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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to .
Commission File Number: 0-26130
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)
(650) 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 July 31,
1998 was 36,830,726.
<PAGE>
<TABLE>
LEGATO SYSTEMS, INC.
INDEX
<CAPTION>
<S> <C>
Page
PART I: Condensed Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1998 and December
31, 1997 3
Condensed Consolidated Statements of Income for the three and six month
periods ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1998 and 1997 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
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<PAGE>
PART I: Condensed Financial Information
Item 1: Financial Statements
<TABLE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 55,115 $ 34,763
Short-term investments 28,181 28,147
Accounts receivable, net 26,005 21,109
Other current assets 4,018 4,355
Deferred tax asset 2,580 2,702
----------- -----------
Total current assets 115,899 91,076
Long-term investments 9,994 8,499
Property and equipment, net 12,296 10,397
Deposits and other assets 526 362
Intangible assets, net 2,837 3,431
----------- -----------
Total assets $ 141,552 $ 113,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 12,151 $ 8,115
Deferred revenues 15,569 12,090
----------- -----------
Total current liabilities 27,720 20,205
Deferred tax liability 610 768
Stockholders' equity:
Capital stock 74,753 65,326
Retained earnings 38,469 27,466
----------- -----------
Total stockholders' equity 113,222 92,792
----------- -----------
Total liabilities and stockholders' equity $ 141,552 $ 113,765
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
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<TABLE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
Product licenses $ 25,611 $ 14,430 $ 47,540 $ 27,427
Service and support 6,736 3,720 12,661 7,344
----------- ----------- ---------- -----------
Total revenues 32,347 18,150 60,201 34,771
Cost of revenues:
Product licenses 1,007 698 1,759 1,162
Service and support 3,041 1,279 5,458 2,557
----------- ----------- ---------- -----------
Total cost of revenues 4,048 1,977 7,217 3,719
----------- ----------- ---------- -----------
Gross profit 28,299 16,173 52,984 31,052
Operating expenses:
Research and development 4,858 3,490 9,261 6,599
Sales and marketing 12,727 6,510 23,147 12,056
General and administrative 2,210 1,345 4,387 2,628
Amortization of intangibles 280 280 559 559
----------- ----------- ---------- -----------
Total operating expenses 20,075 11,625 37,354 21,842
----------- ----------- ---------- -----------
Income from operations 8,224 4,548 15,630 9,210
Interest and other income, net 994 503 1,835 945
--------- ----------- ---------- --------
Income before provision for income taxes 9,218 5,051 17,465 10,155
Provision for income taxes 3,411 1,919 6,462 3,859
----------- ----------- ---------- -----------
Net income $ 5,807 $ 3,132 $ 11,003 $ 6,296
=========== =========== ============= ===========
Basic earnings per share $ 0.16 $ 0.09 $ 0.30 $ 0.18
=========== =========== ========== ===========
Diluted earnings per share $ 0.15 $ 0.08 $ 0.28 $ 0.17
=========== =========== ========== ===========
Shares used in basic earnings
per share calculation 36,466 34,661 36,218 34,437
=========== =========== ========== ===========
Shares used in diluted earnings
per share calculation 39,448 37,181 39,194 37,370
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
<PAGE>
<TABLE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income $ 11,003 $ 6,296
Adjustments to reconcile net income to net cash provided by operating
activities:
Net deferred tax asset (36) (159)
Depreciation and amortization 2,626 1,459
Tax benefit from exercise of stock options 4,739 797
Changes in operating assets and liabilities:
Accounts receivable (4,896) (5,143)
Other current assets 337 (394)
Current liabilities 7,514 1,971
----------- -----------
Net cash provided by operating activities 21,287 4,827
----------- -----------
Cash flows from investing activities:
Purchase of available-for-sale securities (30,944) (13,958)
Proceeds from maturity and sale of available-
for-sale securities 29,418 13,847
Acquisition of property and equipment (3,966) (3,524)
Other (129) (96)
----------- -----------
Net cash used in investing activities (5,621) (3,731)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,676 1,641
Other 10 9
----------- -----------
Net cash provided by financing activities 4,686 1,650
----------- -----------
Net increase in cash and cash equivalents 20,352 2,746
Cash and cash equivalents at beginning of period 34,763 27,673
----------- ----------
Cash and cash equivalents at end of period $ 55,115 $ 30,419
=========== ==========
</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 ("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 1997 Report on Form 10-K
should be read in conjunction with these Condensed Consolidated Financial
Statements. The balance sheet at December 31, 1997 was derived from audited
financial statements; however, it does not include all disclosures required by
generally accepted accounting principles.
