentions.
3. deleting the designations of Series A Preferred Stock and Series B
Preferred Stock following the closing of the Company's initial public
offering: 6,297,803 for; 40 against; 425 abstentions.
4. the First Amended and Restated 1989 Stock Incentive Plan as amended
and as in effect at the date of the special meeting: 6,296,760 for;
0 against; 1,508 abstentions.
5. the 1992 Executive Stock Incentive Plan as amended and as in effect at
the date of the special meeting: 6,296,760 for; 0 against; 1,508
abstentions.
6. the 1994 Stock Incentive Plan as amended and as in effect at the date
of the special meeting: 6,296,760 for; 0 against; 1,508 abstentions.
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7. the 1996 Advisory Board and Director Stock Incentive Plan as amended
and as in effect at the date of the special meeting: 6,296,556 for; 0
against; 1,712 abstentions.
EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the executive officers of the Company.
NAME AGE POSITION
- ---- --- --------
Katherine K. Clark....... 40 Chief Executive Officer and Director
Ralph E. Alexander....... 52 President, Chief Operating Officer, Chief
Financial Officer, Treasurer, Secretary and
Director
Leslie J. Collins........ 42 Vice President, Finance
Theodore L. Cruse........ 39 Vice President, North American Sales
John D. Hunter........... 51 Vice President, Mainframe Products
Mark E. Knecht........... 48 Vice President, Marketing and Business
Development
Andrew L. McCasker....... 35 Vice President, Distributed Products
Roger A. Philips......... 52 Vice President, International Sales
KATHERINE K. CLARK, a co-founder of Landmark, has headed product
development, technical support, finance and human resources at various times
over Landmark's history, has been a director of Landmark since 1983 and from
November 1993 to September 1997 was President of the Company. In 1994, Ms.
Clark assumed her current role as Chief Executive Officer of the Company and
is responsible for the long-term strategic direction of the Company.
RALPH E. ALEXANDER joined Landmark in November 1995 as Chief Financial
Officer, became Chief Operating Officer in March 1996, a director in March
1997 and President in September 1997. Prior to his employment with Landmark,
Mr. Alexander served as Executive Vice President and Chief Financial Officer
of Rational Software Corporation, a software development company, from 1994
to 1995. From 1991 to 1994, Mr. Alexander served as President and Chief
Executive Officer of Verdix Corporation, a software development company,
which merged with Rational in 1994.
LESLIE J. COLLINS has served as Vice President, Finance since September
1993, with responsibility for financial planning, operations and reporting,
contracting and purchasing activities, and information systems. From March
1990 to September 1993, Ms. Collins was Landmark's Director of Finance.
THEODORE L. CRUSE has served as Landmark's Vice President, North American
Sales since May 1996, with responsibility for sales and sales support within
the United States and Canada. Mr. Cruse served as Landmark's Director, North
American Sales, from June 1995 to May 1996
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and as a Regional Sales Manager from February 1993 to June 1995. Prior to
joining Landmark, Mr. Cruse served as Director, North American Sales, at
Platinum technology, inc. from November 1991 to February 1993.
JOHN D. HUNTER has served as Landmark's Vice President, Mainframe Products
since June 1994. Mr. Hunter is responsible for strategy, development,
maintenance and planning for Landmark's mainframe product lines. Mr. Hunter
joined Landmark in August 1992 as Vice President, Development and Technology
after 24 years with IBM, during which time he held management roles in
various IBM development labs and was responsible for IBM's worldwide
standards participation as director of architecture and telecommunications.
MARK E. KNECHT has served as Vice President, Marketing and Business
Development since March 1997, and is responsible for Landmark's marketing and
business development efforts. Prior to joining Landmark, Mr. Knecht served
as Vice President/General Manager, Software Division, of DataFocus, a
software development company, from October 1995 to February 1997. Mr. Knecht
worked at NCR Corporation, and its successors, from 1975 to 1995 where he
held various positions in marketing, management and engineering.
ANDREW L. MCCASKER has served as Vice President, Distributed Products
since April 1996, and is responsible for product strategy, development,
maintenance and planning for Landmark's client/server product lines. From
January 1995 to April 1996, Mr. McCasker served as Landmark's Director of
Strategic Marketing. Prior to joining Landmark in 1995, Mr. McCasker served
as Director, Technology and Planning for the Enterprise Network Applications
Division of Legent Corporation, a software development company, from October
1993 to January 1995 and also served on Legent's Architecture Board from June
1994 to January 1995. Mr. McCasker served as Manager of Product Development
at Systems Center, Inc., a software development company, from September 1989
to October 1993.
ROGER A. PHILIPS has served as Landmark's Vice President, International
Sales since September 1994, with responsibility for sales and operations
outside of the United States and Canada. Prior to joining Landmark, Mr.
Philips was General Manager, International for Viasoft, Inc., a software
development company, from 1988 to 1994.
Mr. Alexander has entered into an employment agreement with the Company
which is for a term of three years beginning April 9, 1997. The remaining
executive officers of the Company are appointed by the Board of Directors (the
"Board") and serve at the Board's discretion.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Landmark's common stock (the "Common Stock") commenced trading on the
Nasdaq National Market on November 18, 1997 under the symbol "LDMK." The
following table sets forth the high and low per-share closing sale price for
the period indicated.
1997
--------------------
High Low
--------- ---------
Fourth Quarter (from $9.125 $7.00
November 18, 1997)
On March 13, 1998 the last reported sale price of the Common Stock was $9.00
per share. As of March 13, 1998, there were 175 holders of record of the 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. Pursuant to an agreement between the Company and the lender
of its term note, the Company may not pay a cash dividend on the Common Stock
without the consent of the lender so long as the term note is outstanding.
The outstanding balance of the term note as of December 31, 1997 was $591,496
and is payable through January 1999.
Set forth below is information concerning sales of unregistered securities
by the Company from January 1, 1997 to December 31, 1997 on an actual basis
(adjusted to reflect a three-for-two stock split which took effect
immediately prior to the Company's initial public offering):
(i) The Company granted stock options to employees and advisors
pursuant to special option arrangements, the 1994 Stock Incentive Plan and
the 1996 Advisory Board and Director Stock Incentive Plan, covering an
aggregate of 593,452 shares of Common Stock exercisable at prices ranging
from $3.33 to $4.97 per share.
(ii) The Company issued and sold an aggregate of 490,435 shares of
Common Stock to employees and advisors for an aggregate cash consideration of
$1,659,745 pursuant to exercises of stock options granted under the First
Amended and Restated 1989 Stock Incentive Plan, the 1994 Stock Incentive
Plan, the 1996 Advisory Board and Director Incentive Plan and special option
arrangements.
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(iii) The Company issued and sold an aggregate of 69,698 shares of
Common Stock to employees for an aggregate cash consideration of $278,791
pursuant to the 1991 Employee Stock Purchase Plan.
(iv) On January 1, 1997, the Company issued warrants to purchase an
aggregate of 225,000 shares of Common Stock at $4.00 per share.
(v) On March 7, 1997 and April 1, 1997, the Company issued an aggregate
of 395,195 shares of Series B Preferred Stock to an accredited investor for
an aggregate cash consideration of $2,500,000.
No underwriters were involved in any of the foregoing transactions. The
issuances described in Items 5(i), (ii) and (iii) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 and were granted
in compensatory arrangements pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation. The issuance described
in Item 5(iv) was deemed exempt from registration under the Securities Act in
reliance on Section 4(2). The issuance described in Item 5(v) was deemed exempt
from registration under the Securities Act in reliance on Rule 506. In addition,
the recipients of securities described in the transactions described in Items
5(i) to (v) represented their intentions to acquire securities for investment
only and not with a view to or for sale in connection with any distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
the above transactions.
The registration statement relating to the Company's initial public
offering (SEC File No. 333-35629) was declared effective on November 18, 1997.
The offering was made on a firm commitment basis. C.E. Uterberg, Towbin and
Wheat First Butcher Singer served as managing underwriters of the offering. In
the offering, the Company registered 3,680,000 shares of common stock. Of these
shares, 2,000,000 were sold by the Company and 1,680,000, including 480,000 to
cover over-allotments, were sold by selling stockholders. The aggregate price of
the offering amount registered was $36,800,000. All of the shares registered
have been sold, at an aggregate price of $25,760,000. Of the total underwriting
discount of $1,803,200, $980,000 was paid by the Company and $823,200 was paid
by the selling stockholders. In addition, the Company paid fees of $1 million to
nonaffiliates for items such as filing fees, Nasdaq listing fee, accounting and
legal fees and expenses, transfer agent and registrar fees and expenses and
printing expenses. The net proceeds to the Company, after deducting the
underwriting discount and estimated expenses, 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.
