UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 1999
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 April
26, 1999 was 81,167,276.
<PAGE>
<TABLE>
<CAPTION>
LEGATO SYSTEMS, INC.
INDEX
Page
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PART I: CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the three-month
periods ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 1999 and 1998 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 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 25
</TABLE>
<PAGE>
PART I: CONDENSED FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 92,835 $ 83,177
Short-term investments 30,627 33,772
Accounts receivable, net 43,063 39,982
Other current assets 6,526 6,059
Deferred tax asset 12,953 11,836
----------- -----------
Total current assets 186,004 174,826
Long-term investments 12,391 9,023
Property and equipment, net 21,164 21,119
Intangible assets, net 1,963 2,243
Deposits and other assets 3,374 536
----------- -----------
Total assets $ 224,896 $ 207,747
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,621 $ 4,577
Accrued liabilities 20,563 22,139
Deferred revenue 26,014 21,879
----------- -----------
Total current liabilities 50,198 48,695
Deferred tax liability 528 523
Stockholders' equity:
Capital stock and other comprehensive income 122,609 115,165
Retained earnings 51,561 43,364
----------- -----------
Total stockholders' equity 174,170 158,529
----------- -----------
Total liabilities and stockholders' equity $ 224,896 $ 207,747
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
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<TABLE>
<CAPTION>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Product license $ 33,146 $ 22,018
Service and support 14,267 7,624
Royalty 4,939 4,743
----------- -----------
Total revenue 52,352 34,385
Cost of revenue:
Product license 1,532 2,143
Service and support 5,355 3,035
----------- -----------
Total cost of revenue 6,887 5,178
----------- -----------
Gross profit 45,465 29,207
Operating expenses:
Research and development 7,713 5,505
Sales and marketing 21,030 15,560
General and administrative 4,808 3,700
Amortization of intangibles 279 279
----------- -----------
Total operating expenses 33,830 25,044
----------- -----------
Income from operations 11,635 4,163
Interest and other income, net 1,404 994
----------- -----------
Income before provision for income taxes 13,039 5,157
Provision for income taxes 4,842 2,039
----------- -----------
Net income $ 8,197 $ 3,118
=========== ===========
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities (9) 32
----------- -----------
Comprehensive income $ 8,188 $ 3,150
=========== ===========
Basic earnings per share $ 0.10 $ 0.04
=========== ===========
Diluted earnings per share $ 0.10 $ 0.04
=========== ===========
Shares used in basic earnings per share calculations 78,873 75,338
=========== ===========
Shares used in diluted earnings per share calculations 85,023 81,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,197 $ 3,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Net deferred tax asset (1,112) (646)
Depreciation and amortization 2,312 1,542
Tax benefit from exercise of stock options 2,785 3,467
Changes in operating assets and liabilities:
Accounts receivable (3,081) 5,193
Other current assets (467) 433
Accounts payable (956) 2,435
Accrued liabilities (1,575) (3,129)
Deferred revenue 4,135 238
----------- -----------
Net cash provided by operating activities 10,238 12,651
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (26,439) (10,204)
Maturities and sales of available-for-sale securities 26,207 22,278
Acquisition of property and equipment (2,077) (3,090)
Purchase of long-term assets and other (2,838) (230)
----------- ------------
Net cash provided by (used in) investing activities (5,147) 8,754
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,709 4,124
Other (142) (3)
------------ ------------
Net cash provided by financing activities 4,567 4,121
----------- -----------
Net increase in cash and cash equivalents 9,658 25,526
Cash and cash equivalents at beginning of period 83,177 38,155
----------- -----------
Cash and cash equivalents at end of period $ 92,835 $ 63,681
=========== ===========
</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 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 1998 Report on Form 10-K, as amended,
should be read in conjunction with these Condensed Consolidated Financial
Statements.
NOTE 2. COMPUTATION OF 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 exercise of stock options.
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
March 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Numerator - basic and diluted earnings per share
- ------------------------------------------------
Net income $ 8,197 $ 3,118
========= =========
Denominator - basic earnings per share
- --------------------------------------
Weighted average common shares outstanding 78,873 75,338
--------- ---------
Basic earnings per share $ 0.10 $ 0.04
========= =========
Denominator - diluted earnings per share
- ----------------------------------------
Weighted average common shares outstanding 78,873 75,338
Effect of dilutive securities:
Common stock options 6,150 5,997
--------- ---------
Weighted average common and common
equivalent shares 85,023 81,335
========= =========
Diluted earnings per share $ 0.10 $ 0.04
========= =========
Options excluded from diluted net income
per share calculation 384 281
========= =========
</TABLE>
Certain shares of common stock issuable upon exercise of stock options were
excluded from the calculation of diluted net income per share because the
options' exercise price was greater than the average market price of the common
shares.