Note 2. Computation of Earnings Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common equivalent shares consist of the incremental common
shares issuable upon conversion of stock options. Prior period earnings per
share amounts have been restated to comply with SFAS 128.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted earnings
per share is provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------
1998 1997 1998 1997
--------- --------- --------- ------
Numerator - basic and diluted earnings per share
<S> <C> <C> <C> <C>
Net income $ 5,807 $ 3,132 $ 11,003 $ 6,296
========= ========= ========= ========
Denominator - basic earning per share
Weighted average common shares outstanding 36,466 34,661 36,218 34,437
--------- --------- --------- --------
Basic earnings per share $ 0.16 $ 0.09 $ 0.30 $ 0.18
========= ========= ========= ========
Denominator - diluted earnings per share
Weighted average common shares outstanding 36,466 34,661 36,218 34,437
Effect of dilutive securities:
Common stock options 2,982 2,520 2,976 2,933
--------- --------- --------- --------
Weighted average common and common
equivalent shares 39,448 37,181 39,194 37,370
========= ========= ========= ========
Diluted earnings per share $ 0.15 $ 0.08 $ 0.28 $ 0.17
========= ========= ========= ========
</TABLE>
Options to purchase 94,000 and 1,432,000 shares of common stock were outstanding
for the three-months ended June 30, 1998 and 1997, respectively. Options to
purchase 85,000 and 1,074,000 shares of common stock were outstanding for the
six-months ended June 30, 1998 and 1997, respectively. Such shares were not
included in the calculation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
during these periods
Note 3. Stock Split
The Company effected a two-for-one stock split (in the form of a stock
dividend) on April 17, 1998. This stock split has been retroactively reflected
in the accompanying Condensed Consolidated Financial Statements.
Note 4. Other Matters
Comprehensive Income
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
The components of comprehensive income that are excluded from net income are not
significant, individually or in aggregate, and therefore, no separate statement
of comprehensive income has been presented.
Revenue Recognition
The Company has adopted the provisions of Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), as amended by Statement of Position
98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2,
effective January 1, 1998. SOP 97-2 supercedes Statement of Position 91-1 and
delineates the accounting for software product and maintenance revenues. Under
SOP 97-2, the Company recognizes product revenues and license fees upon shipment
if a signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable,
except for sales to distributors, which are recognized upon sale by the
distributors to end-users. In addition, for contracts with multiple obligations
(e.g. deliverable and undeliverable products, services and maintenance), revenue
is allocated to each component of the contract based on objective evidence of
its fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. Revenue allocated to
undelivered products is recognized when the criteria for product and license
revenue set forth above are met. Revenue allocated to maintenance fees for
ongoing customer support and product updates is recognized ratably over the
period of the maintenance contract. Payments for maintenance fees are generally
made in advance and are non-refundable. Revenue allocated to other services is
recognized as the related services are performed.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." ("SFAS 131"), which supercedes Statement of
Financial Accounting Standards, "Financial Reporting for Segments of a Business
Enterprise" ("SFAS 14"). SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information. This statement is effective
for fiscal years beginning after December 15, 1997. The statement's interim
reporting disclosures are not required until the first quarter immediately
subsequent to the fiscal year in which SFAS 131 is effective.
Note 5. Subsequent Event
On August 6, 1998, the Company acquired the net assets of Software Moguls,
Inc. a developer of advanced backup-retrieval products for the Windows NT and
UNIX environments in exchange for 250,000 shares of its stock. The combination
was accounted for as a pooling of interests. The historical operating results
and net assets of Software Moguls, Inc. are not material to the Company's
historical consolidated financial statements.
<PAGE>
Reclassifications
Certain reclassifications were made to the 1998 and 1997 consolidated
financial statements to conform to the 1998 presentation. The reclassifications
have no significant effect on previously reported financial position, results of
operations or cash flows.
