<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): October 25, 1998
LEGATO SYSTEMS, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-26130 94-3077394
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
</TABLE>
3210 PORTER DRIVE, PALO ALTO, CALIFORNIA 94304
(Address of Principal Executive Offices) (Zip Code)
Company's telephone number, including area code: (415) 812-6000
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS
Legato Systems, Inc. ("Legato") has agreed to a strategic combination with
Qualix Group, Inc., a Delaware corporation ("Qualix"). Pursuant to an
Agreement and Plan of Reorganization, dated as of October 25, 1998 by and
among Legato, Qualix and Hat Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Legato ("Merger Sub"), at the effective time of the
combination, Merger Sub will merge with and into Qualix and Qualix will become
a wholly-owned subsidiary of Legato (the "Merger"). In the transaction, each
holder of an outstanding share of Qualix Common Stock will receive a fraction
of a share of Common Stock of Legato equal to the Exchange Ratio. The
"Exchange Ratio" equals a number, the numerator of which is (i) 1,721,000
shares of Common Stock of Legato and the denominator of which is equal to (ii)
the sum of (A) the aggregate number of shares of Qualix Common Stock
outstanding at the effective time of the Merger and (B) the aggregate number
of shares of Qualix Common Stock issuable upon exercise of all outstanding
options to acquire Qualix Common Stock at the effective time of the Merger.
Legato will also assume all outstanding Qualix stock options in the
transaction. As of October 22, 1998, Qualix had outstanding approximately 10.7
million shares of Common Stock and 1.4 million options to acquire Common
Stock.
The combination, which is expected to close in late February 1999, is
expected to be accounted for as a tax-free pooling of interests and is subject
to the approval of Qualix's stockholders. Legato has received the agreement of
certain Qualix stockholders holding approximately 20% of Qualix's Common Stock
to vote in favor of the transaction, and an option from Qualix to acquire
19.9% of Qualix's outstanding Common Stock which is exercisable under certain
circumstances. Louis C. Cole, the Chairman, President and Chief Executive
Officer of Legato, has also served as a director of Qualix since October 21,
1997.
Further details regarding this announcement are contained in Legato's press
release dated October 26, 1998, attached as an exhibit hereto and incorporated
by reference herein.
2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed consolidated financial
statements give effect to the proposed Merger between Legato and Qualix
accounted for on a pooling-of-interests basis and are based on each company's
respective historical consolidated financial statements and notes thereto,
which are contained in prior filings on Forms 10-K and 10-Q with the
Securities and Exchange Commission ("Prior Filings") with regard to Legato,
and included elsewhere herein with regard to Qualix. The pro forma combined
condensed balance sheets assume the Merger occurred at the respective balance
sheet dates. The pro forma combined condensed statements of operations assume
the Merger occurred at the beginning of the earliest year presented.
The financial position and results of operations of Legato for the years
ended December 31, 1995, 1996 and 1997 have been derived from Legato's
historical financial statements and at and for the nine months ended September
30, 1997 and 1998 from unaudited historical financial statements contained in
Prior Filings. Qualix has historically reported its operating results on the
basis of a fiscal year ended June 30. The financial position and results of
operations of Qualix for the twelve months ended December 31, 1997 and at and
for the nine months ended September 30, 1997 and 1998 are unaudited. The
results of operations of Qualix for the years ended June 30, 1996 and 1997
have been derived from Qualix's historical audited consolidated financial
statements included elsewhere herein. The pro forma financial statements
should be read in conjunction with the accompanying notes thereto and with the
historical financial statements and the related notes thereto of Legato
contained in Prior Filings and Qualix included elsewhere herein.
Legato and Qualix estimate that they will incur direct transaction costs of
approximately $2,500,000 associated with the Merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the Merger. It is expected that following the
Merger, Legato and Qualix will incur an additional significant charge to
operations, which is not currently reasonably estimable, to reflect costs
associated with integrating the two companies. This additional significant
charge has not been reflected in the pro forma combined condensed balance
sheet or the pro forma combined condensed statements of operations. There can
be no assurance that Legato and Qualix will not incur additional charges to
reflect costs associated with the Merger or that management will be successful
in its efforts to integrate the operations of the two companies.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated at the beginning of the
earliest period presented, nor is it necessarily indicative of future
operating results or financial position.
3
<PAGE>
LEGATO SYSTEMS, INC.
AND QUALIX GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(amounts in thousands)
<TABLE>
<CAPTION>
LEGATO QUALIX PRO FORMA PRO FORMA
SYSTEMS, INC. GROUP, INC. ADJUSTMENTS COMBINED
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 64,716 $ 3,614 $ 68,330
Short-term investment......... 29,409 5,514 34,923
Accounts receivable, net...... 30,597 4,795 35,392
Other current assets.......... 4,571 954 5,525
Deferred tax asset............ 4,099 -- $1,000(5) 5,099
-------- -------- ------ --------
Total current assets......... 133,392 14,877 1,000 149,269
Long-term investments.......... 9,206 -- 9,206
Property and equipment, net.... 15,164 3,641 18,805
Intangible assets, net......... 2,540 -- 2,540
Other assets................... 515 -- 515
Long-term deferred tax asset... -- -- 3,000(5) 3,000
-------- -------- ------ --------
Total assets................. $160,817 $ 18,518 $4,000 $183,335
======== ======== ====== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, accrued
liabilities and current
portion of long-term
obligations.................. $ 16,373 $ 3,875 $2,500(4) $ 22,748
Deferred revenues............. 16,885 2,424 19,309
-------- -------- ------ --------
Total current liabilities.... 33,258 6,299 2,500 42,057
Deferred tax liability......... 531 -- 531
Long-term obligations.......... -- 91 91
Stockholders' equity:
Capital stock................. 81,919 25,233 107,152
Retained earnings (accumulated
deficit)..................... 45,109 (13,105) 1,500 33,504
-------- -------- ------ --------
Total stockholders' equity... 127,028 12,128 1,500 140,656
-------- -------- ------ --------
Total liabilities and
stockholders' equity....... $160,817 $ 18,518 $4,000 $183,335
======== ======== ====== ========
</TABLE>
See notes to unaudited proforma combined condensed financial statements.
4
<PAGE>
LEGATO SYSTEMS, INC.