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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
Financial Condition and Results of Operations included elsewhere herein. The
consolidated statements of operations data for the years ended December 31,
1995, 1996 and 1997, and the consolidated balance sheet data at December 31,
1996 and 1997 were derived, and are qualified by reference to, Consolidated
Financial Statements of the Company which were audited by Price Waterhouse LLP
and are included elsewhere in this Form 10-K. The consolidated statements of
operations data for the years ended December 31, 1993 and 1994 and the
consolidated balance sheet data at December 31, 1993, 1994 and 1995 are derived
from the Company's audited financial statements not included in this Form 10-K.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA
Revenues
License revenues $ 11,643 $ 11,268 $ 10,392 $11,268 $ 16,781
Services revenues 18,860 21,406 24,068 25,288 26,581
------ ------ ------ ------ ------
Total revenues 30,503 32,674 34,460 36,556 43,362
Cost of revenues 7,267 7,844 7,663 8,913 5,884
----- ----- ----- ----- -----
Gross profit 23,236 24,830 26,797 27,643 37,478
------ ------ ------ ------ ------
Operating expenses
Sales and marketing 13,219 11,716 13,092 11,671 14,310
Product research and development 7,780 9,094 12,490 13,924 13,478
General and administrative 7,319 7,800 6,872 4,776 5,258
----- ----- ----- ----- -----
Total operating expenses 28,318 28,610 32,454 30,371 33,046
------ ------ ------ ------- ------
Operating (loss) income (5,082) (3,780) (5,657) (2,728) 4,432
Net interest and other income 12,059 701 548 713 501
------ --- --- --- ---
Income (loss) before income taxes 6,977 (3,079 (5,109) (2,015) 4,933
Provision for (benefit from) income taxes 2,651 (1,158) (940) (813) 1,927
----- ------- ----- ----- -----
Net income (loss) $ 4,326 $ (1,921) $ (4,169) $ (1,202) $ 3,006
======== ========= ========= ========= ========
Historical net income (loss) per share (1)
Basic $ 0.52 $ (0.28) $ (0.65) $ (0.18) $ 0.19
Diluted $ 0.47 $ (0.28) $ (0.65) $ (0.18) $ 0.17
Pro forma net (loss) income per share (1)
Basic $ (0.13) $ 0.32
Diluted $ (0.13) $ 0.29
DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents $ 1,197 $ 800 $ 316 $ 339 $17,243
Working capital (deficit) (3,160) (1,544) (5,985) (4,138) 11,218
Total assets 31,487 33,172 31,479 25,076 44,508
Long-term debt (less current portion) 4 --- 1,084 592 51
Redeemable Common Stock Instruments 311 319 1,049 704 ---
Mandatorily redeemable preferred stock 5,391 5,391 5,865 5,865 ---
Stockholders' equity (deficit) 1,852 (204) (4,915) (6,290) 18,378
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute basic and diluted net income (loss) per share on both a historical
basis and on a pro forma basis.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Landmark commenced operations in 1983 with the release of its first product,
a performance monitor for IBM's on-line transaction processing system, CICS.
Since 1983, the Company has introduced a number of additional performance
management products for a variety of mainframe and client/server computing
environments. Since inception, the Company has financed its product development
activities using cash generated from operations and term and revolving credit
facilities.
During 1996, Landmark re-focused its development efforts in support of
client/server computing environments with the goal of introducing new and
enhanced products, broader platform coverage and additional functionality. In
addition, the Company increased its mainframe development activities, commencing
several new product offerings. Concurrent with these development investments,
the Company's management implemented several initiatives to improve Landmark's
financial performance, including re-negotiation of property leases and employee
benefit plans and tighter cost controls. The Company also refined its sales and
marketing strategy, particularly related to its client/server products, and
accelerated the amortization of capitalized software costs to reflect the
increasingly rapid pace of technology change in the software industry. These
efforts resulted in increased license revenues, increased cost of license
revenues, reduced operating expenses and improved operating results beginning in
1996.
The Company derives its revenues from software licensing and related
services. Service revenues include fees for software maintenance and support,
consulting and training provided by the Company. The Company's maintenance fees
have provided a stable and recurring revenue stream due to relatively high
maintenance renewal rates, which have exceeded 90% each year since inception.
Service revenues were $24.1 million, $25.3 million and $26.6 million in 1995,
1996 and 1997, respectively.
Revenues are recognized in accordance with AICPA Statement of Position
("SOP") 91-1, "Software Revenue Recognition." Accordingly, sales of perpetual
software licenses are recognized as license revenues when performance under the
related contract is completed, collection is probable and no significant vendor
obligations remain. Service revenues, which primarily consist of maintenance
fees collected prior to the performance of the related services, are recorded as
deferred revenue and recognized ratably over the period during which the
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services are performed, generally twelve months. For transactions involving both
license and service revenues, the Company generally allocates 15% to 20% of
total fees as maintenance.
In certain instances, primarily where the Company is replacing its
competitors' mainframe products, the Company enters into a long-term payment
arrangement with a licensee. Under this type of arrangement, licensees may pay
the license fees plus service fees over a three to five year period, generally
in annual installments. If collectibility by the Company is probable, the
Company recognizes the present value of the contracted stream of payments as an
unbilled receivable in its financial statements. Of this amount, the Company
recognizes the underlying license fee as license revenues and defers the
underlying service fees. As installments are invoiced to the licensee in
accordance with the payment arrangement, the Company reflects a reduction in its
unbilled receivable and an increase in its accounts receivable. In addition, the
Company records service revenues over the related maintenance service period.
Historically, the Company has not granted concessions nor experienced any
significant bad debts associated with these long-term arrangements.
The Company accounts for its software development activities in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed." The Company
capitalizes significant development costs incurred subsequent to the point of
demonstrated technological feasibility and up to the time the product is
available for release to customers. 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 1996 and 1997 would have
been $2.3 million lower and $750,000 higher, respectively, if this change had
not been made. The effect of the change was to decrease net income in 1996 by
$1.5 million ($0.20 per basic and diluted share on a historical basis) and
increase net income for 1997 by $450,000 ($0.06 per basic share and $0.05 per
diluted share on a historical basis). Taking into account the effects of the
changes in the Company's capital structure at the time of its initial public
offering of Common Stock in November 1997 (the "IPO"), the impact of the change
in estimated economic life was to decrease 1996 net income per basic and diluted
share by $0.16 and to increase 1997 net income per basic and diluted share by
$0.04 on a pro forma basis.
The Company classifies revenue transactions occurring within the United
States and Canada as "North American" transactions and all other transactions as
"international" transactions. The Company records international revenues net of
commissions paid to distributors. International revenue transactions are
denominated in local currencies. Revenues generated by the Company's
international distributors are translated into U.S. dollars at the time the
transaction occurs. The Company has not sustained material foreign currency
exchange losses, and presently does not attempt to hedge its exposure to
fluctuations in foreign currency exchange rates. International revenues
generated by the Company during 1995, 1996 and 1997 totaled $11.2 million, $11.8
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million and $14.5 million, respectively, contributing 32.4%, 32.4% and 33.5% of
total revenues in 1995, 1996 and 1997, respectively.
The Company replaced certain of its international distributors with direct
international operations through wholly owned subsidiaries in Australia and
Southeast Asia effective January 1, 1995, in Spain effective April 1, 1996, and
in Austria, the Benelux countries, Germany and Switzerland effective January 1,
1997. The Company's direct international operations contributed $1.2 million,
$1.8 million and $6.7 million in revenues in 1995, 1996 and 1997, respectively.
RESULTS OF OPERATIONS
The following table sets forth the Company's Consolidated Statements of
Operations expressed as percentages of total revenues for the periods indicated:
Year ended December 31,
----------------------------------------------------
1995 1996 1997
-------- -------- --------
Revenues
License revenues 30.2% 30.8% 38.7%
Service revenues 69.8 69.2 61.3
---- ---- ----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues
Cost of license revenues 12.4 15.8 6.0
Cost of service revenues 9.8 8.6 7.6
--- --- ---
Total cost of revenues 22.2 24.4 13.6
---- ---- ----
Gross profit 77.8 75.6 86.4
---- ---- ----
Operating expenses
Sales and marketing 38.0 31.9 33.0
Product research and development 36.3 38.1 31.1
General and administrative 19.9 13.1 12.1
---- ---- ----
Total operating expenses 94.2 83.1 76.2
---- ---- ----
Operating (loss) income (16.4) (7.5) 10.2
Net interest and other income 1.6 2.0 1.1
--- --- ---
(Loss) income before income taxes (14.8) (5.5) 11.3
(Benefit from) provision for income
taxes (2.7) (2.2) 4.4
---- ---- ---
Net (loss) income (12.1)% (3.3)% 6.9%
==== === ===
FINANCIAL RESULTS FOR 1995, 1996 AND 1997
Total revenues. Total revenues increased 6.1% from $34.5 million in 1995 to
$36.6 million in 1996, and increased 18.6% to $43.4 million in 1997. From 1995
to 1996 and from 1996 to 1997, both license revenues and service revenues
increased.
License revenues. License revenues increased 8.4% from $10.4 million in 1995
to $11.3 million in 1996, and increased 48.9% to $16.8 million in 1997. The
increases reflect a focusing of the Company's direct sales force on larger
dollar amount transactions, increased customer acceptance of existing products,
additional personnel involved in direct sales activities, the
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introduction of new products and product enhancements and the commencement of
direct operations in Austria, the Benelux countries, Germany and Switzerland on
January 1, 1997.
Service revenues. Service revenues increased 5.1% from $24.1 million in 1995
to $25.3 million in 1996, and increased 5.1% to $26.6 million in 1997. Service
revenues were favorably impacted by customer maintenance renewals, the volume of
prior year's license sales, and the effects of increases in the Company's
maintenance prices.
Cost of license revenues. Cost of license revenues includes amortization of
capitalized software costs, product royalties, materials and packaging expenses.
