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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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: 0-26130
LEGATO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3077394
(State of incorporation) (I.R.S. Employer
Identification No.)
3145 PORTER DRIVE
PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices)
(415) 812-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of April
30, 1996 was 8,195,975.
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LEGATO SYSTEMS, INC.
INDEX
Page
PART I: CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1996 and 1995 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
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PART I: CONDENSED FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,603 $ 8,444
Short term investments 35,228 30,997
Accounts receivable, net 6,187 5,466
Other current assets 884 939
Deferred tax asset 1,658 1,658
----------- -----------
Total current assets 49,560 47,504
Long-term investments 6,321 10,085
Property and equipment, net 2,045 1,533
Deposits and other assets 224 28
Intangible assets, net 5,215 --
----------- -----------
Total assets $ 63,365 $ 59,150
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,628 $ 2,758
Income taxes payable 1,625 998
Deferred revenues 5,657 4,852
----------- -----------
Total current liabilities 10,910 8,608
Deferred tax liability 1,451 --
Commitments and contingencies
Stockholders' equity:
Common stock 1 1
Additional paid-in capital 47,916 47,326
Retained earnings 3,087 3,215
----------- -----------
Total stockholders' equity 51,004 50,542
----------- -----------
Total liabilities and stockholders' equity $ 63,365 $ 59,150
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the Condensed Consolidated Financial Statements.
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LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Product and other $ 6,283 $ 3,145
Royalty and license 2,881 1,838
Software subscription 1,761 845
-------- --------
Total revenues 10,925 5,828
Cost of revenues:
Product and other 512 242
Software subscription 664 314
-------- --------
Total cost of revenues 1,176 556
-------- --------
Gross profit 9,749 5,272
Operating expenses:
Research and development 1,862 874
Sales and marketing 3,799 2,215
General and administrative 1,346 769
Amortization of intangibles 266 --
In-process research and development 1,849 --
-------- --------
Total operating expenses 9,122 3,858
-------- --------
Income from operations 627 1,414
Interest income (net) 454 31
-------- --------
Income before provision for income taxes 1,081 1,445
Provision for income taxes 1,208 450
-------- --------
Net income (loss) $ (127) $ 995
======== ========
Net income (loss) per share $ (0.02) $ 0.15
======== ========
Shares used in per share calculation 8,123 6,610
======== ========
</TABLE>
The accompanying notes are an integral part
of the Condensed Consolidated Financial Statements.
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LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (127) $ 995
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 449 147
Write-off of in-process research and development 1,849 --
Changes in operating assets and liabilities:
Accounts receivable 124 (697)
Other current assets 136 (203)
Current liabilities 1,275 1,331
-------- --------
Net cash provided by operating activities 3,706 1,573
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (579) (181)
Purchase of available-for-sale securities (22,373) --
Proceeds from maturity and sale of available-
for-sale securities 21,905 --
Payment for purchase of subsidiaries, net of
cash acquired (5,894) --
Other (196) (8)
-------- --------
Net cash used in investing activities (7,137) (189)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 586 64
Other 4 --
-------- --------
Net cash provided by financing activities 590 64
-------- --------
Net increase (decrease) in cash and cash equivalents (2,841) 1,448
Cash and cash equivalents at beginning of period 8,444 4,031
-------- --------
Cash and cash equivalents at end of period $ 5,603 $ 5,479
======== ========
Supplemental information:
Income taxes paid $ 822 $ 51
======== ========
Non-cash transactions:
Deferred tax liability $ 1,451 $ --
======== ========
</TABLE>
The accompanying notes are an integral part
of the Condensed Consolidated Financial Statements.
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LEGATO SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the financial position, results
of operations and cash flows of Legato Systems, Inc. and its subsidiaries
("Legato" or "the Company"). The results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected for
the full fiscal year. The Notes to the Condensed Consolidated Financial
Statements contained in the 1995 Report on Form 10-K should be read in
conjunction with these Condensed Consolidated Financial Statements. The balance
sheet at December 31, 1995 was derived from audited financial statements;
however, it does not include all disclosures required by generally accepted
accounting principles.