AND QUALIX GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
LEGATO SYSTEMS, INC. QUALIX GROUP, INC. PRO FORMA ADJUSTMENTS
----------------------- ----------------------------- -------------------------------
TWELVE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
----------------------- ---------------- ------------ -------------------------------
1995 1996 1997 1996 1997 1997 1995 1996 1997
------- ------- ------- ------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product.......... $27,262 $46,500 $66,356 $14,325 $27,204 $29,058
Service and
support......... 5,269 10,274 17,529 2,210 4,942 5,556
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues.. 32,531 56,774 83,885 16,535 32,146 34,614 -- -- --
Cost of revenues:
Product ......... 1,450 2,087 2,888 7,421 11,027 8,951
Service and
support......... 2,583 3,478 6,811 1,021 1,871 2,037
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues....... 4,033 5,565 9,699 8,442 12,898 10,988 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit..... 28,498 51,209 74,186 8,093 19,248 23,626 -- -- --
Operating
expenses:
Research and
development..... 4,702 9,517 14,753 620 2,272 3,073
Sales and
marketing....... 11,588 18,130 29,289 5,101 11,280 16,305
General and
administrative.. 4,633 7,002 7,981 1,920 2,878 3,786
Amortization of
intangibles..... -- 1,097 1,117 -- -- --
In-process
research and
development..... -- 1,849 -- 740 -- --
Merger expenses.. -- -- -- -- 595 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 20,923 37,595 53,140 8,381 17,025 23,164 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
from
operations...... 7,575 13,614 21,046 (288) 2,223 462 -- -- --
Other income,
net............. 1,187 1,812 2,162 846 890 1,319
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
provision for
income taxes.... 8,762 15,426 23,208 558 3,113 1,781 -- -- --
Provision for
income taxes.... 2,729 6,504 9,196 -- 406 405 $ 223 (5) $ 839 (5) $ 145 (5)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income....... $ 6,033 $ 8,922 $14,012 $ 558 $ 2,707 $ 1,376 $ (223) $ (839) $ (145)
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per
share--basic.... $ 0.30 $ 0.27 $ 0.40 $ 0.21 $ 0.41 $ 0.14
======= ======= ======= ======= ======= =======
Net income per
share--diluted.. $ 0.20 $ 0.24 $ 0.37 $ 0.07 $ 0.29 $ 0.13
======= ======= ======= ======= ======= =======
Shares used in
per share
calculations--
basic........... 20,174 33,348 35,070 2,665 6,620 9,596 (2,287)(2) (5,679)(2) (8,233)(2)
======= ======= ======= ======= ======= ======= ======= ======= =======
Shares used in
per share
calculations--
diluted......... 30,469 37,793 37,976 8,177 9,312 10,439 (7,015)(2) (7,989)(2) (8,956)(2)
======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
PRO FORMA COMBINED
------------------------
YEAR ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues:
Product.......... $41,587 $73,704 $ 95,414
Service and
support......... 7,479 15,216 23,085
------- ------- --------
Total revenues.. 49,066 88,920 118,499
Cost of revenues:
Product ......... 8,871 13,114 11,839
Service and
support......... 3,604 5,349 8,848
------- ------- --------
Total cost of
revenues....... 12,475 18,463 20,687
------- ------- --------
Gross profit..... 36,591 70,457 97,812
Operating
expenses:
Research and
development..... 5,322 11,789 17,826
Sales and
marketing....... 16,689 29,410 45,594
General and
administrative.. 6,553 9,880 11,767
Amortization of
intangibles..... -- 1,097 1,117
In-process
research and
development..... 740 1,849 --
Merger expenses.. -- 595 --
------- ------- --------
Total operating
expenses....... 29,304 54,620 76,304
------- ------- --------
Income (loss)
from
operations...... 7,287 15,837 21,508
Other income,
net............. 2,033 2,702 3,481
------- ------- --------
Income before
provision for
income taxes.... 9,320 18,539 24,989
Provision for
income taxes.... 2,952 7,749 9,746
------- ------- --------
Net income....... $ 6,368 $10,790 $ 15,243
======= ======= ========
Net income per
share--basic.... $ 0.31 $ 0.31 $ 0.42
======= ======= ========
Net income per
share--diluted.. $ 0.20 $ 0.28 $ 0.39
======= ======= ========
Shares used in
per share
calculations--
basic........... 20,552 34,289 36,433
======= ======= ========
Shares used in
per share
calculations--
diluted......... 31,631 39,116 39,459
======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
5
<PAGE>
LEGATO SYSTEMS, INC.
AND QUALIX GROUP INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
LEGATO PRO FORMA PRO FORMA
SYSTEMS, INC. QUALIX GROUP, INC. ADJUSTMENTS COMBINED
----------------- ------------------- NINE MONTHS NINE MONTHS
NINE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------- ------------------- ----------------
1997 1998 1997 1998 1997 1998 1997 1998
-------- -------- --------- --------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $ 45,572 $ 76,874 $ 21,290 $ 14,812 $66,862 $ 91,686
Services and support... 12,228 21,764 4,032 4,687 16,260 26,451
-------- -------- --------- --------- ------- ------- ------- --------
Total revenues......... 57,800 98,638 25,322 19,499 -- -- 83,122 118,137
Cost of revenues:
Product................ 1,938 2,917 6,902 4,248 8,840 7,165
Services and support... 4,681 9,169 1,521 1,700 6,202 10,869
-------- -------- --------- --------- ------- ------- ------- --------
Total cost of
revenues.............. 6,619 12,086 8,423 5,948 -- -- 15,042 18,034
Gross profit............ 51,181 86,552 16,899 13,551 -- -- 68,080 100,103
Operating expenses:
Research and
development........... 10,483 15,567 2,142 2,863 12,625 18,430
Sales and marketing.... 20,116 36,052 10,798 15,321 30,914 51,373
General and
administrative........ 4,785 7,434 2,628 3,786 7,413 11,220
Amortization of
intangibles........... 838 838 -- -- 838 838
Merger expenses........ -- 645 -- -- -- 645
-------- -------- --------- --------- ------- ------- ------- --------
Total operating
expenses.............. 36,222 60,536 15,568 21,970 -- -- 51,790 82,506
-------- -------- --------- --------- ------- ------- ------- --------
Income (loss) from
operations............. 14,959 26,016 1,331 (8,419) -- -- 16,290 17,597
Other income, net....... 1,493 2,994 1,107 475 2,600 3,469
-------- -------- --------- --------- ------- ------- ------- --------
Income (loss) before
provision for income
taxes.................. 16,452 29,010 2,438 (7,944) -- -- 18,890 21,066
Provision for income
taxes.................. 6,254 10,883 405 -- $ 408 (5) $(3,177)(5) 7,067 7,706
-------- -------- --------- --------- ------- ------- ------- --------
Net income (loss)....... $ 10,198 $ 18,127 $ 2,033 $ (7,944) $ (408) $ 3,177 $11,823 $ 13,360
======== ======== ========= ========= ======= ======= ======= ========
Net income (loss) per
share--basic........... $ 0.29 $ 0.49 $ 0.22 $ (0.76) $ 0.33 $ 0.35
======== ======== ========= ========= ======= ========
Net income (loss) per
share--diluted......... $ 0.27 $ 0.46 $ 0.20 $ (0.76) $ 0.30 $ 0.32
======== ======== ========= ========= ======= ========
Shares used in per share
calculations--basic.... 34,873 36,693 9,357 10,478 (8,028)(2) (8,989)(2) 36,202 38,182
======== ======== ========= ========= ======= ======= ======= ========
Shares used in per share
calculations--diluted.. 37,710 39,813 10,422 10,478 (8,941)(2) (8,963)(2) 39,191 41,328
======== ======== ========= ========= ======= ======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
6
<PAGE>
LEGATO SYSTEMS AND
QUALIX GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma combined condensed financial statements combine the
financial position of Legato and Qualix at September 30, 1998 and the results
of Legato's and Qualix's operations for the year ended December 31, 1997 and
the twelve months ended December 31, 1997, respectively, the years ended
December 31, 1996 and June 30, 1997, respectively, the years ended December
31, 1995 and June 30, 1996, respectively, and the nine months ended September
30, 1997 and 1998. Qualix's results of operations for the six months ended
June 30, 1997 are included in the pro forma combined results of operations for
both the years ended December 31, 1997 and 1996. Qualix's revenues and net
income for the six months ended June 30, 1997 were approximately $17.1 million
and $2.0 million, respectively. Upon consummation of the Merger, actual
periods combined may differ from those included in the pro forma combined
condensed financial statements.