<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 statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed elsewhere in this item under
the heading "Risk Factors" and the risks discussed in the Company's other
Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, licenses, markets and supports network storage
management software products for heterogeneous client/server computing
environments and large-scale enterprises. The Company's NetWorker family of
software products, from which the Company derives a substantial majority of its
revenues, and Global Enterprise Management Systems (G.E.M.S.) support many
storage management server platforms and can accommodate a variety of servers,
clients, applications, databases and storage devices. The Company licenses its
products 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,
Europe and Asia Pacific.
Selected elements of the Company's consolidated financial statements are
shown below as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -------
Revenues:
<S> <C> <C> <C> <C>
Product licenses 79.2% 79.5% 79.0% 78.9%
Service and support 20.8 20.5 21.0 21.1
---------- ----------- ---------- -----------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product licenses 3.1 3.9 2.9 3.3
Service and support 9.4 7.0 9.1 7.4
---------- ----------- ---------- -----------
Total cost of revenues 12.5 10.9 12.0 10.7
---------- ----------- ---------- -----------
Gross profit 87.5 89.1 88.0 89.3
Operating expenses:
Research and development 15.0 19.2 15.4 19.0
Sales and marketing 39.4 35.9 38.4 34.7
General and administrative 6.8 7.4 7.3 7.5
Amortization of intangibles 0.9 1.5 0.9 1.6
---------- ----------- ---------- -----------
Total operating expenses 62.1 64.0 62.0 62.8
---------- ----------- ---------- -----------
Income from operations 25.4 25.1 26.0 26.5
Interest and other income, net 3.1 2.7 3.0 2.7
---------- --------- ---------- -----------
Income before provision for income taxes 28.5 27.8 29.0 29.2
Provision for income taxes 10.5 10.5 10.7 11.1
---------- ----------- ---------- -----------
Net income 18.0% 17.3% 18.3% 18.1%
========== =========== ========== ===========
</TABLE>
REVENUES
Revenues for the second quarter of 1998 increased 78.2 percent over
revenues for the comparable period of 1997, and revenues for the first half of
1998 grew 73.1 percent from the comparable period of 1997. These increases were
attributable to increased licensing of the Company's products, increased sales
of services and support, as well as increased royalty revenue.
Product License Revenues. Product license revenues were $25.6 million and
$14.4 million for the second quarters of 1998 and 1997, respectively,
representing an increase of 77.5 percent. For the first half of 1998 and 1997,
product license revenues were $47.5 million and $27.4 million, respectively,
representing an increase of 73.3 percent. Product license revenue increased
primarily as a result of the continued market acceptance of the Company's
products. The Company recognizes product license revenues upon shipment if a
signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable,
except for sales to distributors, which are recognized upon sale by the
distributors to end-users. Product license revenues also include royalty
payments received from product sales by OEMs and are recognized upon receipt of
quarterly royalty reports from OEMs related to their product sales for the
previous quarter. Prior growth rates of the Company's product license revenues
are not indicative of future product license revenue growth rates and may not be
sustainable in the future.
Service and Support Revenues. Software service and support revenues were
$6.7 million and $3.7 million for the second quarters of 1998 and 1997,
respectively, representing an increase of 81.1 percent. For the first half of
1998 and 1997, software service and support revenues were $12.7 million and $7.3
million, respectively, representing an increase on 72.4 percent. This growth was
primarily due to the increase in the number of registered customers for the
Company's products electing to subscribe to support contracts, an increase in
the renewal of software support after the initial one-year term, an increase in
internal staffing for software support sales and increases in demand for
education and consulting services offered by the Company. Software support fees
for ongoing customer support and product updates are collected in advance and
are recognized ratably over the period of the contract. Revenues from education
and consulting services are recognized when such services are performed by the
Company. Prior growth rates of the Company's software service and support
revenues are not indicative of future software service and support revenue
growth rates and may not be sustainable in the future.
International product license revenues were $8.4 million and $4.7 million
for the second quarters of 1998 and 1997, respectively, representing an increase
of 77.1 percent. International product license revenues accounted for 32.7
percent of total product license revenues in the second quarters of 1998 and
1997. For the first half of 1998 and 1997, international product license
revenues were $17.1 million and $9.1 million, respectively, representing an
increase of 87.4 percent. International product license revenues accounted for
36.0 percent and 33.3 percent of total product license revenues in the first six
months of 1998 and 1997, respectively. The increase in international license
revenues was primarily attributable to an increase in the market acceptance of
the Company's products overseas, an increase in the number of international
sales offices, and an increase in the number of international distributors and
resellers marketing the Company's products. The majority of international sales
during these periods were made in Europe and Canada. The Company continues to
expand its international operations, which requires 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 expansions 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 $28.3 million, or 87.5 percent of total revenues, and
$16.2 million, or 89.1 percent of total revenues, for the second quarters of
1998 and 1997, respectively. Gross profit was $53.0 million, or 88.0 percent of
total revenues, and $31.1 million, or 89.3 of total revenues, for the first six
months of 1998 and 1997, respectively. The increase in total gross profit in
absolute dollars was primarily attributable to the higher levels of revenues
from all sources.