NOTE 2. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares are included
in the per share calculations where the effect of their inclusion would be
dilutive. Dilutive common equivalent shares consist of the incremental common
shares issuable upon conversion of convertible preferred stock (using the "if
converted" method) and stock options and warrants (using the treasury stock
method.) Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common and common equivalent shares issued by the Company
during the twelve months preceding the initial offering date, using the treasury
stock method and the public offering price per share, have been included in the
calculation of net income per share for all periods presented prior to the
initial public offering.
NOTE 3. ACQUISITION OF INNOVUS
On January 5, 1996, the Company completed its acquisition of Innovus, Inc.,
Innovus Technologies, Inc. and 815598 Ontario, Inc., (collectively "Innovus")
each based in Canada for approximately $6,657,000 including acquisitions costs.
Prior to the acquisition, Innovus (except for 815598 Ontario, Inc.) was in the
business of (i) the porting of licensed software for Hewlett-Packard HP9000 and
HP3000 series computers and the sale and distribution of such ported software,
and (ii) supplying clinical trials and research services on contract in the
Canadian pharmaceutical industry. Legato intends to continue similar operations
in Canada. Prior to the acquisition, 815598 Ontario, Inc. did not conduct any
business other than holding shares of capital stock of Innovus, Inc. The
acquisition was accounted for using the purchase method and, on this basis,
resulted in a one-time write-off of $1,849,000 for purchased in-process research
and development. The balance of the purchase price was allocated to purchased
technology and goodwill totaling $4,030,000. Additional goodwill of $1,451,000
arises as a result of recording a deferred tax liability related to timing
differences in the amortization of purchased technology for book and tax
purposes. The Company plans to amortize purchased technology and goodwill on a
straight-line basis over five years. The operating results of Innovus have been
consolidated with the Company's operating results beginning as of the
acquisition date.
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The following table summarizes the unaudited pro forma results of operations of
the Company for the three months ended March 31, 1995 assuming the acquisition
of Innovus had occurred at the beginning of that period. Operating results for
the first quarter of 1996, included in the Condensed Consolidated Financial
Statements, is provided for comparative purposes.
<TABLE>
<CAPTION>
1996 1995
----------- ----------
(in thousands, except per share amounts)
<S> <C> <C>
Revenues $ 10,925 $ 6,411
Net income before write-off of
in-process technology $ 1,722 $ 737
Write-off of in-process technology $ 1,849 $ 1,849
Net loss $ (127) $ (1,112)
Net loss per share $ (.02) $ (0.55)
Share used in per share calculation 8,123 2,011
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed under the heading "Additional Factors That Might Affect
Future Results," in the Company's filings with the Securities and Exchange
Commission, including but not limited to those discussed under the heading "Risk
Factors" in the Company's 1995 Report on Form 10-K.
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets and supports network storage management software
products for heterogeneous client/server computing environments. The Company's
NetWorker software, from which the Company derives the vast majority its
revenues, supports many storage management server platforms and can accommodate
a variety of clients, servers and storage devices. The Company licenses its
product through resellers and directly to end users in North America, Europe and
Asia Pacific. The Company also licenses its source code in exchange for initial
licensing fees to original equipment manufacturers ("OEMs") and receives ongoing
royalties from product sales by source code OEMs and SunSoft, a private label
reseller. Substantially all of the OEMs are large computer system and software
suppliers located in the United States and Europe. believes it is a technology
leader in the network storage management software market because of the
heterogeneity, scalability, performance and ease of use of its software
products.