Costs of license revenues were $4.3 million, $5.8 million and $2.6 million in
1995, 1996 and 1997, respectively, representing 41.3%, 51.3% and 15.4% of
license revenues. The increase of $1.5 million from 1995 to 1996 is the result
primarily of increased amortization of capitalized software costs and, to a
lesser extent, of product royalties on client/server products which vary with
revenues generated. The reduction of $3.2 million from 1996 to 1997 is the
result of a $3.6 million decrease in amortization of capitalized software costs,
offset by amortization, beginning in 1997, of the intangible assets acquired
from the Company's former distributor in Austria, the Benelux countries,
Germany and Switzerland.
Cost of service revenues. Cost of service revenues consists of personnel and
related costs for customer support, training and consulting services. Costs of
service revenues were $3.4 million, $3.1 million and $3.3 million in 1995, 1996
and 1997, respectively, representing 14.0%, 12.4% and 12.4% of service revenues.
The decrease of $300,000 from 1995 to 1996 is a result of reductions in
personnel deployed in the Company's technical support center and reduced office
and other support costs, offset by increased costs associated with the Company's
commencement of direct international operations in Spain. The increase of
$200,000 from 1996 to 1997 is a result of the commencement of direct
international operations in Austria, the Benelux countries, Germany and
Switzerland.
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 $13.1 million, $11.7 million and
$14.3 million in 1995, 1996 and 1997,respectively, representing 38.0%, 31.9%
and 33.0% of total revenues. The $1.4 million decrease in these expenses from
1995 to 1996 resulted from elimination of several sales and marketing programs,
consolidation of functions previously spread over several groups, and reduced
office and other support costs. The $2.6 million increase from 1996 to 1997 is
attributable 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 includes
personnel and related costs for the Company's development staff. Product
research and development expenses were $12.5 million, $13.9 million and $13.5
million in 1995, 1996 and 1997, respectively, representing 36.3%, 38.1% and
31.1% of total revenues. The $1.4 million increase in product research and
development expenses from 1995 to 1996 reflects increased investments
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in both mainframe and client/server products and reductions in the amount of
software development costs capitalized. The $400,000 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 $1.1 million and $730,000 in 1995 and 1996,
respectively. The Company did not capitalize any software development costs in
1997.
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 $6.9
million, $4.8 million and $5.3 million in 1995, 1996 and 1997, respectively,
representing 19.9%, 13.1% and 12.1% of total revenues. The decline in general
and administrative expenses from 1995 to 1996 is a result of the Company's cost
control efforts including reductions in general management and legal expenses,
reduced severance costs, the favorable settlement in 1996 of an estimated lease
obligation accrued in a prior year, and a reversal of accruals relating to
forfeitures of stock options. The increase in these expenses from 1996 to 1997
includes $590,000 in stock option compensation recorded in 1997, and $260,000 in
bad debt reserves for losses on receivables from Southeast Asia, partially
offset by the impact of the Company's cost containment efforts.
Net interest and other income. Net interest and other income includes
interest recorded on installment receivables, interest income earned by the
Company on its excess cash balances, interest expense incurred on term and
revolving credit facilities, and exchange gains (losses) incurred by the Company
on foreign exchange transactions. During the three year period ending December
31, 1997, these amounts were not material. The 1995 amount includes foreign
exchange losses of $100,000 recorded during the year. The 1996 amount includes
interest received on a federal tax refund. The 1997 amount includes foreign
exchange losses of $250,000 recorded during the year, which resulted from a
strengthened dollar and the Company's additional direct international
operations.
Provision for (benefit from) income taxes. The Company's effective rates were
18.4%, 40.3% and 39.1% for 1995, 1996 and 1997, respectively, and differ from
the federal and state statutory income tax rate primarily as a result of the
adjustments of valuation allowances to reflect management's judgment as to
whether certain tax credit carryforwards would expire before utilization by the
Company, and as to the likelihood that foreign subsidiary net operating losses
would not be recovered.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, the Company financed its activities through cash
flow generated by operations and through term and revolving credit facilities.
In March and April 1997, the Company obtained $2.5 million in outside equity
through the issuance of shares of Series B Preferred Stock and repaid in full
the outstanding balance on its revolving credit facilities. In
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November 1997, the Company completed the IPO and raised capital of $12.0
million. As of December 31, 1997, the Company had cash and cash equivalents
totaling $17.2 million.
As a result of significant non-cash expenses, such as depreciation and
amortization, and the advanced billing and collection of annual maintenance
fees, the Company has generated operating cash flow significantly in excess of
its net income. During 1995, the Company's operating cash outflow totaled
$360,000 on net losses of $4.2 million. During 1996, operating cash flow totaled
$4.1 million on net losses of $1.2 million. During 1997, operating cash flow
totaled $5.8 million on net income of $3.0 million.
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 costs. During 1995, the Company
invested $2.2 million in fixed assets, consisting of computer equipment to
expand and upgrade the Company's development environments and infrastructure.
The Company invested $730,000 and $1.6 million in fixed assets in 1996 and
1997, respectively. The Company expects to upgrade, on an ongoing basis, its
development environments to meet changing customer and market requirements. For
1998, the Company's investments in fixed assets are expected to total $2.5
million.
The Company's investing activities also include amounts recorded as
capitalized software. Of the total research and development expenditures of
$13.6 million, $14.7 million and $13.5 million for 1995, 1996 and 1997, $1.1
million and $730,000 were capitalized for the years ended December 31, 1995 and
1996, respectively.
In 1995, the Company borrowed $1.5 million under a term loan, with interest
at 9% payable monthly and principal due in monthly installments of $47,700
beginning in February 1996 through January 1999, secured by fixed assets. The
balance of this term loan at December 31, 1997 was $591,000. While in the past
the Company has been in default on certain profitability and net worth covenants
associated with its term loan and revolving credit facilities, the lender waived
these defaults in each instance. No financial covenants currently govern the
outstanding term note and the Company is in compliance with the non-financial
covenants associated with the term note.
During 1997, the Company made mandatory redemptions of Series A Preferred
Stock totaling $1.1 million. The Company paid dividends of $153,000, $153,000
and $243,000 during 1995, 1996 and 1997, respectively, to the holders of Series
A Preferred Stock. Upon the closing of the IPO, all the outstanding Series A
Preferred Stock was converted into Common Stock.
The Company believes that cash on hand at December 31, 1997 and cash flow
generated from operations will provide sufficient liquidity to meet its needs
for at least the next twelve months. To the extent the Company makes
acquisitions of other companies, products or technologies, the Company may use
working capital, sell additional equity or debt securities or use credit
facilities.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information."
These statements become effective for the Company's 1998 financial statements.
The Company is evaluating these statements to determine the impact on its
reporting and disclosure requirements.
In October 1997, the AICPA issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," which provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions
and becomes effective for the Company's 1998 financial statements. In February
1998, the AICPA proposed deferring by one year the implementation date for
certain provisions of SOP 97-2. The Company does not currently believe that the
application of SOP 97-2 will have a material impact on its consolidated
financial statements, subject to the proposed one year deferral of certain
provisions.
YEAR 2000 COMPLIANCE
To the extent that the underlying hardware platforms, operating systems and
databases will accommodate the turn of the century, the Company's performance
management software products will also accommodate the "Year 2000" date change.
In addition, with respect to its internal business systems and applications, the
Company plans to implement the necessary vendor upgrades and modifications in
the first quarter of 1999 to ensure continued functionality beyond December 31,
1999. At present, management does not expect that material incremental costs
will be incurred in the aggregate or in any single year to address "Year 2000"
compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
24
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Landmark Systems Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1. and 2. present fairly, in all material respects,
the financial position of Landmark Systems Corporation and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Falls Church, Virginia
February 13, 1998
25
27
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1997 1996
---- ----
ASSETS
Current assets
Cash and cash equivalents $17,242,681 $ 339,073
Accounts receivable, net of allowance for doubtful
accounts of $621,000 and $382,000 10,354,747 10,139,856
Unbilled accounts receivable 4,657,659 4,265,547
Deferred income taxes, net 1,264,501 2,065,460
Income taxes receivable 2,080 16,061
Other current assets 240,564 159,012
----------- -----------
Total current assets 33,762,232 16,985,009
Unbilled accounts receivable 4,786,569 2,995,868
Fixed assets, net 3,249,241 2,896,225
Capitalized software costs, net 400,373 1,650,339
Deferred income taxes 946,517 414,928
Intangible assets, net 1,232,000 --
Other assets 131,332 133,613
----------- -----------
$44,508,264 $25,075,982
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 709,653 $ 1,200,553
Accrued expenses and other current liabilities 3,149,437 1,951,471
Deferred revenue 17,276,345 16,206,265
Income taxes payable 868,126 271,288
Debt due within one year 540,771 1,493,763
----------- -----------
Total current liabilities 22,544,332 21,123,340
Long-term debt 50,725 591,750
Deferred revenue-- noncurrent 3,115,495 2,498,482
Other liabilities 419,528 583,250
----------- -----------
Total liabilities 26,130,080 24,796,822
----------- -----------
Commitments
Redeemable common stock instruments, at redemption value -- 703,930
----------- -----------
Mandatorily redeemable Series A Cumulative Preferred
Stock, $0.01 par value, zero and 1,300,000 shares
authorized, zero and 1,020,000 shares issued and
outstanding -- 5,865,000
----------- -----------
Stockholders' equity (deficit)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 11,213,331 and 7,331,895 issued and
outstanding 112,133 73,320
Additional paid-in capital 23,413,955 432,300
Accumulated deficit (5,240,647) (6,770,890)
Foreign currency translation 92,743 (24,500)
----------- -----------
Total stockholders' equity (deficit) 18,378,184 (6,289,770)
----------- -----------
$44,508,264 $25,075,982
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
26
28
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Revenues
License revenues $16,781,122 $11,268,496 $10,392,273
Service revenues 26,581,373 25,287,902 24,067,551
----------- ----------- -----------
Total revenues 43,362,495 36,556,398 34,459,824
----------- ----------- -----------
Cost of revenues
Cost of license revenues 2,583,265 5,775,318 4,287,307
Cost of service revenues 3,300,851 3,138,095 3,375,710
----------- ----------- -----------
Total cost of revenues 5,884,116 8,913,413 7,663,017
----------- ----------- -----------
Gross profit 37,478,379 27,642,985 26,796,807
----------- ----------- -----------
Operating expenses
Sales and marketing 14,309,460 11,670,261 13,091,974
Product research and development 13,478,173 13,924,117 12,489,713
General and administrative 5,258,230 4,776,282 6,872,697
----------- ----------- -----------
Total operating expenses 33,045,863 30,370,660 32,454,384
----------- ----------- -----------
Operating income (loss) 4,432,516 (2,727,675) (5,657,577)
Interest and other income 776,321 1,077,558 761,022
Interest expense (275,741) (364,676) (212,868)
----------- ----------- -----------
Income (loss) before income taxes 4,933,096 (2,014,793) (5,109,423)
Provision for (benefit from) income taxes 1,927,444 (812,512) (940,413)
----------- ----------- -----------
Net income (loss) 3,005,652 (1,202,281) (4,169,010)
Accretion and dividends on preferred stock 1,475,409 153,000 627,300
----------- ----------- -----------
Net income (loss) available to common stockholders $ 1,530,243 $(1,355,281) $(4,796,310)
=========== =========== ===========
Historical income (loss) per share
Basic $0.19 $(0.18) $(0.65)
Diluted $0.17 $(0.18) $(0.65)
Pro forma income (loss) per share
Basic $0.32 $(0.13)
Diluted $0.29 $(0.13)
The accompanying notes are an integral part of the consolidated financial
statements.