Gross profit from product license revenues increased 79.2 percent to $24.6
million in the second quarter of 1998 from $13.7 million in the comparable
period in 1997. For the first half of 1998, gross profit from product license
revenues increased 74.3 percent to $45.8 million from $26.3 million in the
comparable period in 1997. Gross profit as a percentage of product license
revenues was 96.1 percent and 95.2 percent in the second quarters of 1998 and
1997, respectively, and 96.3 percent and 95.8 percent in the first six months of
1998 and 1997, respectively. Gross profit from product license revenues consists
of product license revenues less the related cost, which consists primarily of
product media and documentation and packaging. The increase in gross profit from
product license revenues as a percentage of product license revenues was
primarily due to leveraging the costs of product licenses over a larger revenue
base.
Gross profit from software service and support revenues increased 51.4
percent to $3.7 million in the second quarter of 1998 from $2.4 million in the
second quarter of 1997. Gross profit as a percentage of software service and
support revenues was 54.9 percent and 65.6 percent in the second quarters of
1998 and 1997, respectively. Gross profit from software service and support
revenue increased 50.5 percent to $7.2 million in the first six months of 1998
from $4.8 million for the corresponding period in 1997. Gross profit as a
percentage of software service and support revenues was 56.9 percent and 65.2
percent in the first six months of 1998 and 1997, respectively. The decrease in
gross profit as a percentage of software service and support revenues was
primarily attributed to the Company's continued investment in developing new
services and support offerings, additional costs associated with supporting a
larger installed base of products, as well as additional costs to provide higher
support levels to customers. Costs of software service and support revenues
consist primarily of personnel-related costs incurred in providing telephone
support, consulting services, and training to customers, costs of providing
software updates and costs of education and consulting materials.
OPERATING EXPENSES
Research and Development. Research and development expenses increased 39.2
percent to $4.9 million in the second quarter of 1998 from $3.5 million in the
second quarter of 1997. Research and development expenses increased 40.3 percent
to $9.3 million in the first six months of 1998, compared to $6.6 million for
the first six months in 1997. The increase in research and development expenses
primarily reflects increased staffing and associated support for engineers
necessary to expand and enhance the Company's product line. As a percentage of
total revenues, research and development expenses decreased to 15.0 percent in
the second quarter of 1998 from 19.2 percent in the second quarter 1997 and
decreased to 15.4 percent in the first six months of 1998 from 19.0 percent for
the corresponding period in 1997, primarily as a result of research and
development expenses increasing less than the rate of increase in total
revenues. The Company believes that research and development expenses will
continue to increase in absolute dollars as it continues to invest in developing
new products, applications, and product enhancements.
Sales and Marketing. Sales and marketing expenses were $12.7 million and
$6.5 million in the second quarter of 1998 and 1997, respectively. Sales and
marketing expenses were $23.1 million and $12.1 million in the first six months
of 1998 and 1997, respectively. As a percentage of total revenues, sales and
marketing expenses increased to 39.4 percent in the second quarter of 1998 from
35.9 percent in the comparable 1997 period and increased to 38.4 percent in the
first six months of 1998 from 34.7 percent in the comparable 1997 period. The
increases were primarily attributable to the growth of the Company's sales force
and associated support personnel, increased marketing and promotional activities
and increased commission expenses. The Company believes that sales and marketing
expenses will increase in absolute dollars as the Company continues to expand
its sales and marketing staff.
General and Administrative. General and administrative expenses were $2.2
million and $1.3 million in the second quarter of 1998 and 1997, respectively.