Selected elements of the Company's financial statements are shown below as a
percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Product and other 57.5% 54.0%
Royalty and license 26.4 31.5
Software subscription 16.1 14.5
----- -----
Total revenues 100.0 100.0
Cost of revenues:
Product and other 4.7 4.1
Software subscription 6.1 5.4
----- -----
Total costs of revenues 10.8 9.5
Gross profit 89.2 90.5
Operating expenses:
Research and development 17.0 15.0
Sales and marketing 34.8 38.0
General and administrative 12.3 13.2
Amortization of intangibles 2.4 --
In-process research and development 16.9 --
----- -----
Total operating expenses 83.4 66.2
----- -----
Income from operations 5.8 24.3
Interest income, net 4.1 0.5
----- -----
Income before income taxes 9.9 24.8
Provision for income taxes 11.1 7.7
----- -----
Net income (loss) (1.2) 17.1
===== =====
</TABLE>
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REVENUES
Revenues for the first quarter of 1996 increased 87% percent over revenues for
the comparable period of 1995. The increase was attributable to increased
licensing of the Company's products, increased sales of software subscriptions,
as well as increased royalty revenue.
Product and Other Revenues. Product and other revenues were $3.1 million and
$6.3 million for the first quarter of 1995 and 1996, respectively, representing
an increase of 100 percent. Product revenue increased primarily as a result of
the continued acceptance of the Company's products including NetWorker (the
Company's principal product), NetWorker for Windows NT which began shipping in
the first quarter of 1996, and the NetWorker add-on options offered by the
Company. Add-on options include autoloaders, ClientPaks and additional
connection options. Other revenues were less than 10 percent of total revenues
for the periods presented. Prior growth rates of the Company's product and other
revenues may not be indicative of future product and other revenues growth rates
and may not be sustainable in the future.
Royalty and License Revenues. Royalty and license revenues were $1.8 million and
$2.9 million for the first quarter of 1995 and 1996, respectively, representing
an increase of 57 percent. The increase primarily relates to an 83 percent
increase in royalty revenues from product sales by source code OEM's from $1.4
million in the first quarter of 1995 to $2.5 million for the first quarter of
1996. Royalty revenues are recognized upon receipt of quarterly royalty reports
from OEMs related to their product sales for the previous quarter. Since its
OEMs generally have stronger product sales for the December quarter, the Company
would expect the first quarter to reflect stronger OEM performance. License fee
revenue for 1995 and 1996 of $450,000 and $335,000, respectively, reflect
licenses sold for the Company's products. Prior growth rates of the Company's
royalty and license revenues are not indicative of future royalty and license
revenues growth rates and may not be sustainable in the future.
Software Subscription Revenues. Software subscription revenues were $845,000 and
$1.8 million for the first quarter of 1995 and 1996, respectively, representing
an increase of 108 percent. This growth was primarily due to the increase in the
number of registered servers for the Company's products that are covered under
maintenance and support contracts, as well as the renewal of software
subscriptions after the initial one-year term. Prior growth rates of the
Company's software subscription revenues are not indicative of future software
subscription revenue growth rates and may not be sustainable in the future.
International product sales were $950,000 and $2.2 million for the first quarter
of 1995 and 1996, respectively. International product sales accounted for 30
percent and 35 percent of total product and other revenues in the first quarter
of 1995 and 1996, respectively. The majority of international sales during these
periods were made in Europe. The Company plans to expand its international
operations, which will require significant management attention and financial
resources and could materially adversely affect the Company's operating results.
To the extent that the Company is unable to effect these additions in a timely
manner, the Company's growth, if any, in international sales will be limited,
and the Company's business, operating results and financial condition could be
materially adversely affected.
GROSS PROFIT
Gross profit was $5.3 million and $9.7 million for the first quarter of 1995 and
1996, respectively, representing 90.5 percent and 89.2 percent of total
revenues, respectively. The increase in total gross profit was primarily related
to the increase in gross profit from product and other revenues, the increase in
royalty and license revenues, which do not generate any material cost of
revenues, and to a lesser extent, an increase in gross profit from software
subscription revenue.
Gross profit from product and other revenues increased 99 percent from $2.9
million or 92.3 percent of product and other revenues in the first quarter of
1995 to $5.8 million or 91.9 percent of product and other revenues in the first
quarter of 1996. Costs of product and other revenues consist primarily of
product media, documentation and packaging. In the first quarter of 1996,
product costs include clinical research
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expenses, reflecting the principle activity of Innovus, Inc. which was acquired
along with Innovus Technologies, Inc. in January 1996. See Note 3 of Notes to
Condensed Consolidated Financial Statements.
