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 September 30, 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.)
3210 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 October
31, 1996 was 16,797,811.
<PAGE>
LEGATO SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: Condensed Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 ....................................... 3
Condensed Consolidated Statements of Income for the three and
nine month periods ended September 30, 1996 and 1995 ........ 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 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 4. Submission of Matters to a Vote of Security Holders ...... 13
Item 6. Exhibits and Reports on Form 8-K .......................... 13
</TABLE>
<PAGE>
PART I: Condensed Financial Information
Item 1: Financial Statements
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------- -------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $27,243 $29,870
Short term investments ........................... 24,633 9,571
Accounts receivable, net ......................... 7,547 5,466
Other current assets ............................. 2,523 939
Deferred tax asset ............................... 1,195 1,658
------- -------
Total current assets ........................... 63,141 47,504
Long-term investments ............................... 3,848 10,085
Property and equipment, net ......................... 5,331 1,533
Deposits and other assets ........................... 225 28
Intangible assets, net .............................. 4,750 --
------- -------
Total assets ................................. $77,295 $59,150
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......... $ 7,093 $ 2,758
Income taxes payable ............................. -- 998
Deferred revenues ............................... 7,394 4,852
------- -------
Total current liabilities ...................... 14,487 8,608
Deferred tax liability .............................. 1,332 --
Commitments
Stockholders' equity:
Common stock ..................................... 2 2
Additional paid-in capital ....................... 53,085 47,325
Retained earnings ................................ 8,389 3,215
------- -------
Total stockholders' equity ..................... 61,476 50,542
======= =======
Total liabilities and stockholders' equity $77,295 $59,150
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
<PAGE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Product and other ................... $8,272 $4,552 $22,322 $11,878
Royalty and license ................. 3,732 2,346 9,295 5,870
Software subscription ............... 2,545 1,102 6,430 2,925
------ ------ ------ ------
Total revenues .................. 14,549 8,000 38,047 20,673
Cost of revenues:
Product and other ................... 695 427 1,667 999
Software subscription ............... 722 412 2,106 1,092
------ ------ ------ ------
Total cost of revenues .......... 1,417 839 3,773 2,091
------ ------ ------ ------
Gross profit ................ 13,132 7,161 34,274 18,582
Operating expenses:
Research and development ............ 2,318 1,272 6,267 3,020
Sales and marketing ................. 4,289 2,846 12,355 7,837
General and administrative .......... 1,915 1,118 4,725 2,753
Amortization of intangibles ......... 276 -- 818 --
In-process research and development . -- -- 1,849 --
------ ------ ------ ------
Total operating expenses ........ 8,798 5,236 26,014 13,610
------ ------ ------ ------
Income from operations ................. 4,334 1,925 8,260 4,972
Interest income (net) .................. 442 511 1,307 591
------ ------ ------ ------
Income before provision
for income taxes .................... 4,776 2,436 9,567 5,563
Provision for income taxes ............. 1,815 739 4,390 1,723
------ ------ ------ ------
Net income ............................. $2,961 $1,697 $5,177 $3,840
====== ====== ====== ======
Net income per share ................... $ .16 $ .09 $ .28 $ .26
====== ====== ====== ======
Shares used in per share calculation ... 18,923 17,996 18,676 14,882
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
<PAGE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 5,177 $ 3,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 1,408 474
Deferred tax asset ............................. 463 (536)
Write-off of in-process research and development 1,849 --
Other .......................................... 163 --
Changes in operating assets and liabilities:
Accounts receivable ............................ (1,236) (2,236)
Other current assets ........................... 1,318 (504)
Current liabilities ............................ 6,091 3,536
-------- --------
Net cash provided by operating activities . 15,233 4,574
Cash flows from investing activities:
Acquisition of property and equipment .............. (4,508) (823)
Purchase of available-for-sale securities ......... (47,040) (106,342)
Proceeds from maturity and sale of available-
for-sale securities .............................. 38,212 87,651
Payment for purchase of subsidiaries, net of
cash acquired .................................... (5,924) --
Other .............................................. (197) 54
-------- --------
Net cash used in investing activities ..... (19,457) (19,460)
Cash flows from financing activities:
Proceeds from issuance of common stock ............. 1,583 39,934
Other .............................................. 14 59
-------- --------
Net cash provided by financing activities 1,597 39,993
Net increase (decrease) in cash and cash equivalents .... (2,627) 25,107
Cash and cash equivalents at beginning of period ........ 29,870 4,031
-------- --------
Cash and cash equivalents at end of period .............. $ 27,243 $ 29,138
Supplemental information:
Income taxes paid .................................. $ 2,554 $ 1,051
======== ========
Non-cash transactions:
Deferred tax liability ......................... $ 1,568 $ --
======== ========
Tax benefit from stock plans ................... $ 4,000 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
<PAGE>
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
any future interim periods or for the full fiscal year. The Notes to the
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 Per Share
Net income 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 (using the treasury stock method).