27
29
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT)
COMMON SHARES
------------------------------
ADDITIONAL RETAINED FOREIGN
PAID-IN EARNINGS CURRENCY
ISSUED PAR VALUE CAPITAL (DEFICIT) TRANSLATION TOTAL
------ --------- ------- -------- ----------- -----
Balance at December 31, 1994 7,331,745 $ 73,318 $ 342,033 $ (619,299) $ -- $ (203,948)
Net loss -- -- -- (4,169,010) -- (4,169,010)
Series A Preferred Stock
redemption value adjustment -- -- -- (474,300) -- (474,300)
Compensation for
non-qualified stock options -- -- 89,769 -- -- 89,769
Common stock issued upon
exercise of non-qualified
stock options 150 2 498 -- -- 500
Foreign currency translation -- -- -- -- (4,536) (4,536)
Series A Preferred
Stock dividends -- -- -- (153,000) -- (153,000)
---------- -------- ----------- ----------- -------- -----------
Balance at December 31, 1995 7,331,895 73,320 432,300 (5,415,609) (4,536) (4,914,525)
Net loss -- -- -- (1,202,281) -- (1,202,281)
Foreign currency translation -- -- -- -- (19,964) (19,964)
Series A Preferred Stock
dividends -- -- -- (153,000) -- (153,000)
---------- -------- ----------- ----------- -------- -----------
Balance at December 31, 1996 7,331,895 73,320 432,300 (6,770,890) (24,500) (6,289,770)
Net income -- -- -- 3,005,652 -- 3,005,652
Issuance of warrants -- -- 48,000 -- -- 48,000
Series B Preferred Stock
issuance costs -- -- (52,115) -- -- (52,115)
Series A Preferred Stock
redemption value adjustment -- -- -- (1,096,500) -- (1,096,500)
Series B Preferred Stock
redemption value adjustment -- -- -- (136,079) -- (136,079)
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 Series A
Preferred Stock to common
stock 833,785 8,338 5,828,163 -- -- 5,836,501
Conversion of Series B
Preferred Stock to common
stock 592,793 5,928 2,630,151 -- -- 2,636,079
Foreign currency translation -- -- -- -- 117,243 117,243
---------- -------- ----------- ----------- -------- -----------
Balance at December 31, 1997 11,213,331 $112,133 $23,413,955 $(5,240,647) $ 92,743 $18,378,184
========== ======== =========== =========== ======== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
28
30
LANDMARK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income (loss) $ 3,005,652 $(1,202,281) $(4,169,010)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 3,066,826 5,865,608 3,957,189
Provision for (reduction in) losses on
accounts receivable 348,882 (73,436) 191,960
(Benefit) provision for loss on leases -- (351,257) 265,816
Stock compensation expense (benefit) 590,917 (96,381) 766,214
Write-off of capitalized software -- -- 513,655
Increase in accounts receivable (1,156,315) (433,803) (899,203)
Decrease (increase) in deferred income taxes 534,816 (1,598,539) (897,868)
Decrease (increase) in income taxes receivable 13,981 3,158,371 (477,653)
(Increase) decrease in unbilled accounts receivable (2,182,813) 564,018 568,816
(Decrease) increase in accounts payable and accrued
expenses (192,934) (1,566,804) 580,219
Increase in income taxes payable 596,838 271,288 --
Increase in deferred revenue 1,377,254 157,187 439,622
Decrease in other, net (240,614) (549,862) (1,201,576)
----------- ----------- -----------
Net cash provided by (used in) operating activities 5,762,490 4,144,109 (361,819)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (1,553,874) (728,494) (2,224,579)
Capitalized software costs -- (734,574) (1,112,121)
----------- ----------- -----------
Net cash used in investing activities (1,553,874) (1,463,068) (3,336,700)
----------- ----------- -----------
Cash flows from financing activities
Principal payments on loans (494,017) (414,487) (3,704)
Proceeds from loans -- -- 1,500,000
(Payments on) net proceeds from line of credit (1,000,000) (1,822,118) 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 1,659,745 882,628 118,081
Issuance of common stock pursuant to 1991 Employee
Stock Purchase Plan 278,791 69,828 78,655
Repurchases of common stock (965,884) (1,201,188) (142,500)
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) (153,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities 12,577,749 (2,638,337) 3,219,650
----------- ----------- -----------
Effect of exchange rate changes on cash 117,243 (19,964) (4,536)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 16,903,608 22,740 (483,405)
Cash and cash equivalents, beginning of period 339,073 316,333 799,738
----------- ----------- -----------
Cash and cash equivalents, end of period $17,242,681 $ 339,073 $ 316,333
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
29
31
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.
In 1985, the Company formed a wholly-owned subsidiary, Landmark Systems
International, Inc. ("Landmark International"), which was an interest charge
domestic international sales corporation ("DISC") under the Tax Reform Act of
1984. In March 1989, Landmark International revoked its election to be treated
as a DISC effective for the period beginning January 1, 1989. All tax benefits
of the DISC were fully utilized at December 31, 1995.
In January 1995, the Company established a wholly-owned subsidiary, Landmark
Systems Pacific Pty. Ltd., to act as its distributor in Australia and New
Zealand and to provide technical support for Australia, New Zealand and
Southeast Asia.
In May 1995, the Company activated a subsidiary, SSG (Europe) Limited to
distribute the Company's products in the United Kingdom and Spain and to provide
marketing and distribution assistance in Europe, the Middle East and Africa
under a management agreement. The subsidiary's name was subsequently changed to
Landmark Systems (EMEA) Limited.
In May 1996, the Company established a wholly-owned subsidiary, Landmark
Systems (HK) Ltd., to act as its distributor of products in the Southeast Asian
market.
In January 1997, the Company established a wholly-owned subsidiary, Landmark
Systems GmbH, to act as its distributor in Germany, Switzerland and Austria.
Also in January 1997, the Company established a wholly-owned subsidiary,
Landmark Systems Benelux BV, to act as its distributor in the Benelux countries
(Note 2).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany transactions and balances have been
eliminated.
30
32
The Company completed an initial public offering of its $0.01 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 give effect to the
stock split and share authorization.
Cash and cash equivalents
For purposes of the consolidated balance sheets and statements of cash flows,
the Company considers all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents.
31
33
Revenue recognition
Revenues are recognized in accordance with AICPA Statement of Position 91-1,
"Software Revenue Recognition." Sales of perpetual software licenses are
recorded as license revenues when performance under the related contract is
completed, collection is probable and no significant vendor obligations remain.
Service revenues, which consist primarily of maintenance fees, generally are
collected prior to the performance of the related services and are recorded as
deferred revenue and recognized ratably over the period during which the
services are performed, generally twelve months except as noted below. For
transactions involving both license and service revenues, the Company generally
allocates maintenance fees based upon the list price for such fees.
In certain circumstances, primarily where the Company is replacing its
mainframe competitors' products, the Company enters into a long-term payment
arrangement with a licensee. Under these types of arrangements, the Company
allows the licensee to pay the license fees plus service fees over a three to
five year period, generally in annual installments. If collectibility by the
Company is probable, the Company recognizes the present value of the contracted
stream of payments as an unbilled receivable in its financial statements. Of
this amount, the Company recognizes the underlying license fee as license
revenues and defers the underlying service fees. As installments are invoiced to
the licensee in accordance with the payment arrangement, the Company reflects a
reduction in its unbilled receivable and an increase in its accounts receivable.