<PAGE>
NOTE 3. COMPREHENSIVE INCOME
Our unrealized loss on investments represents the only component of
comprehensive income that is excluded from net income for the three-month period
ended March 31, 1999. Our comprehensive income has been presented in the
consolidated financial statements.
NOTE 4. SEGMENT INFORMATION
Management uses one measurement of profitability for its business. Our
software products and related services are developed and marketed to support
heterogeneous client/server computing environments and large scale enterprises.
We market our products and related services to customers in the United States,
Canada, Europe and Asia Pacific.
Revenue and long-lived-asset information by geographic area as of the quarter
ended:
<TABLE>
<CAPTION>
Long-lived
Revenue Assets
------------ ------------
(in thousands)
<S> <C> <C>
March 31, 1999:
North America.......................................................... $ 36,548 $ 21,782
International.......................................................... 15,804 1,345
------------ ------------
Total.................................................................. $ 52,352 $ 23,127
============ ============
March 31, 1998:
North America.......................................................... $ 24,913 $ 17,073
International.......................................................... 9,472 730
------------ ------------
Total.................................................................. $ 34,385 $ 17,803
============ ============
</TABLE>
NOTE 5. QUALIX GROUP, INC. MERGER
On April 19, 1999, we completed the merger with Qualix Group, Inc. (dba
FullTime Software, Inc.), a developer of distributed, enterprise-wide,
cross-platform, adaptive computing solutions that enable customers to
proactively manage application service level availability into a wholly-owned
subsidiary of Legato. In this document, we refer to Qualix Group, Inc. as
"FullTime".We issued 3,442,000 shares of our common stock in exchange for all
the common stock and options of FullTime. We accounted for the transaction as a
pooling-of-interests. Accordingly, we restated the accompanying financial
statements to represent the combined results of the previously separate entities
for the periods presented.
The table below presents the separate results of operations of Legato
and FullTime for the periods prior to the combination:
Three Months Ended
March 31,
----------------------
1999 1998
--------- ---------
(in thousands)
Revenue:
Legato Systems, Inc. $ 48,280 $ 28,414
FullTime Software, Inc. 4,072 5,971
--------- ---------
Total $ 52,352 $ 34,385
========= =========
Net income (loss):
Legato Systems, Inc. $ 10,128 $ 5,195
FullTime Software, Inc. (1,931) (2,077)
---------- ----------
Total $ 8,197 $ 3,118
========= =========
<PAGE>
NOTE 6. RECENT PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS 133 will be effective for fiscal years
beginning after June 15, 1999. We do not currently hold derivative instruments
or engage in hedging activities.
In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition," with Respect to
Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence (VSOE) of the fair
values of all the undelivered elements that are not accounted for by means of
long-term contract accounting, (2) VSOE of fair value does not exist for one or
more of the delivered elements, and (3) all revenue recognition criteria of SOP
97-2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. Retroactive application is prohibited. We
do not expect the provisions of SOP 98-9 to have a significant impact on our
current revenue recognition policies.
In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, or SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133. SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal quarter beginning after
June 15, 2000.
NOTE 7. SUBSEQUENT EVENTS
On April 1, 1999, we completed the acquisition of Intelliguard Software,
Inc. and O.R.P., Inc., developers of standards-based storage management
solutions for storage area networks. In this document, we refer to Intelliguard
Software, Inc. and O.R.P., Inc. collectively as "Intelliguard." We issued
1,440,000 shares of our common stock and provided cash consideration of $9.1
million for all of the outstanding stock and stock rights of Intelliguard. We
accounted for the transaction as a business purchase combination.
On July 30, 1999, we completed the acquisition of Vinca Corporation, a
Utah-based leader in high availability and data protection software. The
transaction was accounted for as a purchase business combination. We issued
1,530,732 shares of our common stock and provided cash consideration of $18.8
million in exchange for all the stock and options of Vinca Corporation. We
accounted for the transaction as a purchase business combination.
On August 13, 1999, we effected a two-for-one stock split (in the form of a
stock dividend). This stock split has been retroactively reflected in the
accompanying Condensed Consolidated Financial Statements.