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 $6,687,000, including acquisition 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. 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 for which there was no alternative future
use and technological feasibility was not established. The balance of the
purchase price was allocated to purchased technology and goodwill totaling
$4,060,000. Additional goodwill of $1,568,000 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. Substantially all of the net
assets of Innovus, Inc., the Company's clinical research business, were sold in
September 1996 for approximately $150,000 which approximates the carrying amount
of those net assets. The Company has discontinued all clinical research
activities. The effect of the discontinuance is not expected to have a
significant effect on the operating results of the Company.
Pro forma results of operations of the Company for the three and nine months
ended September 30, 1995, assuming the acquisition of Innovus had occurred at
the beginning of that period, include revenues of $8.7 million and $23.4
million, net income of $1.8 million and $2.1 million and earnings per share of
$0.11 and $0.14, respectively.
Note 4. Stock Split
The Company effected a two-for-one stock split on July 5, 1996. This stock split
has been retroactively reflected in the accompanying Condensed Consolidated
Financial Statements.
Note 5. Lease Agreement
The Company signed a non-cancelable operating lease for its new principal
operating facilities commencing in September 1996 and expiring August 2006. At
September 30, 1996, future minimum lease payments totaled $21.3 million.
<PAGE>
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 "Risk Factors" contained herein and in the
Company's other 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
of 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 the OEMs' product sales. Substantially all
of the OEMs are large computer system and software suppliers located in the
United States and Europe. The Company 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 Nine months Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product and other ................... 56.9% 56.9% 58.7% 57.5%
Royalty and license ................. 25.6 29.3 24.4 28.4
Software subscription ............... 17.5 13.8 16.9 14.1
------ ------ ------ ------
Total revenues .................. 100.0 100.0 100.0 100.0
Cost of revenues:
Product and other ................... 4.7 5.3 4.4 4.8
Software subscription ............... 5.0 5.2 5.5 5.3
------ ------ ------ ------
Total cost of revenues .......... 9.7 10.5 9.9 10.1
------ ------ ------ ------
Gross profit ................ 90.3 89.5 90.1 89.9
Operating expenses:
Research and development ............ 15.9 15.9 16.5 14.6
Sales and marketing ................. 29.5 35.5 32.5 37.9
General and administrative .......... 13.2 14.0 12.4 13.3
Amortization of intangibles ......... 1.9 -- 2.1 --
In-process research and development . -- -- 4.9 --
------ ------ ------ ------
Total operating expenses ........ 60.5 65.4 68.4 65.8
------ ------ ------ ------
Income from operations ................. 29.8 24.1 21.7 24.1
Interest income (net) .................. 3.0 6.4 3.4 2.8
------ ------ ------ ------
Income before provision for income taxes 32.8 30.5 25.1 26.9
Provision for income taxes ............. 12.4 9.2 11.5 8.3
------ ------ ------ ------
Net income ............................. 20.4% 21.3% 13.6% 18.6%
====== ====== ====== ======
</TABLE>
<PAGE>
REVENUES
Revenues for the third quarter of 1996 increased 82% percent over revenues for
the comparable period of 1995, and revenues for the first three quarters of 1996
grew 84% percent from the comparable period of 1995. These increases were
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 $4.6 million and
$8.3 million for the third quarter of 1995 and 1996, respectively, representing
an increase of 82 percent. For the first three quarters of 1995 and 1996,
product and other revenues were $11.9 million and $22.3 million, respectively,
representing an increase of 88 percent. Product revenues increased over these
periods primarily as a result of the continued acceptance of NetWorker (the
Company's principal product), including 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 $2.3 million and
$3.7 million for the third quarter of 1995 and 1996, respectively, representing