Gross profit from software subscription revenue increased 107 percent from
$531,000 or 62.8 percent of software subscription revenue in the first quarter
of 1995 to $1.1 million or 62.3 percent of software subscription revenue in the
first quarter of 1996.
OPERATING EXPENSES
Research and Development. Research and development expenses were $874,000 and
$1.9 million in the first quarter of 1995 and 1996, respectively. In absolute
dollars, research and development expenses increased 113 percent during the
first quarter of 1996 compared to the first quarter of 1995, primarily as a
result of increased headcount. As a percentage of total revenues, research and
development increased from 15.0 percent in the first quarter of 1995 to 17.0
percent in the first quarter of 1996. The Company believes that research and
development expenses will increase in absolute dollar amounts as it continues to
invest in developing new products, applications, and product enhancements.
Sales and Marketing. Sales and marketing expenses were $2.2 million and $3.8
million in the first quarter of 1995 and 1996, respectively. As a percentage of
total revenues, sales and marketing expenses decreased from 38.0 percent in the
first quarter of 1995 to 34.8 percent in the comparable 1996 period, primarily
due to more rapid increases in revenues than related expenses. The Company
believes that sales and marketing expenses will increase in dollar amounts as
the Company continues to expand its sales and marketing staff.
General and Administrative. General and administrative expenses were $769,000
and $1.3 million in the first quarter of 1995 and 1996, respectively. As a
percentage of total revenues, general and administrative expenses decreased from
13.2 percent in the first quarter of 1995 to 12.3 percent in the comparable 1996
period. In absolute dollars, general and administrative expenses increased 75
percent in the first quarter of 1996 from the comparable period in 1995. These
increases are primarily attributable to increased staffing and related costs
required to manage and support the Company's growth. The Company expects that
general and administrative expenses will increase in dollar amount as the
Company expands its staffing and other support operations.
Amortization of Intangibles. In the quarter ended March 31, 1996, the Company
amortized $266,000 of purchased technology and goodwill following the
acquisition of Innovus in the first quarter of 1996. See Note 3 of Notes to
Condensed Consolidated Financial Statements. The Company plans to amortize these
intangibles on a straight-line basis over five years.
In-process Research and Development. In the quarter ended March 31, 1996, the
Company expensed $1.8 million of non-tax deductible in-process research and
development in connection with the acquisition of Innovus . See Note of Notes to
Condensed Consolidated Financial Statements.
Interest Income (Net). Net interest income was $31,000 and $454,000 in the first
quarter of 1995 and 1996, respectively. The increase in interest income is
attributable to the higher level of funds available for investment following the
Company's initial public offering in July 1995.
Provision for Income Taxes. The provision for income taxes for the first quarter
of 1995 was $450,000 compared to $1.2 million for the first quarter of 1996.
Excluding the effect of charges related to the acquisition of Innovus, the
effective tax rate for the first quarter of 1996 was 38 percent. See Note 4 of
Notes to Condensed Consolidated Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments totaled $47.2 million at
March 31, 1996 and represented 74 percent of total assets. Cash and cash
equivalents are highly liquid with original maturities of ninety days or less.
Investments consist mainly of commercial paper rated Aa or better and U.S.
Treasury Notes. At March 31, 1996, the Company had no long-term debt and
stockholders' equity was approximately $51.0 million.
Cash generated from operations and sales of preferred and common stock has been
sufficient to finance the Company's operations. Cash and cash equivalents
decreased $2.8 million during the first three months of 1996 to $5.6 million, as
cash paid for the acquisition of Innovus was only partially offset by cash
generated from operations.
The Company believes that the net proceeds from the initial public offering in
July of 1995, together with its current cash balances and cash flow from
operations, if any, will be sufficient to meet the Company's working capital and
capital expenditure requirements for at least the next twelve months.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
In addition to other information in this Report on Form 10-Q, the following risk
factors should be considered carefully in evaluating the Company and its
business.