On November 18, 1999, the Company entered into a definitive agreement to
acquire Ontrack Data International, Inc. ("Ontrack"), a developer of data
recovery software and a provider of storage service solutions. The agreement
provides for the issuance of common stock and cash, valued at approximately $134
million, in exchange for all the common stock and options of Ontrack. The
transaction will be accounted for as a purchase business combination, and is
expected to close in late January 2000, subject to regulatory and shareholder
approval.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q/A 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 our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under the heading "Risk Factors" and the risks
discussed in our other Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
Overview
We develop, market and support network storage management software products
for heterogeneous client/server computing environments and large scale
enterprises. Our NetWorker family of software products, from which we derive a
substantial majority of our revenue, and the HA+ products from our merger with
FullTime, support many storage management server platforms and can accommodate a
variety of servers, clients, applications, databases and storage devices. We
license our products through resellers and directly to end users primarily
located in North America, Europe and Asia Pacific. We also license our source
code to original equipment manufacturers ("OEMs") in exchange for initial
licensing fees and receive 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.
We accounted for the merger of FullTime, completed on April 19, 1999 as a
pooling-of-interests. Accordingly, we restated the financial statements to
represent the combined financial results of previously separate entities for all
periods presented.
<PAGE>
Selected elements of our consolidated financial statements are shown below
as a percentage of total revenue.
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
Revenue:
Product and other 63% 64%
Service and support 27 22
Royalty 10 14
----------- -----------
Total revenue 100 100
Cost of revenue:
Product and other 3 6
Service and support 10 9
----------- -----------
Total cost of revenue 13 15
----------- -----------
Gross profit 87 85
Operating expenses:
Research and development 15 16
Sales and marketing 40 45
General and administrative 9 11
Amortization of intangibles 1 1
----------- -----------
Total operating expenses 65 73
----------- -----------
Income from operations 22 12
Interest and other, net 3 3
--------- -----------
Income before provision for income taxes 25 15
Provision for income taxes 9 6
----------- -----------
Net income 16% 9%
============ ============
Revenue
Total revenue for the first quarter of 1999 increased 52% percent over
total revenue for the comparable period of 1998. The increase was attributable
to the continued acceptance of our NetWorker family of products, increased
product license sales to large-scale enterprises and increased sales of service
and support contracts.
Product license revenue. Product license revenue were $33.1 million in the
first quarter of 1999 and $22.0 million in the first quarter of 1998. Product
license revenue increased 51 percent from the first quarter of 1998 to the first
quarter of 1999 primarily as a result of the continued acceptance of our
products and increased product sales to large-scale enterprises. We recognize
product license revenue 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 domestic
distributors, which are recognized upon sale by the distributors to end-users.
We recognize revenue from domestic distributors upon sale by the distributor to
end-users since these distributors have unlimited rights of return and we
historically have not been able to make reasonable estimates of product returns
from these distributors. Prior growth rates of our product license revenue are
not indicative of future product license revenue growth rates and may not be
sustainable in the future.
Service and Support Revenue. Service and support revenue was $14.3 million
in the first quarter of 1999 and $7.6 million in the first quarter of 1998.
Service and support revenue increased 87 percent from the first quarter of 1998
to the first quarter of 1999 primarily as a result of the growth in the number
of registered customers electing to subscribe to support contracts and to renew
software support contracts after the initial one-year term. Our increase in
internal staffing for software support and education and consulting services
helped to increase new sales and renewals of our software support contracts, as
well as sales of education and consulting services we offer. We collect fees for
ongoing customer support and product updates in advance and recognize this
support revenue ratably over the period of the contract. For education and
<PAGE>
consulting services, we recognize revenue when such services are performed.
Prior growth rates of our software service and support revenue are not
indicative of future software service and support revenue growth rates and may
not be sustainable in the future.
Royalty Revenue. Royalty revenue was $4.9 million in the first quarter of
1999 and $4.7 million in the first quarter of 1998. Royalty revenue is
recognized upon receipt of quarterly royalty reports from OEMs related to their
product sales for the previous quarter. Prior growth rates of our royalty
revenue are not indicative of future royalty revenue growth rates and may not be
sustainable in the future.