Historically, the Company has not granted concessions nor experienced any
significant bad debts associated with these long-term arrangements. At December
31, 1997 and 1996, unbilled receivables have been reduced by $1,463,000 and
$1,200,000, respectively, to reflect such amounts at their present values.
The Company has relationships with a number of third party distributors to
market and distribute its products internationally. Under such arrangements, the
distributors report to, are invoiced by and remit payments to the Company based
upon transactions with the ultimate customer. The Company records license
revenues and service revenues based upon transactions reported to the Company.
The Company records an accrual for estimated sales returns. Historically,
such amounts have not been material.
Fixed assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Capital lease obligations are recorded at the present value of the
future lease obligations discounted at the interest rate implicit in each lease.
A corresponding amount is capitalized and depreciated over the term of the
lease. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives for computing
depreciation are generally five years for computer equipment, office equipment
and furniture. Amortization of leasehold
32
34
improvements is computed using the straight-line method over the shorter of the
estimated useful lives of the improvements or the terms of the related lease.
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 its
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 $900,000 was paid in 1997.
In addition, the Company granted Infarmedica a warrant to purchase 225,000
shares of the Company's common stock at $4.00 per share, which was fully vested
upon issuance, expires on January 1, 2007 and is transferable only with the
Company's consent. The Company recorded the acquisition of the customer base as
an intangible asset representing the present value of the cash payments plus the
fair value of the warrant issued. The related intangible asset will be amortized
over three years. Amortization expense recorded in 1997 was $616,000.
33
35
Impairment of long-lived assets
Long-lived assets are evaluated for possible impairment through a review of
undiscounted expected future cash flows. If the sum of the undiscounted expected
future cash flows is less than the carrying amount of the asset or if changes in
facts and circumstances indicate, an impairment loss is recognized.
Foreign currency translations
The functional currency for the Company's international subsidiaries is the
applicable local currency. The financial statements of international
subsidiaries are translated into U.S. dollars using exchange rates in effect at
period end for assets and liabilities and average exchange rates during each
reporting period for results of operations. Adjustments resulting from
translation of financial statements are reflected as a separate component of
stockholders' equity (deficit). The Company does not attempt to hedge its
foreign currency exposures. Foreign currency losses of $253,000, $9,600 and
$102,000 in 1997, 1996 and 1995, respectively, are included in other income.
Software development costs
The Company accounts for its software development activities in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased or Otherwise Marketed." The Company
capitalizes significant development costs incurred subsequent to the point of
demonstrated technological feasibility and up to the time the product is
available for release to customers. Amortization is computed on an individual
product basis and is the greater of (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 1996 and 1997 would have
been $2.3 million lower and $750,000 higher, respectively, if this change had
not been made. The effect of the change was to decrease net income in 1996 by
$1.5 million ($0.20 per basic and diluted share on a historical basis and $0.16
per basic and diluted share on a pro forma basis) and increase net income for
1997 by $450,000 ($0.06 per basic share and $0.05 per diluted share on a
historical basis and $0.04 per basic and diluted share on a pro forma basis).
Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB No. 25) and related Interpretations. Under APB
No. 25, compensation cost is measured as the excess, if any, of the market price
of the Company's stock at the date of grant over the exercise price of the
option granted. Compensation cost for stock options, if any, is recognized
ratably over the
34
36
vesting period. Until the time of the IPO, the market price of the Company's
common stock was established by the Company's Board of Directors (the "Board").
The Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) (Note 10).
Transactions for which non-employees are issued equity instruments for goods
or services received are recorded by the Company based upon the fair value of
the equity instruments issued or the fair value of the goods or services
received, whichever is more reliably measured.
Income taxes
The Company provides for income taxes using the asset and liability approach.
The asset and liability approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of the assets and
liabilities. A valuation allowance is recorded if, based on the evidence
available, it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
35
37
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short maturity of those instruments. The carrying amounts of
notes payable to banks, which includes short-term borrowings at market rates and
long-term debt, and preferred stock approximate their fair value.
The Company has $9,444,000 and $7,261,000 of unbilled receivables outstanding
at December 31, 1997 and 1996, respectively; the estimated fair values of these
receivables are $10,474,000 and $7,486,000, respectively, calculated using
discounted cash flows.
Concentrations of credit risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of accounts receivable and unbilled receivables. Credit
risk is limited due to the large number and geographic dispersion of customers
comprising the Company's customer base. No distributor or customer accounted for
more than 5% of the Company's total outstanding receivables.
Use of estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.
Earnings per share
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," for its financial statements for the year
ended December 31, 1997. SFAS 128 requires restatement of earnings per share for
all periods presented. The following reconciliation of the numerators and
denominators is provided for historical basic and diluted net income (loss) per
share for 1997, 1996 and 1995. Basic net income (loss) per share is computed by
dividing the net income (loss) available to common stockholders by the weighted
average number of common shares outstanding. Diluted net income (loss) per share
is computed by additionally reflecting the potential dilution that could occur,
using the treasury stock method, if warrants and options to acquire common stock
were exercised or resulted in the issuance of common stock that then shared in
the earnings of the Company.
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38
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income $3,005,652
Less: Accretion of redemption value and dividends
on Series A Preferred Stock (1,339,330)
Less: Accretion of redemption value on Series B
Preferred Stock (136,079)
HISTORICAL BASIC EPS
Net income available to common stockholders 1,530,243 7,876,208 $0.19
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- 889,056
---------- -------
HISTORICAL DILUTED EPS $1,530,243 8,765,264 $0.17
========== =========
FOR THE YEAR ENDED DECEMBER 31, 1996
Net loss $(1,202,281)
Less: Accretion of redemption value and dividends
on Series A Preferred Stock (153,000)
------------
HISTORICAL BASIC EPS
Net income available to common stockholders (1,355,281) 7,380,316 $(0.18)
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- --
------------ ---------
HISTORICAL DILUTED EPS $(1,355,281) 7,380,316 $(0.18)
============ =========
FOR THE YEAR ENDED DECEMBER 31, 1995
Net loss $(4,169,010)
Less: Accretion of redemption value and dividends
on Series A Preferred Stock (627,300)
------------
HISTORICAL BASIC EPS
Net income available to common stockholders (4,796,310) 7,368,705 $(0.65)
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- --
------------ ---------
HISTORICAL DILUTED EPS $(4,796,310) 7,368,705 $(0.65)
============ =========
For the purposes of the historical diluted EPS calculations for 1996 and
1995, common stock options and warrants are excluded because their impact is
anti-dilutive.
In light of the changes in the capital structure of the Company which took
effect at the time of the IPO and in accordance with Staff Accounting Bulletin
No. 98, the Company calculated its basic and diluted net income (loss) per share
on a pro forma basis, assuming (i) conversion of the Series A Preferred Stock
into 833,785 shares of the Company's common stock, (ii) conversion of the Series
B Preferred Stock into 592,793 shares of the Company's common stock, and (iii)
lapse of the rights to require repurchase by holders of the Redeemable Common
Stock Instruments, all as of the beginning of the period. The following
reconciliation of the numerator and denominator is provided for pro forma basic
and diluted net income (loss) for 1997 and 1996.
37
39
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income $3,005,652
Less: Accretion of redemption value and
dividends on Series A Preferred Stock (1,339,330)
Less: Accretion of redemption value on
Series B Preferred Stock (136,079)
------------
Net income available to common stockholders 1,530,243 7,722,083
Assumed conversion of Series A Preferred
Stock at the beginning of the period 1,339,330 833,785
Assumed conversion of Series B Preferred
Stock at the beginning of the period 136,079 592,793
Assumed conversion of redeemable common stock
instruments at the beginning of the period -- 273,890
---------- ----------
PRO FORMA BASIC EPS $3,005,652 9,422,551 $0.32
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- 889,382
---------- ----------
PRO FORMA DILUTED EPS $3,005,652 10,311,933 $0.29
========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1996
Net loss $(1,202,281)
Less: Accretion of redemption value and
dividends on Series A Preferred Stock (153,000)
------------
Net income available to common stockholders (1,355,281) 7,492,730
Assumed conversion of Series A Preferred
Stock at the beginning of the period 153,000 833,785
Assumed conversion of Series B Preferred
Stock at the beginning of the period -- 592,793
Assumed conversion of redeemable common stock
instruments at the beginning of the period -- 273,890
------------ ---------
PRO FORMA BASIC EPS $(1,202,281) 9,193,198 $(0.13)
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- --
------------ ---------
PRO FORMA DILUTED EPS $(1,202,281) 9,193,198 $(0.13)
============ =========
For the purposes of the pro forma diluted EPS calculation for 1996, common
stock options and warrants are excluded because their impact is anti-dilutive.
NOTE 3 -- FIXED ASSETS
Fixed assets consist of the following:
AT DECEMBER 31,
---------------
1997 1996
------------ -----------
Computer equipment $ 4,305,632 $ 3,173,420
Office equipment 4,881,920 4,685,196
Furniture and fixtures 3,256,845 3,092,399
Leasehold improvements 1,259,912 1,226,080
------------ -----------
13,704,309 12,177,095
Less accumulated depreciation (10,455,068) (9,280,870)
------------ -----------
$ 3,249,241 $ 2,896,225
============ ===========
Depreciation expense totaled $1,201,000, $1,024,000 and $876,000 in 1997,
1996 and 1995, respectively.