Fluctuations in Quarterly Operating Results; Future Operating Results Uncertain
The Company's quarterly operating results have in the past varied and may in the
future vary significantly depending on a number of factors, including the size
and timing of significant orders; increased competition; market acceptance of
new products, applications and product enhancements; changes in pricing policies
by the Company and its competitors; the ability of the Company to timely
develop, introduce and market new products, applications and product
enhancements and to control costs; the Company's success in expanding its sales
and marketing programs; technological changes in the network storage management
market; the mix of sales among the Company's channels; deferrals of customer
orders in anticipation of new products, applications or product enhancements;
changes in Company strategy; personnel changes; and general economic factors.
The Company's future revenues are difficult to predict. The Company operates
with virtually no order backlog because its software products typically are
shipped shortly after orders are received. In addition, the Company does not
recognize revenues on sales through domestic distributors until the products are
sold through to end users. As a result, product revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter and to a
lesser extent on sell-through to end users in that quarter. Revenues for any
future quarter are not predictable with any significant degree of certainty.
Product revenues are also difficult to forecast because the network storage
management market is rapidly evolving and the Company's sales cycle varies
substantially from customer to customer. Royalty and license revenues are
substantially dependent upon sales by OEMs of their products that incorporate
the Company's software. Accordingly, royalty and license revenues are subject to
OEMs' product cycles, which are also difficult to predict. Royalty and license
revenues are further impacted by fluctuations in licensing activity from
quarter-to quarter, because initial license fees generally are non-recurring and
recognized upon the signing of the license agreement. The Company's expense
levels are based, in part, on its expectations as to future revenues. If revenue
levels are below expectations, operating results are likely to be adversely
affected. Net income may be disproportionately affected by a reduction in
revenues because a proportionately smaller amount of the Company's expenses
varies with its revenues. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is possible that in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
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Product Concentration
The Company currently derives substantially all of its revenues from its
NetWorker software products and related services, and the Company expects that
revenues from NetWorker will continue to account for substantially all of the
Company's revenues for the foreseeable future. Broad market acceptance of
NetWorker is, therefore, critical to the Company's future success. As a result,
a decline in unit prices of or demand for NetWorker, or failure to achieve broad
market acceptance of NetWorker, as a result of competition, technological change
or otherwise, would have a material adverse effect on the business, operating
results and financial condition of the Company. The life cycle of NetWorker is
difficult to estimate due in large measure to the recent emergence of the
Company's market, the effect of new products, applications or product
enhancements, technological changes in the network storage management
environment in which NetWorker operates and future competition. The Company's
future financial performance will depend in part on the successful development,
introduction and market acceptance of new products, applications and product
enhancements. There can be no assurance that the Company will continue to be
successful in marketing NetWorker or any new products, applications or product
enhancements.
Competition
The network storage management market is intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. Competitors vary in size and in the scope and breadth of the products
and services offered. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, operating results and
financial condition. Many of the Company's current and potential competitors
have significantly greater financial, technical, marketing and other resources
than the Company. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products than the Company. The Company also expects that competition will
increase as a result of future software industry consolidations, which have
occurred in the network storage management market in the past. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. In addition, network operating system
vendors could introduce new or upgrade existing operating systems or
environments that include storage management functionality offered by the
Company's products, which could render the Company's products obsolete and
unmarketable. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially adversely affect its business,
operating results and financial condition.
Dependence on New Software Products; Rapid Technological Change
The network storage management market is characterized by rapid technological
change, changing customer needs, frequent new software product introductions and
evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to develop and introduce new software
products (including new releases, applications and enhancements) on a timely
basis that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers.