2. UNAUDITED PRO FORMA COMBINED NET INCOME (LOSS) PER SHARE
The unaudited pro forma combined net income (loss) per share is based on the
combined weighted average number of common and common equivalent shares of
Legato common stock and Qualix common stock for each period based upon the
Exchange Ratio of 0.1421 shares of Legato common stock for each share of
Qualix common stock (based on the number of shares of Qualix common stock and
options to purchase shares of Qualix common stock outstanding as of October
25, 1998, the date of signing of the Reorganization Agreement). In computing
pro forma diluted earnings per share for 1997 and the nine months ended
September 30, 1998, however, dilutive common stock equivalent shares, which
were excluded from the calculation of Qualix's net loss per share, were
included in the pro forma combined net income per share as their impact would
have been dilutive.
3. PRO FORMA UNAUDITED COMBINED SHARES OUTSTANDING
These unaudited pro forma combined condensed financial statements reflect
the issuance of 1,721,000 shares of Legato common stock in exchange for an
aggregate of 12,112,927 shares of Qualix common stock, based on the
outstanding Qualix common stock and potential common shares as of October 25,
1998.
The following table details the pro forma share issuance in connection with
the Merger:
<TABLE>
<S> <C>
Qualix common stock outstanding and potential common shares as
of October 25, 1998........................................... 12,112,927
Assumed Exchange Rate.......................................... 0.1421
----------
Number of shares of Legato common stock exchanged for Qualix
common stock.................................................. 1,721,000
Total number of shares of Legato common stock as of October 25,
1998.......................................................... 37,336,785
----------
Number of Legato common shares outstanding after completion of
the Merger.................................................... 39,057,785
==========
</TABLE>
7
<PAGE>
LEGATO SYSTEMS AND
QUALIX GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4. TRANSACTION COSTS AND MERGER RELATED EXPENSES
Legato and Qualix estimate they will incur direct transaction costs of
approximately $2,500,000 associated with the Merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the Merger.
Legato and Qualix also expect that following the Merger, Legato and Qualix
will incur an additional significant charge to operations, which is not
currently reasonably estimable, to reflect costs associated with integrating
the two companies. This additional charge has not been reflected in the pro
forma combined condensed balance sheet or the pro forma combined condensed
statements of operations. There can be no assurance that Legato and Qualix
will not incur additional charges to reflect costs associated with the Merger
or that management will be successful in its efforts to integrate the
operations of the two companies.
The unaudited pro forma combined condensed balance sheet gives effect to
estimated direct transaction costs as if such costs and expenses had been
incurred as of September 30, 1998. These costs and expenses are assumed to be
nondeductible for income tax purposes. These costs and expenses are not
reflected in the unaudited pro forma combined condensed statements of
operations.
5. PRO FORMA ADJUSTMENTS
Qualix has previously provided a valuation allowance for its net deferred
tax assets related primarily to loss carryforwards generated in periods since
inception until 1995 and in its fiscal 1999. Legato has determined that
estimated combined taxable income is sufficient to conclude that such net
deferred tax assets would be realized. The extent to which the loss
carryforwards can be used to offset future taxable income may be limited,
depending on the extent of ownership changes resulting from this business
combination. Accordingly, a pro forma adjustment has been made to eliminate
the valuation allowance during Qualix's year ended June 30, 1995. As this
period is not included in the pro forma combined condensed statement of
operations, it only impacts the combined condensed balance sheet as of June
30, 1995.
In addition, pro forma adjustments have been made to eliminate the benefit
of recognition of the net operating loss carryforward in the pro forma
combined condensed financial statements by increasing income tax expense by
$223,000, $839,000, $145,000, and $408,000 for the years ended June 30, 1996,
June 30, 1997, the twelve-month period ended December 31, 1997, and the nine-
month period ended September 30, 1997, respectively, using the statutory tax
rate. Pro forma adjustments reduce income tax expense by $3,177,000 for the
nine-month period ended September 30, 1998, using the statutory tax rate.
8
<PAGE>
INDEX TO QUALIX GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUALIX GROUP, INC.
Independent Auditors' Report............................................. 10
Consolidated Balance Sheets at June 30, 1998 and 1997.................... 11
Consolidated Statements of Operations for the Years Ended June 30, 1998,
1997 and 1996........................................................... 12
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1998, 1997 and 1996................................................. 13
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996........................................................... 14
Notes to Consolidated Financial Statements............................... 15
Condensed Consolidated Balance Sheets at September 30, 1998 (unaudited)
and June 30, 1998....................................................... 27
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and 1997 (unaudited)........................... 28
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1998 and 1997 (unaudited)........................... 29
Notes to Condensed Consolidated Financial Statements (unaudited)......... 30
</TABLE>
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Qualix
Group, Inc. and subsidiaries ("the Company") as of June 30, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements, based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Qualix Group, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
San Jose, California
July 23, 1998
10
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 6,869 $ 9,617
Temporary investments..................................... 5,005 9,541
Accounts receivable, less allowance for doubtful accounts
($537 in 1998 and $386 in 1997).......................... 4,236 5,147
Inventories............................................... 142 194
Prepaid expenses.......................................... 910 276
-------- -------
Total current assets.................................... 17,162 24,775
Property and equipment, net................................. 3,772 1,559
-------- -------
Total assets............................................ $ 20,934 $26,334
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... 851 1,280
Accrued liabilities....................................... 2,743 2,748
Deferred revenue and advances............................. 2,856 1,795
Income taxes payable...................................... -- 91
Current portion of long-term obligations.................. 258 126
-------- -------
Total current liabilities............................... 6,708 6,040
Long-term obligations....................................... 87 191
Commitments and contingencies (Note 7)
Stockholders' Equity:
Convertible preferred stock--par value $0.001; 5,000,000
shares authorized; shares outstanding: none in 1998 or
1997..................................................... -- --
Common stock--par value $0.001; 20,000,000 shares
authorized; shares outstanding: 10,635,456 shares in 1998
and 10,305,605 shares in 1997............................ 25,469 24,862
Notes receivable from sale of stock....................... (345) (175)
Net unrealized loss on available-for-sale securities...... -- (43)
Accumulated deficit....................................... (10,985) (4,541)
-------- -------
Total stockholders' equity.............................. 14,139 20,103
-------- -------
Total liabilities and stockholders' equity.............. $ 20,934 $26,334
======== =======
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Reliability software............................... $16,034 $16,868 $ 8,965
Other products..................................... 8,027 10,336 5,360
Support, maintenance and consulting................ 5,954 4,942 2,210
------- ------- -------
Total revenue.................................... 30,015 32,146 16,535
------- ------- -------
Cost of revenue:
Cost of reliability software....................... 976 3,738 3,640
Cost of other products............................. 5,758 7,289 3,781
Cost of support, maintenance and consulting........ 2,103 1,871 1,021
------- ------- -------
Total cost of revenue............................ 8,837 12,898 8,442
------- ------- -------