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40
NOTE 4 -- CAPITALIZED SOFTWARE COSTS
Capitalized software costs consist of the following:
AT DECEMBER 31,
---------------
1997 1996
---- ----
Capitalized software costs $ 19,905,976 $ 19,905,976
Less accumulated amortization (19,505,603) (18,255,637)
------------ ------------
$ 400,373 $ 1,650,339
============ ============
The Company did not capitalize any software development costs in 1997 as any
amounts eligible for capitalization were not material. The Company capitalized
software development costs of $735,000 and $1,112,000 during 1996 and 1995,
respectively. Amortization expense of capitalized software costs was $1,250,000,
$4,841,000 and $3,081,000 in 1997, 1996 and 1995, respectively.
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41
NOTE 5 -- DEBT
Debt consists of the following:
AT DECEMBER 31,
---------------
1997 1996
---- ----
Bank line of credit, at prime plus 1.5%,
secured by all assets $ --- $ 1,000,000
Note payable at 9%, due in monthly
installments of $47,700, beginning in
February 1996 through January 1999,
secured by fixed assets 591,496 1,085,513
--------- -----------
Total debt 591,496 2,085,513
Less amounts due within one year (540,771) (1,493,763)
--------- -----------
Long-term debt $ 50,725 $ 591,750
========= ===========
The Company's lines of credit expired on June 30, 1997.
The Company paid interest of $278,000, $414,000 and $180,000 in 1997, 1996
and 1995, respectively.
NOTE 6 -- SEGMENT INFORMATION
The Company classifies its operations into one industry segment, software
development and related services. The Company reports international license and
service revenues net of distributor commissions. Export sales, which represent
sales through international distributors, by geographic area consist of the
following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Europe $4,111,670 $ 7,121,934 $6,903,732
Far East 2,785,799 2,183,904 2,193,173
Latin America 914,189 734,287 858,777
---------- ----------- ----------
$7,811,658 $10,040,125 $9,955,682
========== =========== ==========
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42
A summary of the Company's operations by geographic region in 1997, 1996
and 1995 is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Revenues
United States $40,351,342 $35,618,743 $33,853,964
Europe 2,346,287 544,220 163,682
Australia and Southeast Asia 1,110,780 837,224 605,860
Eliminations (445,914) (443,789) (163,682)
----------- ----------- -----------
Consolidated $43,362,495 $36,556,398 $34,459,824
=========== =========== ===========
Operating income (loss)
United States $ 4,827,302 $(2,262,628) $(5,360,185)
Europe (327,987) (47,173) (17,677)
Australia and Southeast Asia (66,799) (417,874) (279,715)
Eliminations -- -- --
----------- ----------- -----------
Consolidated $ 4,432,516 $(2,727,675) $(5,657,577)
=========== =========== ===========
Assets at end of period
United States $43,981,267 $25,195,178 $31,053,058
Europe 2,732,959 403,348 53,758
Australia and Southeast Asia 860,206 807,677 815,221
Eliminations (3,066,168) (1,330,221) (442,829)
----------- ----------- -----------
Consolidated $44,508,264 $25,075,982 $31,479,208
=========== =========== ===========
NOTE 7 -- INCOME TAXES
The income (loss) before income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
U.S. $5,560,340 $(1,559,453) $(4,806,941)
International subsidiaries (627,244) (455,340) (302,482)
---------- ----------- -----------
Income (loss) before taxes $4,933,096 $(2,014,793) $(5,109,423)
========== =========== ===========
The provision for (benefit from) income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Current taxes payable (receivable)
U.S. Federal $ 994,371 $ 226,835 $(566,102)
Foreign 520,103 518,599 433,608
State and local 143,600 40,593 89,949
---------- ----------- ---------
1,658,074 786,027 (42,545)
---------- ----------- ---------
Deferred tax provision (benefit)
U.S. Federal 333,311 (1,534,972) (812,133)
Foreign (89,822) --- ---
State and local 25,881 (63,567) (85,735)
---------- ----------- ---------
269,370 (1,598,539) (897,868)
---------- ----------- ---------
Provision for (benefit from)
income taxes $1,927,444 $ (812,512) $(940,413)
========== =========== =========
The Company paid income taxes of $1,334,000, $527,000 and $436,000 in 1997,
1996 and 1995, respectively. Foreign taxes paid relate primarily to taxes
withheld from revenues.
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43
The Company provides deferred taxes for temporary differences between the
bases of assets and liabilities for financial reporting purposes and the bases
of assets and liabilities for tax return purposes. The deferred tax
asset/(liability) at December 31, 1997 and 1996 is attributable to the
following:
AT DECEMBER 31,
---------------
1997 1996
---- ----
Deferred tax assets
Deferred revenue $ 869,567 $ 827,289
Stock incentive plan 235,826 252,906
Allowance for doubtful accounts 190,911 139,981
Tax credit carryforwards 320,664 1,221,719
Sublease and general sales tax accrual 86,590 260,689
Capitalized software development costs 159,018 181,734
Losses from international subsidiaries not
utilized 414,822 185,000
Depreciation and amortization 332,444 --
Other 55,176 120,303
Valuation allowance (454,000) (410,000)
---------- ----------
2,211,018 2,779,621
---------- ----------
Deferred tax liabilities
Depreciation and amortization -- (288,059)
Other -- (11,174)
---------- ----------
-- (299,233)
---------- ----------
Net deferred tax asset $2,211,018 $2,480,388
========== ==========
Current deferred tax asset $1,264,501 $2,065,460
Non-current deferred tax asset 946,517 414,928
---------- ----------
Net deferred tax asset $2,211,018 $2,480,388
========== ==========
As of December 31, 1996, the Company had a valuation allowance of $225,000 to
reflect foreign tax credit carryforwards that, in the Company's estimation,
would more likely than not expire prior to utilization. During 1997, the Company
reduced the tax credit carryforward valuation allowance to $129,000 to reflect
the increased likelihood that a portion of the foreign tax credits would be
realized. The Company also recorded an increase to the valuation allowance of
$140,000 in 1997 to reflect the tax effect of estimated international subsidiary
net operating losses that, in the Company's estimation, will more likely than
not result in no future tax benefit to the Company.
At December 31, 1997, the Company had foreign net operating loss
carryforwards of approximately $1,150,000, of which $200,000 expires in years
2001 and 2002. The remaining $950,000 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 of 34% to income
(loss) before income taxes as a result of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Computation of U.S. Federal income
taxes at 34% $1,677,253 $(685,030) $(1,634,359)
State and local taxes, net of Federal
income tax benefit 94,776 (49,750) 21,769
Change in valuation allowance 44,000 (132,499) 690,885
Other 111,415 54,767 (18,708)
---------- --------- -----------
Provision for (benefit from)
income taxes $1,927,444 $(812,512) $ (940,413)
========== ========= ===========
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44
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The Company has a profit incentive plan ("PIP") which is a defined
contribution plan with a cash (or non-qualified) component covering all U.S.
employees with one year of service and providing for annual discretionary
contributions of up to 15% of eligible compensation. Employees are 100% vested
in all contributions to the PIP. The Company did not make contributions to the
PIP in 1997, 1996 or 1995.
The Company also has a 401(k) defined contribution plan. During 1997, 1996
and 1995, 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 $217,000, $205,000
and $192,000 during 1997, 1996 and 1995, respectively.
NOTE 9 -- MANDATORILY REDEEMABLE PREFERRED STOCK
The Board has the authority to issue up to 8,000,000 shares of preferred
stock, and to determine the price, rights, preferences and privileges of those
shares without further vote or action by the stockholders, subject to the
consent of the holders of outstanding preferred stock, if any.
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 holders of Series A
Preferred Stock could not sell, assign or transfer any of the stock without the
Company's prior written consent.
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 at the beginning of the
redemption year or (ii) $7.4333 per share, exceeds $5.00 per share. Accordingly,
the redemption price per share could not exceed $6.825 per share.
In 1995, the redemption price of the Series A Preferred Stock was adjusted
based upon the fair market value of the Company's common stock of $4.00 per
share. In April 1997, the Board
43
45
approved an adjustment in the fair market value of the Company's common stock to
$4.97 to be effective May 1, 1997, which resulted in an increase in the
redemption price of the Series A Preferred Stock. During 1997, the Company
redeemed 164,835 shares of Series A Preferred Stock from the holders for
$1,125,000.
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 amended its articles to designate 1,580,779 shares
of Series B Preferred Stock and authorized the sale and issuance of such shares.
The Series B Preferred Stock 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.
Concurrent with the authorization of Series B Preferred Stock, the Company
issued 316,156 shares of Series B Preferred Stock at a price of $6.326 per share
and, in April 1997, an additional 79,039 shares of Series B Preferred Stock at a
price of $6.326 per share. Based on these issuances, the purchaser was entitled
to elect a representative to the Board.
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:
Series A Preferred Stock Series B Preferred Stock
------------------------ ------------------------
Redemption Redemption
Shares Value Shares Value
------ ----- ------ -----
Balance at December 31, 1994 1,020,000 $ 5,390,700
Adjustment to redemption value -- 474,300
--------- -----------
Balance at December 31, 1995 1,020,000 5,865,000
Adjustment to redemption value -- --
--------- -----------
Balance at December 31, 1996 1,020,000 5,865,000
Issuance of Series B preferred stock -- -- 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 -- $ -- -- $ --
========= =========== ======== ===========
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46
NOTE 10 -- REDEEMABLE COMMON STOCK INSTRUMENTS AND STOCKHOLDERS' EQUITY
1994 Stock Incentive Plan
During 1994, the Company adopted the 1994 Stock Incentive Plan ("1994 SIP")
under which employees may acquire shares of the Company's common stock via stock
option grants, restricted stock awards and/or stock bonuses. The 1994 SIP is
administered by the Board, which has the sole discretion to grant options and
restricted stock awards. The 1994 SIP replaced the 1989 Stock Incentive Plan
("1989 SIP") and the 1992 Executive Stock Incentive Plan ("1992 ESIP"). Options
outstanding under the 1989 SIP and the 1992 ESIP will remain outstanding until
the options either expire or are exercised.