an increase of 59 percent. The increase is attributable to a 42 percent increase
in royalty revenues from product sales by OEMs, from $2.3 million in the third
quarter of 1995 to $3.3 million for the third quarter of 1996, as well as
license fee revenue of $400,000 in the third quarter of 1996. No license revenue
was recorded in the same period of 1995. Royalty and license revenues were $5.9
million and $9.3 million for the first three quarters of 1995 and 1996,
respectively, representing an increase of 58 percent, due primarily to a 68
percent increase in royalty revenues. Royalty revenues are recognized upon
receipt of quarterly royalty reports from OEMs related to their product sales
for the previous quarter. License fee revenue for the first three quarters of
1995 and 1996 of $850,000 and $880,000, respectively, reflect licenses sold for
the Company's products. Prior growth rates of the Company's royalty and license
revenues may not be indicative of future royalty and license revenues growth
rates and may not be sustainable in the future.
Software Subscription Revenues. Software subscription revenues were $1.1 million
and $2.5 million for the third quarter of 1995 and 1996, respectively,
representing an increase of 131 percent. For the first three quarters of 1995
and 1996, software subscription revenues were $2.9 million and $6.4 million,
respectively, representing an increase of 120 percent. These increases were
primarily due to the increase in the number of registered servers for the
Company's products that are covered under maintenance and support contracts, the
renewal of software subscriptions after the initial one-year term, and increased
internal staffing for software subscription sales. Prior growth rates of the
Company's software subscription revenues may not be indicative of future
software subscription revenue growth rates and may not be sustainable in the
future.
International product sales were $1.3 million and $2.5 million for the third
quarter of 1995 and 1996, respectively. International product sales accounted
for 27 percent and 32 percent of total product and other revenues in the third
quarter of 1995 and 1996, respectively. For the first three quarters of 1995 and
1996, international product sales were $3.0 million and $7.1 million,
respectively. International product sales accounted for 25 percent and 33
percent of total product and other revenues in the first three quarters of 1995
<PAGE>
and 1996, respectively. The majority of international sales during these periods
were made in Europe. The Company has begun and plans to continue 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 $7.2 million and $13.1 million for the third quarter of 1995
and 1996, respectively, representing 89.5 percent and 90.3 percent of total
revenues, respectively. Gross profit was $18.6 million and $34.3 million for the
first three quarters of 1995 and 1996, respectively, representing 89.9 percent
and 90.1 percent of total revenues, respectively. The increases in total gross
profit were attributable to the higher levels of revenues, with gross margin
percentages remaining comparable from period to period.
Gross profit from product and other revenues increased 84 percent from $4.1
million (or 90.6 percent of product and other revenues) in the third quarter of
1995 to $7.6 million (or 91.6 percent of product and other revenues) in the
third quarter of 1996. For the first three quarters of 1995 and 1996, gross
profit from product and other revenues increased 90 percent from $10.9 million
(or 91.6 percent of product and other revenues) to $20.7 million (or 92.5
percent of product and other revenues), respectively. Costs of product and other
revenues consist primarily of product media, documentation and packaging. In the
first three quarters of 1996, product costs include clinical research expenses,
reflecting the principle activity of Innovus, Inc., which was acquired along
with Innovus Technologies, Inc. in January 1996. Substantially all of the net
assets of Innovus, Inc., the Company's clerical research business, were sold in
September 1996 and the Company has discontinued all clinical research
activities. The effect of the discontinuance is not expected to have a
significant effect on the operating results of the Company. See Note 3 of Notes
to Condensed Consolidated Financial Statements.