Gross profit......................................... 21,178 19,248 8,093
Operating expenses:
Sales and marketing................................ 19,878 11,280 5,101
General and administrative......................... 4,724 2,878 1,920
Research and development........................... 3,823 2,272 620
Merger expenses.................................... -- 595 --
Purchased in-process technology.................... -- -- 740
------- ------- -------
Total operating expenses......................... 28,425 17,025 8,381
------- ------- -------
Income (loss) from operations........................ (7,247) 2,223 (288)
Other income (expense):
Gain on sale of investments........................ 2 528 763
Interest income.................................... 830 403 88
Interest expense................................... (29) (41) (5)
------- ------- -------
Total other income............................... 803 890 846
------- ------- -------
Income (loss) before income taxes.................... (6,444) 3,113 558
Provision for income taxes........................... -- 406 --
------- ------- -------
Net income (loss)................................ $(6,444) $ 2,707 $ 558
======= ======= =======
Earnings (loss) per share:
Basic.............................................. $ (0.62) $ 0.41 $ 0.21
======= ======= =======
Diluted............................................ $ (0.62) $ 0.29 $ 0.07
======= ======= =======
Shares used in per share computation:
Basic.............................................. 10,336 6,620 2,665
======= ======= =======
Diluted............................................ 10,336 9,312 8,177
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
NET
UNREALIZED
CONVERTIBLE NOTES GAIN (LOSS)
PREFERRED STOCK COMMON STOCK RECEIVABLE ON AVAILABLE-
------------------- ------------------ FROM SALE FOR-SALE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OF STOCK SECURITIES DEFICIT TOTAL
---------- ------- ---------- ------- ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1995.. 3,915,660 $ 7,879 2,324,324 $ 1,396 $ (8) $1,018 $ (7,806) $ 2,479
Exercise of Series C
preferred stock
options............... 23,333 56 -- -- (56) -- -- --
Exercise of Series D
preferred stock
options............... 40,000 96 -- -- (96) -- -- --
Conversion of short-
term notes for common
stock, net of issuance
costs of $11.......... -- -- 457,246 319 -- -- -- 319
Exercise of stock
options............... -- -- 99,172 20 (9) -- -- 11
Issuance of common
stock for services
rendered.............. -- -- 62,760 12 -- -- -- 12
Net unrealized gain
(loss) on available-
for-sale securities... -- -- -- -- -- (533) -- (533)
Net income............. -- -- -- -- -- -- 558 558
---------- ------- ---------- ------- ----- ------ -------- -------
Balances, June 30,
1996................... 3,978,993 8,031 2,943,502 1,747 (169) 485 (7,248) 2,846
Conversion of preferred
stock................. (3,978,993) (8,031) 4,774,791 8,031 -- -- -- --
Initial public
offering, net of
issuance costs of
$1,433................ -- -- 2,201,981 14,950 -- -- -- 14,950
Exercise of stock
options............... -- -- 112,419 26 (6) -- -- 20
Exercise of stock
warrants.............. -- -- 272,912 108 -- -- -- 108
Net unrealized gain
(loss) on available-
for-sale securities... -- -- -- -- (528) -- (528)
Net income............. -- -- -- -- -- -- 2,707 2,707
---------- ------- ---------- ------- ----- ------ -------- -------
Balances, June 30,
1997................... -- -- 10,305,605 24,862 (175) (43) (4,541) 20,103
Exercise of stock
options............... -- -- 212,530 200 (170) -- -- 30
Purchases under
employee stock
purchase plan......... -- -- 117,321 407 -- -- -- 407
Net unrealized gain
(loss) on available-
for-sale securities... -- -- -- -- -- 43 -- 43
Net loss............... -- -- -- -- -- -- (6,444) (6,444)
---------- ------- ---------- ------- ----- ------ -------- -------
Balances, June 30,
1998................... -- $ -- 10,635,456 $25,469 $(345) $ -- $(10,985) $14,139
========== ======= ========== ======= ===== ====== ======== =======
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ (6,444) $ 2,707 $ 558
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 932 323 87
Amortization of discount on long-term
obligations.................................... 28 36 --
(Gain) loss on disposal of fixed assets......... 164 -- --
Gain on sale of available-for-sale securities... -- (528) (763)
Purchased in-process technology................. -- -- 740
Changes in:
Accounts receivable............................ 911 (2,342) (1,300)
Inventories.................................... 52 (86) (5)
Prepaid expenses............................... (634) (216) (14)
Accounts payable............................... (429) 283 250
Accrued liabilities............................ (5) 1,333 572
Income taxes payable........................... (91) 91 --
Deferred revenue and advances.................. 1,061 708 735
Liability under employment termination
agreement..................................... -- (151) (72)
-------- -------- -------
Net cash provided by (used in) operating
activities..................................... (4,455) 2,158 788
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment, net......... (3,309) (1,539) (267)
Purchase of temporary investments................ (12,819) (21,240) 847
Proceeds from maturity or sale of temporary
investments..................................... 17,398 12,185 --
Business acquisition............................. -- -- (617)
-------- -------- -------
Net cash provided by (used in) investing
activities..................................... 1,270 (10,594) (37)
-------- -------- -------
Cash flows from financing activities:
Issuance of convertible promissory notes......... -- -- 315
Repayments of capital lease obligations, net..... -- (1) (7)
Issuance of long-term obligations................ -- -- 405
Repayment of long-term obligations............... -- (125) --
Proceeds from issuance of preferred and common
stock, net...................................... 437 15,077 27
-------- -------- -------
Net cash provided by financing activities....... 437 14,951 740
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents...................................... (2,748) 6,515 1,491
Cash and cash equivalents, beginning of year...... 9,617 3,102 1,611
-------- -------- -------
Cash and cash equivalents, end of year............ $ 6,869 $ 9,617 $ 3,102
======== ======== =======
Noncash investing and financing activities:
Conversion of preferred shares to common stock... -- $ 8,031 --
======== ======== =======
Exercise of options for stockholder notes
receivable...................................... $ 170 $ 10 $ 161
======== ======== =======
Conversion of promissory notes for stock, net of
issuance costs.................................. $ -- $ -- $ 315
======== ======== =======
Issuance of common stock for services rendered... $ -- $ -- $ 13
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........... $ -- $ 41 $ 28
======== ======== =======
Cash paid during the year for income taxes....... $ -- $ 314 $ --
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Qualix Group, Inc. ("the Company") was incorporated in
Delaware in September 1990. The Company develops or acquires, markets and
supports reliability software for distributed computing systems based on Unix
and Windows NT operating systems. The Company's customers are in a variety of
industries, including telecommunications, finance, manufacturing and energy.
The Company markets its software and services to Fortune 2000 accounts
primarily through its field sales organization located in the United States,
Europe and the Pacific Rim, complemented by other sales channels, including
systems integrators, OEMs, VARs and international distributors.
Basis of Presentation. The Company acquired Octopus Technologies, Inc.
("Octopus") in August 1996. The acquisition was accounted for as a pooling-of-
interests. All financial data of the Company has been restated to include the
historical financial information of Octopus.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. Accounts
denominated in foreign currencies have been remeasured into the functional
currency, using the U.S. dollar as the functional currency. Foreign currency
gains and losses from remeasurement, which have been insignificant, are
included in the consolidated statements of income.
Cash Equivalents. Cash equivalents include highly liquid investments with
original maturities of 90 days or less at the time of acquisition. The
recorded carrying amounts of cash equivalents approximate their fair market
value.
Temporary Investments. Temporary investments consist of highly liquid
investments acquired with maturities exceeding three months and are classified
as "available-for-sale securities." The investments are reported at fair value
with unrealized gains or losses excluded from earnings and reported as a
separate component of stockholders' equity, net of taxes. Any gains or losses
on sales of investments are computed on a specific identification basis.