There can be no assurance that the Company will be successful in developing and
marketing new products that respond to technological changes or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
new products, or that its new products will adequately meet the requirements of
the marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, the Company' business, operating results and financial condition
will be materially adversely affected. The
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Company currently has plans to introduce and market several other potential new
products in the next several months. Some of the Company's competitors currently
offer certain of these potential new products. Due to the complexity of
client/server software and the difficulty in gauging the engineering effort
required to produce these potential new products, such potential new products
are subject to significant technical risks. There can be no assurance that such
potential new products will be introduced on a timely basis or at all. In the
past, the Company has experienced delays in the commencement of commercial
shipments of its new products, resulting in customer frustrations and delay or
loss of product revenues. If potential new products are delayed or do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected. The Company has also,
in the past, experienced delays in purchases of its products by customers
anticipating the launch of new products by the Company. There can be no
assurance that material order deferrals in anticipation of new product
introductions will not occur.
Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. The Company has in the past discovered software errors in certain of
its new products after their introduction and has experienced delays or lost
revenues during the period required to correct these errors. Although the
Company has not experienced material adverse effects resulting from any such
errors to date, there can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Possible Volatility of Stock Price
The Company completed its initial public offering in July, 1995. Prior to this
date there has been no public market for the Company's Common Stock, and there
can be no assurance that an active public market for the Common Stock will be
sustained. The trading price of the Company's Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products, applications or
product enhancements by the Company or its competitors, changes in financial
estimates by securities analysts and other events or factors. In addition, the
stock market has experienced volatility that has particularly affected the
market prices of equity securities of many high technology companies and that
often has been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock.
The Company's business entails a variety of additional risks, which are set
forth in the Company's 1995 Report on Form 10-K. See "Risk Factors" in the
Company's 1995 Report on Form 10-K.
Page 13
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.0 Statement of Computation of Net Income (Loss) Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K
On January 19, 1996, the Registrant filed a report on Form 8-K in
connection with the Registrant's acquisition of Innovus, Inc., Innovus
Technologies, Inc. and 815598 Ontario, Inc., each Canadian corporations and
also filed a Report on Form 8-K/A on March 19, 1996, amending the former
filing to include certain financial information related to the acquisition.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEGATO SYSTEMS, INC.
Date: May 10, 1996 /s/ Gary L. Thompson
----------------------------------------------------
Gary L. Thompson
Vice President, Finance and Administration, Chief
Financial Officer and Assistant Secretary
(Duly authorized officer and principal financial and
accounting officer)
Page 14
<PAGE> 1
EXHIBIT 11.0
LEGATO SYSTEMS, INC.
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Primary:
Weighted average common shares outstanding 8,123 2,011
Weighted average common equivalent shares -- 359
Shares issuable from assumed conversion of
convertible preferred shares -- 3,600
Shares related to SAB Nos. 64 and 83 -- 640
------- -------
Total weighted average common and common
equivalent shares 8,123 6,610
Net income (loss) $ (127) $ 995
======= =======
Net income (loss) per share $ (0.02) $ 0.15
======= =======
Fully Diluted:
Weighted average common shares outstanding 8,123 2,011
Weighted average common equivalent shares -- 359
Shares issuable from assumed conversion of
convertible preferred shares -- 3,600
Shares related to SAB Nos. 64 and 83 -- 640
------- -------
Total weighted average common and common
equivalent shares 8,123 6,610
Net income (loss) $ (127) $ 995
======= =======
Net income (loss) per share $ (0.02) $ 0.15
======= =======
</TABLE>
Page 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET - UNAUDITED, CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,603
<SECURITIES> 41,549
<RECEIVABLES> 6,187
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,560
<PP&E> 2,045
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,365
<CURRENT-LIABILITIES> 10,910
<BONDS> 0
1
0
<COMMON> 0
<OTHER-SE> 51,003
<TOTAL-LIABILITY-AND-EQUITY> 63,365
<SALES> 0
<TOTAL-REVENUES> 10,925
<CGS> 0
<TOTAL-COSTS> 1,176
<OTHER-EXPENSES> 9,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454
<INCOME-PRETAX> 1,081
<INCOME-TAX> 1,208
<INCOME-CONTINUING> (127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