As of December 31, 1997, a total of 3,000,000 shares of common stock can be
issued under the 1994 SIP through (i) qualified stock options, which qualify as
incentive stock options and have an exercise price equal to or greater than the
fair market value of the common stock, as determined by the Board, at the date
of grant, (ii) non-qualified stock options, which have an exercise price equal
to or greater than 85% of the fair market value of the common stock, as
determined by the Board, on the date of grant, (iii) restricted stock awards for
common stock at a price determined by the Board, but not less than 85% of the
fair market value of the stock at the date of grant, which is non-transferable
and subject to repurchase at the holder's cost until Board designated conditions
have been met, or (iv) stock bonuses.
Prior to the IPO, the Company had the right to repurchase at the fair market
value, as determined by the Board, at any time following the termination of a
grantee's employment with the Company for any reason (including retirement,
death or disability), all or any portion of the option shares, restricted stock
or bonus shares then held by the grantee. This repurchase right lapsed at the
time of the IPO. A grantee did not have the right to require the Company to
repurchase shares issued pursuant to the 1994 SIP.
45
47
1992 Executive Stock Incentive Plan
During 1992, the Company adopted the 1992 ESIP under which key executives
were granted options to purchase shares of the Company's common stock.
Prior to the IPO, while employed by the Company and for a period of ninety
days thereafter, a grantee had the right to require the Company to repurchase at
the fair market value, as established by the Board, all or any portion of the
grantee's option shares. 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 then held
by the grantee. These repurchase rights lapsed at the time of the IPO.
In 1994, the 1992 ESIP was replaced by the 1994 SIP. No additional grants
will be made under the 1992 ESIP. Options outstanding under the 1992 ESIP will
remain outstanding until the options either terminate or are exercised.
1989 Stock Incentive Plan
During 1989, the Company adopted the 1989 SIP under which certain employees
were granted options to purchase shares of the Company's common stock and/or
restricted stock awards. The 1989 SIP is administered by the Board, which has
the sole discretion to grant options and restricted stock awards.
Prior to the IPO, while employed by the Company, a grantee had the right to
require the Company to repurchase at the fair market value, as established by
the Board, all or any portion of the grantee's (i) option shares and (ii)
restricted stock with respect to which all of the conditions have 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.
In 1994, the 1989 SIP was replaced by the 1994 SIP. No additional grants will
be made under the 1989 SIP. Options outstanding under the 1989 SIP will remain
outstanding until the options either terminate or are exercised.
1996 Advisory Board Plan
In 1996, the Company established the 1996 Advisory Board Stock Incentive Plan
("1996 ABP"). In July 1997, the Company amended its 1996 ABP to allow the
Company to issue options to designated outside members of the Company's Board
and to rename the 1996 ABP to the 1996 Advisory Board and Directors Stock
Incentive Plan and to increase the number of shares issuable under the 1996 ABP
from 150,000 to 300,000.
46
48
In 1996, the Company granted 120,000 options, with vesting over a four year
period at an exercise price of $4.00 per share. The Company is recording 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, 1996 and 1995, the Company issued 85,335, 24,750 and 107,799
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, but not identical to,
the terms of the options they replaced. The Company recorded compensation
expense associated with these options of $60,000 and $90,000 in 1997 and 1995.
The Company did not record compensation expense for these options in 1996
because such amount was not material.
47
49
Options Outstanding and Exercisable
The following table summarizes information about options outstanding for all
stock option plans:
SHARES PRICE PER WEIGHTED AVERAGE
OUTSTANDING SHARE EXERCISE PRICE
UNDER OPTION UNDER OPTION PER SHARE
------------ ------------ ---------
Balance at December 31, 1994 2,150,564 $3.00--3.59 $3.29
Stock options granted 618,537 3.00--4.00 3.81
Stock options exercised (34,389) 3.33--3.59 3.43
Stock options canceled (385,101) 3.00--4.00 3.35
Stock options expired (29,691) 3.33 3.33
---------
Balance at December 31, 1995 2,319,920 3.00--4.00 3.42
Stock options granted 1,166,010 3.59--4.00 3.99
Stock options exercised (286,083) 3.00--3.59 3.09
Stock options canceled (406,215) 3.00--4.00 3.61
---------
Balance at December 31, 1996 2,793,632 3.00--4.00 3.67
Stock options granted 593,452 3.33--4.97 3.97
Stock options exercised (490,435) 3.00--4.00 3.38
Stock options canceled (348,821) 3.33--4.00 3.88
Stock options expired (48,875) 3.59--4.00 3.95
---------
Balance at December 31, 1997 2,498,953 $3.00--4.97 $3.76
=========
The following table summarizes information about options outstanding at
December 31, 1997 by plan:
TOTAL OPTIONS TOTAL OPTIONS TOTAL OPTIONS AVAILABLE
OUTSTANDING EXERCISABLE FOR FUTURE GRANT
----------- ----------- ----------------
1989 SIP 44,980 44,980 --
1992 ESIP 304,687 304,687 --
1994 SIP 1,851,386 685,796 1,101,589
1996 ABP 48,000 24,000 240,000
Other stock options 249,900 248,212 --
--------- --------- ---------
Total at December 31, 1997 2,498,953 1,307,675 1,341,589
========= ========= =========
At December 31, 1997, the average exercise price per share of exercisable
options is $3.53. The unvested options vest primarily over a four year period
and will be fully vested in the year 2001. The remaining average option life is
5.3 years.
48
50
As all of the Company's stock option grants were made 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:
1997 1996 1995
---- ---- ----
Expected life (years) 5 5 5
Risk-free interest rate 5--6% 6--7% 6--7%
Volatility 0 0 0
Dividend yield 0% 0% 0%
The weighted-average fair value of stock options granted under the employee
stock option plans during 1997, 1996 and 1995 was $1.05, $1.08 and $1.01,
respectively. Had the Company determined compensation costs for these plans in
accordance with SFAS No. 123 (Note 2), the Company's net income for 1997 would
have been $2,645,000, or $0.15 per basic share and $0.13 per diluted share on a
historical basis and $0.26 per basic share and $0.23 per diluted share on a pro
forma basis. Additionally, the Company's net loss for 1996 would have been
$(1,391,000), or $(0.21) per basic and diluted share on a historical basis and
$(0.15) per basic and diluted share on a pro forma basis. The Company's net
loss for 1995 would have been $(4,210,000), or $(0.66) per basic and diluted
share on a historical basis. The SFAS No. 123 method of accounting does not
apply to options granted prior to January 1, 1995 and, accordingly, the
resulting pro forma compensation cost may not be representative of that to be
expected in the future.
Employee Stock Purchase Plan
During 1991, the Company adopted an Employee Stock Purchase Plan ("ESPP")
under which employees may purchase shares of the Company's common stock. The
Board determined the number of shares of common stock made available under this
plan for each purchase year. For each of the plan years ended April 30, 1997,
1996 and 1995, 75,000 shares were made available for purchase. For the plan year
ended April 30, 1998, the Board did not make any shares of common stock
available for purchase. For the plan years ended April 30, 1997, 1996 and 1995,
75,000, 20,817 and 4,557 shares, respectively, were purchased. Shares are
purchased at their fair market value as determined by the Board. Eligible
employees can purchase shares valued at up to 10% of their gross cash
compensation.
Prior to the IPO, the shares employees purchased under this plan 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
elect to require the Company to repurchase the employee's shares at fair market
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 this
plan at fair market value. These rights and restrictions lapsed at the time of
the IPO.
49
51
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. In addition, prior to the IPO
and the lapse of such rights, the Company also recorded stock compensation
expense for shares and options outstanding under the 1989 SIP, the 1992 ESIP and
the ESPP to reflect any increase in the amount at which the holders 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 $591,000, $(96,000) and
$763,000 in 1997, 1996 and 1995, respectively. The fair market value of the
Company's common stock, as determined by the Board effective as of May 1 of each
year, was $4.97, $4.00 and $4.00 for 1997, 1996 and 1995, respectively.
Redeemable Common Stock Instruments
The redeemable common stock instruments represent shares of common stock and
options to acquire common stock issued by the Company to certain employees
pursuant to the 1989 SIP, the 1992 ESIP, the ESPP and other agreements whereby
the holder had the right to require the Company to repurchase such shares at
their current fair market value, as determined by the Company's Board. The
rights of holders of Redeemable Common Stock Instruments to require the Company
to repurchase such shares automatically lapsed on the effective date of the
IPO.