Inventories. Inventories are stated at the lower of cost (first-in, first-
out method) or market and consist primarily of computer products, software and
component parts purchased for resale.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the shorter of the estimated useful lives, generally three to seven years, or
the lease term, as appropriate.
Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the
15
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
reporting period. Such management estimates include the allowance for
potentially uncollectible accounts receivable, the valuation allowance on
deferred tax assets and certain reserves and accruals. Actual results could
differ materially from those estimates.
Software Development Costs. Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs are capitalized. The costs to develop such
software have not been capitalized as the Company believes its current
software development process is essentially complete concurrent with the
establishment of technological feasibility.
Revenue Recognition Policy. Software license revenue is recognized when
either a noncancelable license agreement or purchase order has been executed,
the product has been shipped, all significant contractual obligations have
been satisfied and collection of the resulting receivable is probable.
Maintenance revenue is recognized ratably over the maintenance period,
generally one year, and revenue from consulting and training services is
recognized as services are performed.
Warranty. The Company generally warrants its products for 90 days or less.
The Company has no provision for warranty costs at June 30, 1998, as
historically costs have not been significant.
Income Taxes. Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to account for income taxes
and requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
Stock-Based Compensation. The Company accounts for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and, accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans.
Earnings (Loss) Per Share. During the second quarter of fiscal 1998, the
Company adopted Statement of Financial Accounting Standards No. 128, Earnings
Per Share. All prior periods have been restated to conform with this
Statement. Net income (loss) per basic share is computed using the weighted
average number of common shares outstanding during the periods presented, as
adjusted for contingently issuable shares.
For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive common
shares outstanding. Potentially dilutive common shares consist of shares
issuable upon the assumed exercise of dilutive stock options. Pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletins and staff
policy, all outstanding preferred stock and warrants that were converted into
common stock in the initial public offering are included in the computation as
potentially dilutive shares when the effect is dilutive. Prior to the
16
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Company's initial public offering in February 1997, potentially dilutive
shares include preferred stock and certain warrants (using the "if converted"
method) as well as common and potentially dilutive shares issued within 12
months preceding the initial filing date.
Options to purchase 200,000 shares of common stock were outstanding during
fiscal 1998 but were not included in the computation of diluted earnings per
share as the effect was anti-dilutive.
Certain Significant Risks and Uncertainties. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, temporary cash investments and
accounts receivable. The Company invests in a variety of financial instruments
with an investment credit rating of AA and better. The Company, by policy,
limits the amount of credit exposure with any one financial instrument or
commercial issuer. The Company also places its cash, cash equivalents and
investments for safekeeping with high-credit-quality financial institutions.
The Company sells its products primarily to companies in diversified
industries in North America, Europe and the Pacific Rim, and generally does
not require its customers to provide collateral or other security to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. While the Company maintains
allowances for potential bad debt losses, actual losses to date have not been
material. No customer accounted for more than 10% of total revenue in 1998,
1997 and 1996; one customer accounted for 11% of accounts receivable in fiscal
1998. Export sales from the United States represented 22%, 17% and 17% of
total revenue in fiscal 1998, 1997 and 1996, respectively.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse
effect on the Company's future financial position or results of operations:
advances and trends in new technologies; competitive pressures in the form of
new products or price reductions on current products; changes in product mix;
changes in the overall demand for products and services offered by the
Company; changes in certain strategic partnerships or customer relationships;
litigation or claims against the Company based on intellectual property,
patent, product, regulatory or other issues or factors; risks associated with
changes in domestic and international economic and/or political conditions or
regulations; availability of necessary components; performance of third-party
suppliers and vendors; year 2000 compliance issues; and the Company's ability
to attract and retain employees necessary to support its growth.
Recently Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards (SFAS)
No.130, "Reporting Comprehensive Income," which requires that an enterprise
report, by major components and as a single total, the change in its net
assets during the period from nonowner sources; and SFAS No.131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for a company's business segments and
related disclosures about its products, services, geographic areas and major
customers. The Company has not yet identified its SFAS 131 reporting segments.
Adoption of these statements will not impact the Company's consolidated
financial
17
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
position, results of operations or cash flows. Both statements are effective
for the Company beginning July 1, 1998, with earlier application permitted.
2. BUSINESS COMBINATIONS
Merger with Octopus Technologies, Inc. In August 1996, the Company acquired
Octopus by issuing 1,597,173 shares of its common stock and 280,673 shares of
Series E preferred stock in exchange for all of the outstanding common stock
and preferred stock of Octopus. The Company also assumed and exchanged all
options to purchase Octopus stock for options to purchase an aggregate of
149,590 shares of the Company's common stock with an average exercise price of
$2.60 per share. The merger was accounted for as a pooling-of-interests.
Octopus develops, markets and supports real time data protection software
throughout the United States and internationally. Approximately $595,000 of
costs directly attributable to the business combination, primarily
professional fees associated with investment bankers, attorneys and
accountants, were incurred by the Company.
Purchase of Anthill Incorporated. In May 1996, the Company acquired
substantially all of the assets and assumed certain of the liabilities of
Anthill Incorporated ("Anthill"). The purchase price totaled approximately
$675,000, of which $175,000 was paid at the closing of the transaction with
the remaining purchase price to be paid in four annual installments of
$125,000 each (see Note 7). Anthill was engaged in the development of a
hierarchical storage management product.
The acquisition was accounted for as a purchase, and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The aggregate purchase of $675,000, plus
$116,000 of costs directly attributable to the completion of the acquisition,
has been allocated to the assets and liabilities acquired. Approximately
$740,000 of the total purchase price represented the value of in-process
technology which had no future alternative use and was charged to the
Company's operations in the fourth quarter of fiscal 1996.
3. TEMPORARY INVESTMENTS
Available-for-sale securities at June 30, 1998 consist of:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal bonds.................. $1,300 $1,300
Corporate bonds.................. 1,955 $ 1 $(1) 1,955
Certificates of deposit.......... 1,750 1,750
------ --- --- ------
$5,005 $ 1 $(1) $5,005
====== === === ======
</TABLE>
18
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Available-for-sale securities at June 30, 1997 consist of:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial paper................. $3,935 $3,935
Municipal bonds.................. 3,605 $ (5) 3,600
Corporate bonds.................. 1,015 (18) 997
Agency securities................ 1,029 (20) 1,009
------ ---- ---- ------
$9,584 $ -- $(43) $9,541
====== ==== ==== ======
</TABLE>
At June 30, 1998, the municipal bonds had maturities greater than 10 years.
The estimated market value of corporate bonds with maturities between one and
five years was $949,000 with the remaining available-for-sale securities
maturing within one year. All certificates of deposit mature during fiscal
1999.