General and administrative expenses were $4.4 million and $2.6 million for the
first six months of 1998 and 1997, respectively. As a percentage of total
revenues, general and administrative expenses decreased to 6.8 percent in the
second quarter of 1998 from 7.4 percent in the comparable 1997 period and
decreased to 7.3 percent for the first six months in 1998 from 7.5 percent in
the comparable 1997 period. The decreases, as a percentage of total revenues,
were primarily attributed to leveraging general and administrative expenses over
a larger revenue base. The Company expects that general and administrative
expenses will increase in absolute dollars from the second quarter of 1998 level
as the Company expands its staffing and other support operations.
Amortization of Intangibles. Amortization of intangibles was $280,000 for
both the second quarter of 1998 and 1997. Amortization of intangibles was
$559,000 for both the first half of 1998 and the first half of 1997. The related
intangibles were recorded following an acquisition in the first quarter of 1996.
The Company is amortizing these intangibles on a straight-line basis over five
years.
Interest and Other Income, Net. Interest and other income, net, was
$994,000 and $503,000 in the second quarter of 1998 and 1997, respectively.
Interest and other income, net, was $1.8 million and $945,000 in the first half
of 1998 and 1997, respectively. Interest and other income, net, primarily
represent interest income from funds available for investment. The increase in
interest income relates primarily to interest earned from the increased cash
provided by the Company's operations.
Provision for Income Taxes. The provision for income taxes for the second
quarter of 1998 was $3.4 million, compared to $1.9 million for the first quarter
of 1997. The provision for income taxes for the first six month of 1998 and 1997
were $6.5 million and $3.9 million, respectively. The effective tax rates for
the second quarters of 1998 and 1997 were 37 percent and 38 percent,
respectively. The effective tax rates for the first six months of 1998 and 1997
were 37 percent and 38 percent, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments totaled $93.3 million
at June 30, 1998 and represented 66 percent of total assets. Cash equivalents
are highly liquid investments with original maturities of ninety days or less.
Investments consist mainly of short-term and long-term municipal securities. At
June 30, 1998, the Company had no long-term debt and stockholders' equity was
$113.2 million.
Cash generated from operations and sales of common stock has been
sufficient to finance the Company's operations to date. Cash and cash
equivalents increased $20.4 million during the first six months of 1998. Net
cash provided by operating activities of $21.3 million was derived primarily
from net income of $11.0 million, changes in operating assets and liabilities of
$3.0 million and $4.7 million related to the tax benefit from the exercise of
stock options. Cash used in investing activities of $5.6 million primarily
reflected the purchases of available-for-sale securities, net of, maturities and
sales of available-for-sale securities, of $1.5 million and the acquisition of
property and equipment of $4.0 million. Cash from financing activities of $4.7
million reflects proceeds received from the issuance of common stock under the
Company's stock plans.
The Company believes its current cash balances and cash flow from
operations, if any, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies will need to be upgraded to comply with such
"Year 2000" requirements. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Management does not anticipate that the Company
will incur significant operating expenses or be required to invest heavily in
computer systems improvements to be Year 2000 compliant. Although the Company
believes its software products are Year 2000 compliant, there can be no
assurance that the Company's software products contain all the necessary
software routines and programs for the accurate calculation, display, storage
and manipulation of data involving dates. If the Company's software products do
not contain all the necessary software routines and programs for the accurate
calculation, display, storage and manipulation of data involving dates, it would
have a material adverse effect on the Company's business, operating results and
financial condition. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products such as those offered by the
Company. The occurrence of any of the foregoing could have a material adverse
effect on the Company's business, operating results or financial condition.
Although the Company believes the software and hardware it uses internally
comply with Year 2000 requirements and is not aware of any material operational
issues or costs associated with preparing its internally used software and
hardware for the Year 2000, there can be no assurances that the Company will not
experience serious, unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems. The occurrence of any of the foregoing could have a material adverse
effect on the Company's business, operating results or financial condition.
RISK FACTORS
In addition to the other information in this Report, 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,
but not limited to, 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 to domestic distributors until the products are sold
through to end-users. As a result, product license revenues in any quarter are
substantially dependent on orders booked and shipped and on sell-through to
end-users in that quarter. Revenues for any future quarter are not predictable
with any significant degree of certainty. Product licenses and software services
and support revenues are difficult to forecast because the network storage
management market is rapidly evolving and the Company's sales cycle varies
substantially from customer to customer. The Company has become increasingly
dependent upon the larger enterprise license transactions to corporate
customers, which often include product license, service and support components.