International product license revenue was $15.8 million in the quarter of
1999 and $9.5 million in the first quarter of 1998. International product
license revenue increased 67 percent from the first quarter of 1998 to the first
quarter of 1999. International product license revenue accounted for 48 percent
of total product license revenue in the first quarter of 1999 and 43 percent in
the first quarter of 1998. International license revenue increased primarily as
a result of the continued market acceptance of our products overseas. An
increase in the number of international sales offices and international
distributors and resellers marketing our products helped increase the market
acceptance of our products overseas. The majority of international revenue
during these periods was made in Europe. We continue to expand our international
operations, which requires significant management attention and financial
resources and could materially adversely affect our operating results. To the
extent that we are unable to effect these additions in a timely manner, our
growth, if any, in international revenue will be limited, and our business,
operating results and financial condition could be seriously harmed. In
addition, we cannot guarantee that we will be able to maintain or increase
international market demand for our products.
Gross Profit
Gross profit was $45.5 million in the first quarter of 1999 and $29.2
million in the first quarter of 1998, representing 87 percent of total revenue
in the first quarter of 1999 and 85 percent of total revenue in the first
quarter of 1998. Gross profit consists of product license, service and support
and other revenue less related costs.
Gross profit from product license revenue was $31.6 million in the first
quarter of 1999 and $19.9 million in the first quarter of 1998, representing 95
percent of product license in the first quarter of 1999 and 90 percent in the
first quarter of 1998. Gross profit from product license increased 63 percent
from the first quarter of 1998 to the first quarter of 1999. Gross profit from
product license as a percentage of product license revenue increased primarily
as a result of leveraging the costs of product license revenue over a larger
revenue base. The rate of increase in product license revenue was greater than
the rate of increase in the related costs of product license. Gross profit from
product license consists of primarily of product license revenue less the
related costs. Related costs of revenue consist primarily of product media,
documentation and packaging.
Gross profit from service and support revenue was $8.9 million in the first
quarter of 1999 and $4.6 million in 1998, representing 62 percent of the service
and support revenue in the first quarter of 1999 and 60 percent in 1998. Gross
profit from service and support revenue increased 94 percent from the first
quarter of 1998 to the same period of 1999. Gross profit from service and
support revenue as a percentage of service and support revenue increased
primarily as a result of leveraging the costs of service and support revenue
over a larger revenue base. The rate of increase in service and support revenue
was greater than the rate of increase in the related costs of service and
support revenue. The increase in our costs of service and support revenue in
absolute dollars is attributed to our continued investment in developing new
services and support offerings. The continued investment consists of costs
associated with supporting a larger installed base of products, as well as costs
to provide higher support levels to customers. Costs of service and support
revenue 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 consist
primarily of personnel-related costs. Research and development expenses were
$7.7 million in the first quarter of 1999 and $5.5 million in the first quarter
of 1998, representing 15 percent of total revenue in the first quarter of 1999
and 16 percent in the first quarter of 1998. Research and development expenses
increased 40 percent from the first quarter of 1998 to the first quarter of
1999. The increases in research and development expenses in absolute dollars
<PAGE>
primarily reflect increased staffing and associated support for engineers
necessary to continue to expand and enhance our product line. Research and
development expenses as a percentage of total revenue decreased primarily as a
result of research and development expenses increasing at a slower rate than the
rate of increase in total revenue and the merger with FullTime. We believe that
research and development expenses will continue to increase in absolute dollars
as we continue to invest in developing new products, applications, and product
enhancements.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing personnel and promotional
expenses. Sales and marketing expenses were $21.0 million in the first quarter
of 1999 and $15.6 million in the first quarter of 1998, representing 40 percent
of total revenue in the first quarter of 1999 and 45 percent in 1998. Sales and
marketing expenses increased 35 percent from the first quarter of 1998 to the
first quarter of 1999. The increases in sales and marketing expenses were
primarily attributable to the continued growth of our sales force and associated
support personnel. Sales and marketing expenses also increased from the first
quarter of 1998 to the first quarter of 1999 as a result of additional marketing
and promotional activities to increase awareness of our products. The decreases
in sales and marketing expenses as a percentage of total revenue were primarily
attributable to our merger with FullTime, accounted for as a
pooling-of-interests. Prior to the merger, FullTime's sales and marketing
expenses as a percentage of total revenues were higher than Legato's. We believe
that sales and marketing expenses will continue to increase in absolute dollars
as we continue to expand our sales and marketing staff.