At June 30, 1995, the Company held 46,121 shares of common stock of a public
company which were subject to certain holding restrictions. During 1996, the
Company sold 34,590 shares and realized a gain of $763,000, net of legal costs
of $84,500. In June 1997, the Company sold the remaining shares and realized a
gain of $828,000. The gain on the sale of stock was recorded, net of legal
costs of $300,000. The Company realized an insignificant gain on the sale of
investments in fiscal 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Computer equipment and software........................... $ 4,041 $2,250
Furniture and fixtures.................................... 554 67
Office equipment.......................................... 176 14
Leasehold improvements.................................... 697 39
------- ------
5,468 2,370
Less accumulated depreciation and amortization............ (1,696) (811)
------- ------
Property and equipment--net............................... $ 3,772 $1,559
======= ======
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Compensation, bonuses and related benefits................. $1,143 $ 988
Royalties payable and costs associated with product
acquisition............................................... 130 666
Other accrued liabilities.................................. 1,470 1,094
------ ------
Total.................................................... $2,743 $2,748
====== ======
</TABLE>
19
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $ -- $ 83 $ --
State.................................................... -- 367 --
---- ---- ----
-- 450 --
---- ---- ----
Deferred:
Federal.................................................. -- -- --
State.................................................... -- (44) --
---- ---- ----
-- (44) --
---- ---- ----
$ -- $406 $ --
==== ==== ====
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal rate to the income (loss) before income taxes as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Taxes computed at federal statutory rate............. (35.0)% 35.0% 35.0%
State taxes net of federal income tax benefit........ -- 6.0 6.1
Nondeductible merger and other costs................. (2.6) 6.7 6.6
Change in valuation allowance........................ 36.6 (36.2) (50.0)
Other................................................ 1.0 1.5 2.3
----- ----- -----
Total provision.................................... --% 13.0% --%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to deferred taxes
are as follows at June 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Deferred tax assets:
Deferred revenue......................................... $ 299 $ --
Expenses not currently deductible for tax purposes....... 557 144
Tax net operating loss carryforwards..................... 2,168 292
Tax credit carryforwards................................. 416 87
Purchased in-process technology.......................... 260 278
------- -----
Total deferred tax assets.............................. 3,700 801
Valuation allowance........................................ (3,656) (757)
------- -----
Net deferred tax assets................................ $ 44 $ 44
======= =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net
operating loss and tax credit carryforwards. The deferred tax assets at
June 30, 1998 and 1997 are $3,700,000 and $801,000, respectively, and have
been substantially reserved as the Company believes that, due to its history
of operating losses and the expiration dates of the carryforwards, it is more
likely than not that the majority of such benefits will not be realized.
Deferred tax assets are presented within prepaid expenses on the Consolidated
Balance Sheet as of June 30, 1998.
20
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
At June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $6,000,000 and 1,400,000 available to reduce
future federal and state taxable income, respectively. The federal and state
carryforwards begin to expire in 2011 and 2003, respectively. The Company has
federal research and experimental credit carryforwards of $377,000, which
expire beginning in 2018, and minimum tax credit carryforwards of $39,000,
which do not expire. The extent to which the loss and credit carryforwards can
be used to offset future taxable income or taxes may be limited, depending on
the extent of ownership changes within any three-year period as provided by
Section 382 of the Internal Revenue Code and applicable California state tax
law.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases certain office facilities under
noncancellable operating leases, which expire through May 31, 2003. Under the
terms of the facility leases, the Company is responsible for its proportionate
share of maintenance, property tax and insurance expenses. The corporate
headquarters lease provides an option to extend the lease for five years. The
future minimum annual rental payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
<S> <C>
1999............................................................. $ 959
2000............................................................. 893
2001............................................................. 681
2002............................................................. 591
2003............................................................. 500
------
$3,624
======
</TABLE>
Facilities rent expense under operating leases was approximately $812,000,
$441,000, and $243,000 for fiscal years 1998, 1997 and 1996, respectively.
Anthill Acquisition. In connection with the Anthill acquisition, the Company
has a remaining obligation to pay three annual installments of $125,000 each
(see Note 2). The present value of the obligation is discounted at 9% and
aggregates approximately $345,000. The Company has granted a security interest
in the software technology acquired from Anthill in order to secure the
obligation.
Software License Agreement. In April 1998, the Company entered into a
Development and License Agreement (the "Agreement") which provides the Company
an exclusive, perpetual worldwide right to license certain of the Licensor's
product, as well as a non-exclusive, perpetual, worldwide right to license
related support software tools. Under the terms of the agreement, the Company
is required to pay a specified royalty based on a percentage of revenue
generated from products sold with technology therein up to a maximum of
$3,000,000, at which time all technology rights will transfer to the Company.
At June 30, 1998, the Company had prepaid $500,000 under the Agreement. If and
when the Company develops the existing object code to run on other software
platforms, the Licensor will have the right to sublicense such software and
will pay a specified royalty based on a percentage of revenue generated from
products sublicensed with the related technology therein.
21
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Contingency. The industry in which the Company operates is characterized by
frequent litigation. The Company filed a lawsuit against Anthill in May, 1998;
in the suit the Company contends that the software acquired from Anthill did
not function as had been represented by Anthill, and it seeks a declaration
that it need not remit the remaining payments to Anthill under the Agreement,
rescission of the Agreement and damages of $300,000 or more based upon
payments already made to Anthill.
On August 12, 1998, Anthill commenced arbitration proceedings against the
Company alleging that the Company breached its agreement with Anthill by not
making the annual installment payment due in May 1998 (See Note 2). Anthill
seeks damages of $375,000, plus interest, for the three remaining payments
allegedly due under the agreement.
The Company has denied the claims made by Anthill in the arbitration and
intends to vigorously defend those claims. The Company has also submitted a
counterclaim in the arbitration, in which it seeks the same relief it is
demanding in its lawsuit. Management does not believe that the disposition of
these actions will have a material adverse effect on the Company's business,
financial condition or results of operations.
8. STOCKHOLDERS' EQUITY
Initial Public Offering. In February 1997, the Company completed its initial
public offering and issued 2,201,981 shares of common stock to the public at a
price of $8.00 per share. As a result of this offering, the Company received
$14,950,000, net of underwriting discounts, commissions, offering costs and
expenses payable by the Company. Simultaneously, all outstanding preferred
shares were automatically converted into common stock.
Shareholder Rights Plan. In July 1997, the Company's Board of Directors
approved a stock purchase rights plan which provides a dividend distribution
of one common stock purchase right for each outstanding share of its common
stock. The rights become exercisable based on certain limited conditions
related to acquisitions of stock, tender offers and certain business
combination transactions of the Company. In the event one of the limited
conditions is triggered, each right entitles the registered holder to purchase
for $60 per one-thousandth of a Preferred Share of Qualix Series A Junior
Participating Preferred Stock with a par value of $.001 per share. The rights
are redeemable at the Company's option for $0.01 per right and expire on July
30, 2007.
Employee Stock Purchase Plan. The Company has an employee stock purchase
plan, under which employees may, subject to certain restrictions, purchase
shares of common stock at six month intervals at a price not less than 85
percent of the lower of the fair market value as of the beginning or the end
of the two year offering period. 117,321 shares have been issued under this
Plan to date as of June 30, 1998. At June 30, 1998, 232,679 shares were
reserved for future issuance.
22
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Restricted Stock. During 1994, an officer of the Company was granted
nonstatutory stock options to purchase 48,000 shares of common stock at $.20
per share and 40,000 shares of Series D preferred stock at $2.40 per share. In
May 1996, the holder exercised the options in exchange for a full recourse
promissory note, bearing interest at 6.83% per annum, due May 2006 and secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
During 1996, an officer of the Company was granted a nonstatutory stock
option to purchase 23,333 shares of Series C preferred stock at $2.40 per
share. The option was exercised in exchange for a full recourse promissory
note which bears interest at 7.04% per annum, is due May 2006 and is secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
In July 1996, two officers exercised unvested stock options to purchase
50,266 shares of common stock at $0.20 per share. The options were exercised
in exchange for full recourse promissory notes which bear interest at 6.74%
per annum, are due July 2001 and are secured by the underlying stock. The
related shares of common stock are subject to repurchase by the Company at the
original purchase price per share upon termination of employment prior to
vesting of such shares. These restricted shares vest over four years in
accordance with the terms of the original stock options.