The Company's operating results are sensitive to the timing of such orders and
are subject to purchasing cycles and budgetary constraints of the customer,
which are difficult to predict. Due to the lengthier sales cycle and the larger
size of enterprise license transactions, if orders forecasted for a particular
quarter are not realized in that quarter, the Company's operating results for
that quarter may be adversely affected. Royalty revenues are substantially
dependent upon product license sales by OEMs of their products that incorporate
the Company's software. Accordingly, royalty revenues are subject to OEMs'
product cycles, which are also difficult to predict. Royalty 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 quarters 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.
<PAGE>
Product Concentration
The Company currently derives a substantial majority of its revenues from
its NetWorker software products and related services, and the Company expects
that revenues from NetWorker will continue to account for a majority 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 and licensing NetWorker or any new products,
applications, product enhancements and related services.
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. The Company's major competitors on the Novell NetWare and
Windows NT platforms include Computer Associates (Cheyenne Software) and Seagate
(Palindrome and Arcada); on the Sun Solaris/SunOS platform include Computer
Associates (Legent/Lachman), EMC2 (Epoch), Peripheral Devices (Delta
Microsystems), Software Moguls, Spectra Logic and Veritas; on the AIX platform
include IBM; and on the HP-UX platform include Hewlett Packard. In the future,
as the Company enters new markets, the Company expects that such markets will
have additional, market-specific competitors. In addition, many of the Company's
existing competitors are broadening their platform coverage. The Company also
expects increased competition from systems and network management companies,
especially those that have historically focused on the mainframe market and are
broadening their focus to include the client/server market. In addition, because
there are relatively low barriers to entry in the software market, the Company
expects additional competition from other established and emerging companies.
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 and are expected to occur in the future.
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 or 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's business, operating results and financial
condition will be materially adversely affected. The Company currently has plans
to introduce and market several potential new products in the next twelve
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, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
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.
Risks Associated with Reliance on Enterprise License Transactions; Resellers;
Strategy of Expanding OEM Channel
An integral part of the Company's strategy is to pursue larger enterprise
license transactions with corporate customers. As there has been an increasing
number of larger enterprise license transactions, which may often include
product license, service and support components, the Company's operating results
are sensitive to the timing of such orders. These transactions are typically
difficult to manage and predict. The execution of such larger enterprise license
transactions typically involves significant technical evaluation and commitment
of capital and other resources, with the delays frequently associated with
customers' internal procedures, including delays to approve large capital
expenditures, to implement the deployment of new technologies within their
networks, and to test and accept new technologies that affect key operations.
For these and other reasons, the sales cycle associated with the completing an
enterprise license transaction is typically lengthy, generally lasting three to
six months, is subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, that are beyond the
Company's control, and varies substantially from transaction to transaction. Due
to the lengthy sales cycle and the large size of certain transactions, if orders
forecasted for a specific transaction for a particular quarter are not realized
in that quarter, the Company's operating results for that quarter may be
adversely affected. There can be no assurance that the Company will continue to
complete or increase the number of such larger enterprise license transactions,
and the inability to do so could materially adversely affect the Company's
business, operating results and financial condition.
The Company relies significantly on its distributors, systems integrators
and value added resellers (collectively, "resellers") for the marketing and
distribution of its products. The Company's agreements with resellers are
generally not exclusive and in many cases may be terminated by either party
without cause. Many of the Company's resellers carry product lines that are
competitive with those of the Company. There can be no assurance that these
resellers will give a high priority to the marketing of the Company's products
(they may, in fact, give a higher priority to other products, including the
products of competitors) or that they will continue to carry the Company's
products. Events or occurrences of this nature could materially adversely affect
the Company's business, operating results and financial condition. The Company's
results of operations could also be materially adversely affected by changes in
reseller inventory strategies, which could occur rapidly, and in many cases, may
not be related to end user demand. There can be no assurance that the Company
will retain any of its current resellers, nor can there be any assurance that
the Company will be successful in recruiting replacement or new organizations to
represent it. Any such changes in the Company's distribution channels could
materially adversely affect the Company's business, operating results and
financial condition.