Gross profit from software subscription revenues increased 164 percent from
$690,000 (or 62.6 percent of software subscription revenues) in the third
quarter of 1995 to $1.8 million (or 71.6 percent of software subscription
revenues) in the third quarter of 1996. Gross profit from software subscription
revenues increased 136 percent from $1.8 million (or 62.7 percent of software
subscription revenues) in the first three quarters of 1995 to $4.3 million (or
67.2 percent of software subscription revenues) in the first three quarters of
1996. These increases in absolute dollars are the result of similar increases in
software subscription revenues over these periods. The increases in software
subscription gross profit margins are attributable to revenue increasing at a
faster rate than the costs of supporting software subscriptions.
OPERATING EXPENSES
Research and Development. Research and development expenses were $1.3 million
and $2.3 million in the third quarter of 1995 and 1996, respectively, an
increase of 82 percent. As a percentage of total revenues, research and
development was consistent at 15.9 percent in both the third quarter of 1995 and
1996. Research and development expenses were $3.0 million and $6.3 million in
the first nine months of 1995 and 1996, or 14.6 percent and 16.5 percent of
total revenues, respectively. The increases in absolute dollars are principally
a result of increased headcount. 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.
<PAGE>
Sales and Marketing. Sales and marketing expenses were $2.8 million and $4.3
million in the third quarter of 1995 and 1996, respectively. As a percentage of
total revenues, sales and marketing expenses decreased from 35.5 percent in the
third quarter of 1995 to 29.5 percent in the comparable 1996 period, as the rate
of hiring new employees was slightly below the rapid increases in revenues.
Also, third quarter 1996 promotional expenses were slightly lower, in absolute
dollars, compared to the third quarter of 1995. Sales and marketing expenses
were $7.8 million and $12.4 million in the first three quarters of 1995 and
1996, or 37.9 percent and 32.5 percent of total revenues, respectively. The
decrease in percentage is 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 $1.1
million and $1.9 million in the third quarter of 1995 and 1996, respectively,
representing an increase of 71 percent. This increase includes approximately
$500,000 of moving-related expenses as the Company relocated its headquarters in
the third quarter of 1996. As a percentage of total revenues, general and
administrative expenses decreased from 14.0 percent in the third quarter of 1995
to 13.2 percent in the comparable 1996 period. General and administrative
expenses increased 72 percent from $2.8 million in the first three quarters of
1995 to $4.7 million in the first three quarters of 1996. As a percentage of
total revenues, general and administrative expenses decreased from 13.3 percent
in the first nine months of 1995 to 12.4 percent in the comparable period of
1996. In addition to the moving-related expenses, these higher dollar costs 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 terms as the Company expands its
staffing and other support operations.
Amortization of Intangibles. In the first three quarters of 1996, the Company
amortized $818,000 of purchased technology and goodwill following the
acquisition of Innovus in the first quarter of 1996. The Company plans to
amortize these intangibles on a straight-line basis over five years. (See Note 3
of Notes to Condensed Consolidated Financial Statements.)
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 3 of Notes
to Condensed Consolidated Financial Statements.)
Interest Income (Net). Net interest income was $511,000 and $442,000 in the
third quarter of 1995 and 1996, respectively, and $591,000 and $1.3 million in
the first three quarters of 1995 and 1996, respectively. The increase in
interest income for the year-to-date periods is attributable to the higher level
of funds available for investment following the Company's initial public
offering in July 1995. The lower net interest income in the third quarter of
1996 compared to the third quarter of 1995 is due to transitioning a higher
percentage of the Company's instruments to tax-exempt securities in 1996, which
provide lower pre-tax yields than fully taxable securities.
Provision for Income Taxes. The provision for income taxes for the first three
quarters of 1995 was $1.7 million compared to $4.4 million for the first nine
months of 1996. Excluding the effect of one time charges related to the
acquisition of Innovus, the effective tax rate for the first three quarters of
1996 was 38.5 percent.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments totaled $55.7 million at
September 30, 1996 and represented 72 percent of total assets. Cash and cash
equivalents are highly liquid instruments, with original maturities of ninety
days or less. Investments consist mainly of municipal securities and commercial
paper rated Aa or better. At September 30, 1996, the Company had no long-term
debt and stockholders' equity was approximately $61.5 million.