In January 1998, an officer exercised unvested stock options to purchase
60,000 shares of common stock at $2.75 per share with a full recourse
promissory note which bears interest at 6.13% per annum. The note is due in
January 2008 and is secured by the underlying stock. The related shares of
common stock are subject to repurchase by the Company at the original purchase
price per share upon termination of employment prior to vesting of such
shares. These restricted shares vest over four years in accordance with the
terms of the original stock options.
At June 30, 1998, 91,751 outstanding shares of such common stock were
subject to repurchase.
In January 1998 an officer exercised vested stock options to purchase 10,000
shares of common stock at $0.20 per share with a full recourse promissory note
which bears interest at 5.83% per annum. The note is due January 2003 and is
secured by the underlying stock.
Stock Option Plans. The Company has stock option plans (the "Plans") under
which shares are reserved for issuance to employees, consultants and
directors. The Plans authorize the direct award or sale of common stock or the
grant of incentive and nonstatutory stock options. Incentive stock options
23
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
are granted at fair market value (as determined by the Board of Directors) at
the date of grant; nonstatutory options and stock sales may be offered at not
less than 85% of fair market value. Options become exercisable over four years
and expire ten years after the date of grant.
A summary of option transactions under the plans are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING
OPTIONS
-------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Balance, July 1, 1995....................................... 232,840 $0.47
Granted (weighted average fair value of $0.08)............ 478,078 0.59
Exercised................................................. (51,172) 0.20
Cancelled................................................. (56,151) 0.20
--------- -----
Balance, June 30, 1996...................................... 603,595 0.61
Granted (weighted average fair value of $3.23)............ 500,400 5.92
Exercised................................................. (112,419) 0.23
Cancelled................................................. (56,983) 2.66
--------- -----
Balance, June 30, 1997...................................... 934,593 3.38
Granted (weighted average fair value of $1.99)............ 1,660,381 3.50
Exercised................................................. (212,530) 0.95
Cancelled................................................. (913,358) 4.99
--------- -----
Balance, June 30, 1998...................................... 1,469,086 $2.85
========= =====
</TABLE>
At June 30, 1998, options for 768,483 shares were exercisable under the
Plans and 288,980 shares were available for future grant. At June 30, 1997 and
1996, 741,347 and 383,008 options, respectively, were exercisable at weighted
average exercise prices of $3.31 and $0.30, respectively.
The following table summarizes information concerning options outstanding
and exercisable as of June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.08-$0.73 168,247 7.69 $ 0.35 161,804 $ 0.36
$1.60-$2.50 108,372 8.19 2.12 48,996 2.12
$2.75-$3.03 863,443 9.35 2.79 384,483 2.75
$3.06-$8.50 327,340 8.71 6.75 171,516 6.74
$21.65 1,684 5.44 21.65 1,684 21.65
--------- ---- ------ ------- ------
1,469,086 8.94 $ 2.85 768,483 $ 2.65
========= ======
</TABLE>
24
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Stock Option Repricing. During the third quarter of fiscal 1998, the Company
approved a cancellation and regrant of outstanding stock options for all
holders of outstanding options with exercise prices in excess of the closing
selling price per share on January 23, 1998. 464,378 options were repriced at
an exercise price of $2.75 per share, the fair market value of the stock on
January 23, 1998, the regrant date. The repriced options become exercisable in
accordance with the same exercise schedule in effect under the higher priced
option to which such new option relates except that no portion of the option
may be exercised prior to one year from the regrant date. The regrant applied
to all employees and consultants of the Company; officers of the Company were
excluded from the repricing arrangement.
Stock Based Compensation. The Company uses the intrinsic value method
specified by Accounting Principles Board Opinion No. 25 in accounting for its
employee stock options and, accordingly, has recorded no compensation expense
through June 30, 1998, as such issuances have been at the fair value of the
Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended June 30, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum
value method prior to the initial public offering and the Black-Scholes option
pricing model thereafter, with the following weighted average assumptions for
fiscal 1998, 1997 and 1996, respectively: expected option life of six months
following vesting; 89% and 80% stock price volatility for 1998 and 1997,
respectively; risk-free interest rates of 5.6% for options granted during the
year ended June 30, 1998, 6.1% for options granted during the year ended June
30, 1997 and 5.9% for options granted during the year ended June 30, 1996; and
no dividends during the expected term. The Company's calculations are based on
a multiple option valuation approach and recognition of forfeitures as they
occur. The fair value of the employee purchase rights under the Employee Stock
Purchase Plan was estimated using the same model, but with the following
weighted average assumptions for fiscal 1998 and 1997, respectively: risk-free
interest rates of 5.6% and 5.7% and stock volatility of 89% and 80%. The
weighted average fair value of purchase rights granted in fiscal 1998 and 1997
was $2.54 and $3.55, respectively. If the computed fair values of the fiscal
1998, 1997 and 1996 awards had been amortized to expense, pro forma net income
(loss) and earnings (loss) per share would have been ($8,205,000), (($0.79)
per share, basic and diluted) in fiscal 1998, $2,302,000 ($0.35 per share,
basic and $0.25 per share, diluted) in fiscal 1997 and $554,000 ($0.21 per
share, basic and $0.07 per share, diluted) in fiscal 1996. The impact of
outstanding non-vested stock options granted prior to fiscal 1996 has been
excluded from the pro forma
25
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
calculations; as such, the pro forma adjustments may not be indicative of
future period pro forma adjustments, which will include expenses for more than
three years of awards.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit-Sharing Plan (the Plan) for all
employees. Participants may contribute between 1% and 15% of their annual
compensation on a before-tax basis, but not to exceed the amount allowable as
a deduction for federal income tax purposes. Participants vest immediately in
their contributions. The Company was not required to contribute, nor has it
contributed, to the Plan for the fiscal years ended June 30, 1997 and 1996 and
through March 31, 1998. Commencing April 1, 1998, the Company instituted a
matching program with a maximum annual Company contribution of $500 per
employee. For the fiscal year ended June 30, 1998, the Company contributed
approximately $58,000 to the Plan.