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52
The following table summarizes the activity with respect to the redeemable
common stock instruments:
Shares of
Common Stock Redemption
Underlying Shares of Value of
Redeemable Redeemable Common Stock
Stock Options Common Stock Instruments
------------- ------------ -----------
Balance at December 31, 1994 1,181,774 28,674 $ 318,862
Compensation for non-qualified redeemable
stock options -- -- 673,445
Redeemable common stock issued (34,239) 55,806 199,236
Redeemable common stock repurchased by the
Company -- (37,363) (142,500)
Cancellation of redeemable stock option grants (223,097) -- --
--------- -------- -----------
Balance at December 31, 1995 924,438 47,117 1,049,043
Redeemable common stock issued (286,083) 303,540 952,456
Redeemable common stock repurchased by the
Company (300,297) (1,201,188)
Cancellation of redeemable stock option grants (66,345) -- --
Forfeiture of unvested redeemable stock
options -- -- (96,381)
--------- -------- -----------
Balance at December 31, 1996 572,010 50,360 703,930
Adjustment to redemption value -- -- 425,834
Redeemable common stock issued (173,265) 242,963 820,007
Redeemable common stock repurchased by the
Company -- (19,433) (93,366)
Cancellation of redeemable stock option grants (20,967) -- (4,185)
Waiver of rights to require repurchase (213,750) (8,240) (237,108)
Lapse of rights to require repurchase (164,028) (265,650) (1,615,112)
--------- -------- -----------
Balance at December 31, 1997 -- -- $ --
========= ======== ===========
NOTE 11 -- COMMITMENTS
During 1988, the Company entered into a ten-year lease for office space which
included a rent abatement for one and one-half years. Rental expense has been
calculated as total rental payments spread ratably over the life of the lease.
An accrued rent expense is created in years when rent expense exceeds cash
payments. In 1996, the Company extended the lease commitment by five years. The
current and long-term portions of the deferred rent abatement at December 31,
1997 are $87,000 and $392,000, respectively, and have been included in accrued
expenses or other liabilities, as appropriate.
The Company is committed for the payment of minimum rentals, exclusive of
escalation charges and renewal options and net of sublease income, under office
space, computer and other equipment operating lease agreements through 2003 in
the following amounts:
YEAR ENDED DECEMBER 31, AMOUNT
------------------------- ---------
1998 $ 2,700,000
1999 2,800,000
2000 2,400,000
2001 2,400,000
2002 2,400,000
Thereafter 1,200,000
---------
$13,900,000
===========
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Additionally, the Company leases certain equipment under cancelable operating
leases. The total rental expense under all equipment and office space operating
leases was approximately $2,700,000, $3,500,000 and $3,600,000 in 1997, 1996 and
1995, respectively.
During 1995, the Company attempted to sublease additional office space at
below market rates and recorded expense of $266,000 for the anticipated rate
differential. During 1996, the Company was able to terminate its lease for the
office space it was attempting to sublease and reversed this reserve plus
additional amounts recorded as expense in 1994 (totaling $351,000).
In 1992, the Company entered into a five-year non-compete agreement with a
former officer who is also a common stockholder and a Series A Preferred
stockholder pursuant to which the Company paid the former officer $22,917 per
month from May 1992 through January 1993 and $20,000 per month from February
1993 through April 1997. In addition, the former officer received $50,000 per
year from May 1992 through January 1993 and $15,000 per year from February 1993
through April 1997 for services rendered as a member of the Board.
NOTE 12-- SUBSEQUENT EVENTS
During January 1998, the Company entered into a lease for new office space for
the Company's 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 sublessee
at that time. The lease for the new facility has a twelve year term.
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NOTE 13 - UNAUDITED QUARTERLY RESULTS
The following table sets forth unaudited consolidated statements of
operations data for each of the eight quarters ended December 31, 1997:
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31,
1996 1996 1996 1996 1997 1997 1997 1997
------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues
License revenues $ 1,847 $ 2,909 $2,768 $ 3,744 $3,513 $3,319 $ 3,717 $ 6,232
Service revenues 6,201 6,324 6,151 6,612 6,482 6,641 6,705 6,753
-------- ------- ------ -------- ------ ------ -------- ------
Total revenues 8,048 9,233 8,919 10,356 9,995 9,960 10,422 12,985
Cost of revenues 2,432 2,364 2,219 1,898 1,422 1,485 1,425 1,552
-------- ------- ------ -------- ------ ------ -------- --------
Gross profit 5,616 6,869 6,700 8,458 8,573 8,475 8,997 11,433
-------- ------- ------ -------- ------ ------ -------- -------
Operating expenses
Sales and marketing 2,680 2,995 2,847 3,149 3,366 3,373 3,536 4,035
Product research
and development 3,729 3,811 3,233 3,151 3,231 3,457 3,391 3,399
General and
administrative 1,492 816 1,193 1,275 1,398 1,500 1,072 1,288
-------- ------- ------ -------- ------ ------ -------- --------
Total operating
expenses 7,901 7,622 7,273 7,575 7,995 8,330 7,999 8,722
-------- ------- ------ -------- ------ ------ -------- --------
Operating (loss) income (2,285) (753) (573) 883 578 145 998 2,711
Net interest and
other income 395 139 62 117 18 138 161 184
-------- ------- ------ -------- ------ ------ -------- --------
(Loss) income before
income taxes (1,890) (614) (511) 1,000 596 283 1,159 2,895
(Benefit from)
provision for income
taxes (701) (228) (189) 305 239 113 464 1,112
-------- ------- ------ -------- ------ ------ -------- --------
Net (loss) income $ (1,189) $ (386) $ (322) $ 695 $ 357 $ 170 $ 695 $ 1,783
======== ======= ====== ======== ====== ====== ======== =======
Historical (loss)
income per share
Basic $(0.17) $(0.06) $(0.05) $0.09 $0.04 $(0.14) $0.07 $0.19
Diluted $(0.17) $(0.06) $(0.05) $0.08 $0.04 $(0.14) $0.07 $0.16
Pro forma (loss) income
per share
Basic $(0.13) $(0.04) $(0.04) $0.08 $0.04 $0.02 $0.08 $0.18
Diluted $(0.13) $(0.04) $(0.04) $0.07 $0.04 $0.02 $0.07 $0.16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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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 1998 Proxy Statement to be filed
with the Securities and Exchange Commission by April 30, 1998.
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 1998 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
Company's 1998 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Company's 1998 Proxy Statement to be filed with the Securities and Exchange
Commission by April 30, 1998.
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 Statement of Cash Flows
Notes to Consolidated Financial Statements
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2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits:
3.1 Articles of Incorporation (incorporated by reference to
Exhibit 3.1 forming a part of the Company's registration
statement on Form S-1 (File No. 333-35629) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended.)
3.2 Amended and Restated Bylaws (incorporated by reference
to Exhibit 3.2 forming a part of the Company's
registration statement on Form S-1 (File No. 333-35629)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen certificate of Common Stock (incorporated by
reference to Exhibit 4.2 forming a part of the Company's
registration statement on Form S-1 (File No. 333-35629)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.)
10.1 Employment agreement between the Company and Ralph E.
Alexander dated April 9, 1997 (incorporated by reference
to Exhibit 10.1 forming a part of the Company's
registration statement on Form S-1 (File No. 333-35629)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.)
10.2 1989 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 forming a part of the Company's
registration statement on Form S-1 (File No. 333-35629)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.)
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.)
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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.)
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 Price Waterhouse LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule (restating Exhibit 27
to the Company's registration statement on Form S-1
(File No. 333-35629) filed with the Securities and
Exchange Commission on September 15, 1997.)
27.3 Restated Financial Data Schedule (restating Exhibit 27
to Amendment No. 1 to the Company's registration
statement on Form S-1 (File No. 333-35629) filed with
the Securities and Exchange Commission on October
23, 1997.)
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LANDMARK SYSTEMS CORPORATION
Date: March 30, 1998 By: /s/ KATHERINE K. CLARK
--------------------------------
Katherine K. Clark
Chief Executive Officer and Director
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 1998.
Signature Title
--------- -----
/s/ PATRICK H. MCGETTIGAN Chairman of the Board
---------------------------------------------
Patrick H. McGettigan
/s/ KATHERINE K. CLARK Chief Executive Officer and Director
--------------------------------------------- (Principal Executive Officer)
Katherine K. Clark
/s/ RALPH E. ALEXANDER President, Chief Operating Officer, Chief
--------------------------------------------- Financial Officer, Secretary, Treasurer and
Ralph E. Alexander Director (Principal Financial Officer)
/s/ HENRY D. BARRATT, JR. Director
---------------------------------------------
Henry D. Barratt, Jr.
/s/ JEFFREY H. BERGMAN Director
---------------------------------------------
Jeffrey H. Bergman
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/s/ T. EUGENE BLANCHARD Director
---------------------------------------------
T. Eugene Blanchard
/s/ PATRICK W. GROSS Director
---------------------------------------------
Patrick W. Gross
/s/ LESLIE J. COLLINS Vice President, Finance
--------------------------------------------- (Principal Accounting Officer)
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LANDMARK SYSTEMS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
BALANCE AT
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION PERIOD OPERATIONS DEDUCTIONS END OF PERIOD
- ----------- ------ ---------- ---------- -------------
Year Ended December 31, 1995
Allowance for uncollectible accounts $613,816 $761,425 $(650,902) (A) $724,339
Deferred tax asset valuation allowance $ -- $690,885 $ -- $690,885
Year Ended December 31, 1996
Allowance for uncollectible accounts $724,339 $303,913 $(646,208) (A) $382,044
Deferred tax asset valuation allowance $690,885 $ -- $(280,885) (B) $410,000
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
(A) Uncollectible accounts written off
(B) Reduction in the tax valuation allowance
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------ --------
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule (#1)
27.3 Restated Financial Data Schedule (#2)