The Company's strategy is also to increase the proportion of the Company's
customers licensed through OEMs. The Company is currently investing, and intends
to continue to invest, resources to develop this channel, which could materially
adversely affect the Company's operating margins. There can be no assurance that
the Company will be successful in its efforts to increase the revenues
represented by this channel. The Company is dependent upon its OEMs' ability to
develop new products, applications and product enhancements on a timely and
cost-effective basis that will meet changing customer needs and respond to
emerging industry standards and other technological changes. There is no
assurance that the Company's OEMs will effectively meet these technological
challenges. These OEMs are not within the control of the Company, may
incorporate into their products the technologies of other companies in addition
to those of the Company and are not obligated to purchase products from the
Company. In addition, the Company's OEMs generally have exclusive rights to the
Company's technology on their respective platforms, subject to certain minimum
royalty obligations. There can be no assurance that any OEM will continue to
carry the Company's products, and the inability to recruit, or the loss of,
important OEMs could materially adversely affect the Company's business,
operating results and financial condition.
International Operations; Risks Associated with International Sales
The Company believes that its continued growth and profitability will
require further expansion of its international operations. In order to
successfully expand international sales, the Company must establish additional
foreign operations, hire additional personnel and recruit additional
international resellers. This will require significant management attention and
financial resources and could materially adversely affect the Company's
operating margins. 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. In addition, there
can be no assurance that the Company will be able to maintain or increase
international market demand for the Company's products. The Company's
international sales are currently denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in those markets. In some markets, localization of the Company's products is
essential to achieve market penetration. The Company may incur substantial costs
and experience delays in localizing its products, and there can be no assurance
that any localized product will ever generate significant revenues. In addition,
the Company relies significantly on its distributors and other resellers in
international sales efforts. Since these distributors and other resellers are
not employees of the Company and typically do not offer the Company's products
exclusively, there can be no assurance that they will continue to market the
Company's products. Additional risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, lack of acceptance of localized
products, if any, in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences including restrictions on the repatriation of earnings, and the
burdens of complying with a wide variety of foreign laws. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's business,
operating results and financial condition.
Management of Expanding Operations
The Company has recently experienced a period of significant expansion of
its operations that has placed a significant strain upon its management systems
and resources. In addition, the Company has recently hired a significant number
of employees, and plans to further increase its total headcount. The Company
also plans to expand the geographic scope of its customer base and operations.
This expansion has resulted and will continue to result in substantial demands
on the Company's management resources. From time to time, the Company receives
customer complaints about the timeliness and accuracy of customer support.
Although the Company plans to add customer support personnel in order to address
current customer support needs and intends to closely monitor progress in this
area, there can be no assurance that these efforts will be successful. If the
Company's efforts are not successful, the Company's business, operating results
and financial condition could be materially adversely affected. The Company's
ability to compete effectively and to manage future expansion of its operations,
if any, will require the Company to continue to improve its financial and
management controls, reporting systems and procedures on a timely basis and
expand, train and manage its employee work force. There can be no assurance that
the Company will be able to do so successfully. The Company's failure to do so
could have a material adverse effect upon the Company's business, operating
results and financial condition.
In addition, on August 6, 1998, the Company consummated its acquisition of
Software Moguls, Inc. ("SMI"), a developer of advanced backup-retrieval products
for the Windows NT and UNIX environments based in Eden Prairie, Minnesota with
32 employees. The Company expects that it will face numerous challenges in
integrating the SMI operations and employees into the Company. If such
integration is not successful, the Company's business, operating results and
financial condition could be materially adversely affected.
Dependence Upon Key Personnel
The Company's future performance also depends in significant part upon the
continued service of its key technical and senior management personnel, none of
whom is bound by an employment agreement. The loss of the services of one or
more of the Company's officers or other key employees could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's future success also depends on its continuing ability
to attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical and managerial employees or that it can
attract, assimilate or retain other highly qualified technical and managerial
personnel in the future.
Dependence on Growth in the Network Storage Management Market; General Economic
and Market Conditions
All of the Company's business is in the network storage management market,
which is still an emerging market. The Company's future financial performance
will depend in large part on continued growth in the number of organizations
adopting network storage management solutions for their client/server computing
environments. There can be no assurance that the market for network storage
management will continue to grow. If the network storage management market fails
to grow or grows more slowly than the Company currently anticipates, the
Company's business, operating results and financial condition would be
materially adversely affected. During recent years, segments of the computer
industry have experienced significant economic downturns characterized by
decreased product demand, production overcapacity, price erosion, work slowdowns
and layoffs. The Company's operations may in the future experience substantial
fluctuations from period-to-period as a consequence of such industry patterns,
general economic conditions affecting the timing of orders from major customers,
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
operating results or financial condition.