26
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE
SEPT. 30, 30,
1998 1998
----------- -------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,614 $ 6,869
Temporary cash investments............................... 5,514 5,005
Accounts receivable, net................................. 4,795 4,236
Other current assets..................................... 954 1,052
------- -------
Total current assets................................... 14,877 17,162
Property and equipment, net................................ 3,641 3,772
------- -------
Total assets........................................... $18,518 $20,934
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities................. $ 3,616 $ 3,594
Deferred revenue and advances............................ 2,424 2,856
Current portion of long-term obligations................. 259 258
------- -------
Total current liabilities.............................. 6,299 6,708
------- -------
Long-term obligations...................................... 91 87
Stockholders' equity....................................... 12,128 14,139
------- -------
Total liabilities and stockholders' equity............. $18,518 $20,934
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
27
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue:
Reliability software.................................... $ 3,956 $ 4,506
Other products.......................................... 1,455 2,386
Support, maintenance and consulting..................... 1,590 1,333
--------- ---------
Total revenue......................................... 7,001 8,225
--------- ---------
Cost of revenue:
Cost of reliability software............................ 349 64
Cost of other products.................................. 986 1,708
Cost of support, maintenance and consulting............. 596 483
--------- ---------
Total cost of revenue................................. 1,931 2,255
--------- ---------
Gross profit.............................................. 5,070 5,970
Operating expenses:
Sales and marketing..................................... 5,269 4,319
General and administrative.............................. 1,234 1,014
Research and development................................ 819 848
--------- ---------
Total operating expenses.............................. 7,322 6,181
--------- ---------
Loss from operations...................................... (2,252) (211)
Interest income (expense), net............................ 132 248
--------- ---------
Income (loss) before income taxes......................... (2,120) 37
Provision for income taxes................................ -- --
--------- ---------
Net income (loss)..................................... $ (2,120) $ 37
========= =========
Basic earnings (loss) per share........................... $ (0.20) $ --
========= =========
Shares used in per share computation...................... 10,589 10,215
========= =========
Diluted earnings (loss) per share......................... $ (0.20) $ --
========= =========
Shares used in per share computation...................... 10,589 10,717
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
28
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (2,120) $ 37
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 365 152
Amortization of discounts on long-term obligations..... 5 7
Changes in:
Account receivable.................................... (559) (281)
Other current assets.................................. 98 (81)
Accounts payable and accrued liabilities.............. 22 (98)
Deferred revenue and advances......................... (432) (497)
--------- ---------
Net cash used in operating activities.................. (2,621) (761)
Cash flows from investing activities:
Purchase of property and equipment, net................. (234) (487)
Purchase of temporary cash investments.................. (1,190) (6,594)
Proceeds from maturity of temporary cash investments.... 700 2,946
--------- ---------
Net cash used in investing activities.................. (724) (4,135)
Cash flows from financing activities:
Proceeds from issuance of common stock, net............. 90 236
--------- ---------
Net decrease in cash and cash equivalents................ (3,255) (4,660)
Cash and cash equivalents, beginning of period........... 6,869 9,617
--------- ---------
Cash and cash equivalents, end of period................. $ 3,614 $ 4,957
========= =========
Cash paid during the period for income taxes............. $ -- $ 109
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
29
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The Company completed its initial public offering on February 12, 1997. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. The interim condensed consolidated financial
statements should be read in conjunction with the June 30, 1998 consolidated
financial statements and notes thereto.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position, results of operations and cash flows at the dates and for
the periods presented have been included. The interim financial information
herein is not necessarily indicative of the results of any future period.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per basic share has been computed based upon the weighted
average number of common shares outstanding for the periods presented,
adjusted for contingently issuable shares totalling 78,000 and 110,000 for the
quarters ended September 30, 1998 and 1997, respectively.
For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive shares
outstanding. Potentially dilutive common shares consist of shares issuable
upon the assumed exercise of dilutive stock options and totalled 391,000 for
the quarter ended September 30, 1997. Due to their anti-dilutive effect,
132,760 potentially dilutive shares were excluded from the diluted loss per
share computation for the quarter ended September 30, 1998.
3. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", during the quarter ended September 30,
1998. Comprehensive income (loss) represents net income (loss) for the period
as adjusted for net unrealized gains (losses) on available-for-sale
securities, net of taxes, and was $(2,101,000) and $79,000, respectively, for
the quarters ended September 30, 1998 and 1997.
4. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued SFAS No.131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for a company's business
segments and related disclosures about its products, services, geographic
areas and major customers. The Company has not yet identified its SFAS 131
reporting segments. Adoption of this standard will not impact the Company's
consolidated financial position, results of operations or cash flows and is
effective for the Company for fiscal 1999.
30
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SUBSEQUENT EVENT
The Company and Legato Systems, Inc. ("Legato") have entered into an
Agreement and Plan of Reorganization, dated as of October 25, 1998 (the
"Reorganization Agreement"). Pursuant to the Reorganization Agreement, Hat
Acquisition Corp. will merge (the "Merger") with and into the Company, with
the Company as the surviving corporation and becoming a wholly-owned
subsidiary of Legato; each share of the Company's common stock issued and
outstanding immediately prior to the effective time of the Merger (the
"Effective Time") will be canceled and extinguished and be converted
automatically into the right to receive a fraction of a share of Legato common
stock (the "Exchange Ratio"), the numerator of which will be equal to
1,721,000 shares and the denominator of which will be equal to (i) the sum of
(A) the aggregate number of shares of the Company's common stock issued and
outstanding as of the Effective Time, and (ii) the aggregate number of shares
of the Company's common stock issuable upon exercise of all outstanding
options to acquire shares of Company common stock outstanding as of the
Effective Time.
All outstanding options to purchase Company common stock will be assumed by
Legato and will become options to purchase shares of the Legato's common
stock. The transaction is intended to be accounted for as a pooling of
interests and qualify as a tax-free reorganization. The Merger has been
approved by the boards of directors of the Company and Legato, but is still
subject to regulatory review and approval, approval by the stockholders of the
Company and other conditions to closing.
The Company has agreed that if the Merger is not consummated as a result of
certain specified events (involving, in general, a change in Board support for
the Merger and/or an alternative transaction), it will pay to the Legato a
termination fee of $2.0 million. If the Merger is not consummated, expenses
incurred in connection with the proposed Merger (including the possible
"break-up" fees described above) could have a material adverse effect on the
Company's results of operations.
31
<PAGE>
ITEM 7(C). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1+ Agreement and Plan of Reorganization dated as of October 25, 1998 by
and among Legato Systems, Inc., Qualix Group, Inc. and Hat Acquisition
Corp., including certain exhibits thereto;*
2.2+ Stock Option Agreement dated as of October 25, 1998 among Legato
Systems, Inc. and Qualix Group, Inc.; and
23.1 Consent of Deloitte & Touche LLP
99.1+ Press release, dated October 26, 1998.
</TABLE>
- --------
* Pursuant to Item 601(b)(2) of Regulation S-K, certain exhibits to this
Agreement and Plan of Reorganization have been omitted. Such exhibits will
be submitted to the Securities and Exchange Commission upon request.
+ Previously filed.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LEGATO SYSTEMS, INC.
Date: December 14, 1998 By: /s/ Stephen C. Wise
----------------------------------
Name: Stephen C. Wise
Title: Senior Vice President,
Finance and Administration
and Chief Financial Officer
33
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1+ Agreement and Plan of Reorganization dated as of October 25, 1998 by
and among Legato Systems, Inc., Qualix Group, Inc. and Hat Acquisition
Corp., including certain exhibits thereto;*
2.2+ Stock Option Agreement dated as of October 25, 1998 among Legato
Systems, Inc. and Qualix Group, Inc.; and
23.1 Consent of Deloitte & Touche LLP
99.1+ Press release, dated October 26, 1998.
</TABLE>
- --------
* Pursuant to Item 601(b)(2) of Regulation S-K, certain exhibits to this
Agreement and Plan of Reorganization have been omitted. Such exhibits will
be submitted to the Securities and Exchange Commission upon request.
+ Previously filed.
34
<PAGE>
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in the Registration Statements
Nos. 333-02378, 333-28405, 333-67031 and 333-94306 of Legato Systems, Inc. on
Form S-8 of our report dated July 23, 1998 on the consolidated financial
statements of Qualix Group, Inc. as of June 30, 1997 and 1998 and the three
years in the period ended June 30, 1998, appearing in this Current Report on
Form 8-K/A of Legato Systems, Inc.
/s/ Deloitte & Touche
San Jose California
December 14, 1998