Cash generated from operations and sales of preferred and common stock have been
sufficient to finance the Company's operations. Cash, cash equivalents and
investments increased $6.2 million during the first nine months of 1996, as cash
generated from operations more than offset cash paid for the acquisition of
Innovus.
The Company believes that the net proceeds from the initial public offering in
July 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.
RISK FACTORS
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
<PAGE>
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.
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.
<PAGE>
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 Company currently has plans to
introduce and market several other 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.
<PAGE>
Possible Volatility of Stock Price
The Company completed its initial public offering in July, 1995. Prior to that
date there was 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>
PART II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders was held on July 2, 1996 in Palo Alto,
California. Of the 16,454,522 shares outstanding as of the record date,
11,902,272 shares were present or represented by proxy at the meeting. The
following matter was submitted to a vote of security holders:
An amendment and restatement to the Company's Certificate of Incorporation
to effect a two-for-one stock split and to increase the number of authorized
shares of Common Stock and Preferred Stock:
Votes for: 11,140,502
Votes against: 686,470
Votes abstaining: 75,300
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
11.0 Statement of Computation of Net Income Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
<PAGE>
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: November 14, 1996 /s/ Stephen C. Wise
-------------------
Stephen C. Wise
V.P. of Finance and
Chief Financial Officer
(Duly authorized officer and principal
financial and accounting officer)
<PAGE>
EXHIBIT INDEX
11.0 Statement of Computation of Net Income Per Share
27.0 Financial Data Schedule
<PAGE>
Exhibit 11.0
LEGATO SYSTEMS, INC.
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
------- ------- ------- -------
Primary:
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 16,675 15,696 16,408 7,944
Weighted average common equivalent shares 2,248 2,300 2,268 1,286
Shares issuable from assumed conversion of
convertible preferred shares .......... -- -- -- 4,800
Shares related to SAB Nos. 64 and 83 ..... -- -- -- 852
------- ------- ------- -------
Total weighted average common and common . 18,923 17,996 18,676 14,882
------- ------- ------- -------
equivalent shares
Net income ............................... $ 2,961 $ 1,697 $ 5,177 $ 3,840
======= ======= ======= =======
Net income per share ..................... $ .16 $ .09 $ .28 $ .26
======= ======= ======= =======
Fully Diluted:
Weighted average common shares outstanding 16,675 15,696 16,408 7,944
Weighted average common equivalent shares 2,328 2,316 2,345 1,322
Shares issuable from assumed conversion of
convertible preferred shares .......... -- -- -- 4,800
Shares related to SAB Nos. 64 and 83 ..... -- -- -- 852
------- ------- ------- -------
Total weighted average common and common . 19,003 18,012 18,753 14,918
equivalent shares ------- ------- ------- -------
Net income ............................... $ 2,961 $ 1,697 $ 5,177 $ 3,840
======= ======= ======= =======
Net income per share ..................... $ .16 $ .09 $ .28 $ .26
======= ======= ======= =======
</TABLE>
The Company authorized a two-for-one stock split, effective July 5, 1996.
This stock split has been retroactively reflected in the Statement of
Computation of Net Income Per Share.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATEDD BALANCE SHEET - UNAUDITED AND CONDENSED CONSOLIDATED STATEMENT OF
INCOME INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000859360
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 27,243
<SECURITIES> 28,481
<RECEIVABLES> 7,547
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,141
<PP&E> 5,331
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,295
<CURRENT-LIABILITIES> 14,487
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 61,474
<TOTAL-LIABILITY-AND-EQUITY> 77,295
<SALES> 0
<TOTAL-REVENUES> 38,047
<CGS> 3,773
<TOTAL-COSTS> 29,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,567
<INCOME-TAX> 4,390
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,177
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