Dependence on Proprietary Technology; Risks of Infringement
The Company depends significantly upon proprietary technology. The Company
relies on a combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials under patent, trade secret and copyright laws, which afford
only limited protection. There can be no assurance that the Company will develop
proprietary products or technologies that are patentable, that any issued patent
will provide the Company with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's ability to do business. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In licensing its products
(other than in enterprise license transactions), the Company relies primarily on
"shrink wrap" licenses that are not signed by licensees, and, therefore, such
licenses may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.
There have also been substantial amounts of litigation in the software
industry regarding intellectual property rights. The Company has from time to
time received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
Product Liability
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. In licensing its products (other than in enterprise license
transactions), the Company relies primarily on "shrink wrap" licenses that are
not signed by licensees, and, therefore, such licenses may be unenforceable
under the laws of certain jurisdictions. As a result of these and other factors,
the limitation of liability provisions contained in the Company's license
agreements may not be effective. The Company's products can be used to manage
data critical to organizations, and, as a result, the sale and support of
products by the Company may entail the risk of product liability claims. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies will need to be upgraded to comply with such
"Year 2000" requirements. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Management does not anticipate that the Company
will incur significant operating expenses or be required to invest heavily in
computer systems improvements to be Year 2000 compliant. Although the Company
believes its software products are Year 2000 compliant, there can be no
assurance that the Company's software products contain all the necessary
software routines and programs for the accurate calculation, display, storage
and manipulation of data involving dates. If the Company's software products do
not contain all the necessary software routines and programs for the accurate
calculation, display, storage and manipulation of data involving dates, it would
have a material adverse effect on the Company's business, operating results and
financial condition. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products such as those offered by the
Company. The occurrence of any of the foregoing could have a material adverse
effect on the Company's business, operating results or financial condition.
Although the Company believes the software and hardware it uses internally
comply with Year 2000 requirements and is not aware of any material operational
issues or costs associated with preparing its internally used software and
hardware for the Year 2000, there can be no assurances that the Company will not
experience serious, unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems. The occurrence of any of the foregoing could have a material adverse
effect on the Company's business, operating results or financial condition.
Possible Volatility of Stock Price
The trading price of the Company's common stock has been subject to wide
fluctuations. The trading price of the Company's common stock could be subject
to wide fluctuations in the future 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.
PART II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 14, 1998 in Palo
Alto, California. Of the 18,143,785 shares outstanding as of the record date,
16,332,976 shares were present or represented by proxy at the meeting. The
following matters were submitted to a vote of security holders:
(1) To elect the following to serve as Directors of the Company:
Votes For Votes Abstaining
Louis C. Cole 16,019,278 313,698
Eric A. Benhamou 16,019,205 313,771
Kevin Fong 16,019,289 313,687
David N. Strohm 16,019,289 313,687
Phillip E. White 15,719,543 613,433
(2) To approve an amendment to the Company's Certificate of Incorporation
to increase the number of shares of Common Stock that the Company is
authorized to issue from 50,000,000 to 100,000,000:
Votes for: 15,607,780
Votes against: 722,488
Votes abstaining: 2,708
(3) To approve an amendment to the Company's 1995 Stock Option/Stock
Issuance Plan, including an increase to the number of shares available
for issuance:
Votes for: 7,645,423
Votes against: 6,177,013
Votes abstaining: 7,962
(4) To ratify the Company's appointment of PricewaterhouseCoopers LLP as
independent accountants for the Company for the fiscal year ending
December 31, 1998:
Votes for: 16,331,738
Votes against: 380
Votes abstaining: 1,158
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 (1) Amended and Restated Certificate of Incorporation of the
Registrant, as amended to date 27.1 Financial Data Schedule
(1) Incorporated by reference to the registrant's definitive Proxy
Statement for the Annual Meeting of Stockholders, dated April 6, 1998.
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the quarter ended June 30, 1998.
<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: August 10, 1998 /s/ Stephen C. Wise
-------------------
Stephen C. Wise
V.P. of Finance and Chief Financial Officer
(Duly authorized officer and principal
financial and accounting officer)
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