General and Administrative. General and administrative expenses include
personnel and other costs of our finance, human resources, facilities,
information systems and other administrative departments. General and
administrative expenses were $4.8 million in the first quarter of 1999 and $3.7
million in the first quarter of 1998, representing 9 percent of total revenue in
the first quarter of 1999 and 11 percent of total revenue in the first quarter
of 1998. General and administrative expenses increased 30 percent from the first
quarter of 1998 to the first quarter of 1999. The increase in absolute dollars
of general and administrative expenses from the first quarter of 1998 to the
first quarter of 1999 was primarily attributable to increased staffing and
related costs required to manage and support our expansion. The decreases in
general and administrative expenses as a percentage of total revenue were
attributable to leveraging general and administrative expenses over a larger
revenue base and our merger with FullTime, accounted for as a
pooling-of-interests. Prior to the merger, FullTime's general and administrative
expenses as a percentage of total revenues were higher than Legato's. General
and administrative expenses increased at a slower rate than our rate of increase
for revenue. We expect that general and administrative expenses will increase in
dollar amount as we continue to expand our operations.
Amortization of Intangibles. Amortization of intangibles was $279,000 in
the first quarter of 1999 and 1998. We recorded the related intangibles
following an acquisition in the first quarter of 1996. We amortize these
intangibles on a straight-line basis over five years.
Interest and Other Income, Net. Interest and other income, net, was $1.4
million in the first quarter of 1999 and $1.0 million in the first quarter of
1998. Interest and other income primarily represent interest income from funds
available for investment. The increase in interest income relates primarily to
interest earned from increased purchases of available for sale securities.
Provision for Income Taxes. The provision for income taxes for the first
quarter of 1999 was $4.8 million, compared to $2.0 million for the first quarter
of 1998. The effective tax rate was 37 percent for the first quarter of 1999 and
40 percent for the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and investments totaled $135.9 million at March
31, 1999, and represented 60 percent of total assets. Cash and 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
March 31, 1999, we had no long-term debt and stockholders' equity was $174.2
million.
We have financed our operations to date primarily by cash from operations
and sales of common stock. Net cash provided by operating activities was $10.2
<PAGE>
million in the first quarter of 1999. Net cash provided by operations in the
first quarter of 1999 consisted primarily of net income of $8.2 million plus the
tax benefit from exercise of stock options of $2.8 million and depreciation and
amortization of $2.3 million offset by the net change in operating assets and
liabilities of $1.9 million and net deferred tax assets of $1.1 million.
Net cash used in investing activities was $5.1 million in the first quarter
of 1999. Net cash used in investing activities primarily reflected net purchases
of marketable securities of $0.2 million, purchases of property and equipment of
$2.1 million and a partial payment of $2.5 million for the acquisition of
Intelliguard which closed on April 1, 1999.
Net cash provided by financing activities was $4.6 million in the first
quarter of 1999. Net cash provided by financing activities consisted primarily
of proceeds received from the issuance of our common stock.
We believe our 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 include
coding 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. 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 problems.
We have conducted Year 2000 compliance reviews for current versions of our
products. The reviews include:
- Assessment;
- Implementation;
- Validation testing; and
- Contingency planning.
We respond to customer concerns about our products on a case-by-case basis.
Although we have performed validation testing to ensure our products are Year
2000 compliant and believe our software products are Year 2000 compliant, our
software products may not contain all the necessary software routines and
programs for the accurate calculation, display, storage and manipulation of data
involving dates. Failures of our software products to contain all the necessary
software routines and programs for the accurate calculation, display, storage
and manipulation of data involving dates would seriously harm our business,
operating results and financial condition.
We have tested software obtained from third parties that is incorporated
into our products and believe that such licensed software is Year 2000
compliant. Despite such testing and assurances, products incorporated into our
products may contain undetected errors or defects associated with Year 2000 date
functions. Known or unknown errors or defects in our products may result in:
- Delay or loss of revenue;
- Diversion of development resources;
- Damage to our reputation; or
- Increased service and warranty costs.
The occurrence of any of the foregoing could seriously harm our business,
operating results, or financial condition.
We do not currently have any information concerning the Year 2000
compliance status of our customers. If our current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures to
address Year 2000 compliance problems, our business, results of operations, or
financial condition could be seriously harmed.
<PAGE>
We believe the software and hardware we use internally comply with Year
2000 requirements. During 1998, we replaced or upgraded much of our internal use
hardware and software. In addition, we are not aware of any material operational
issues or costs associated with preparing our internal use software and hardware
for the Year 2000. However, serious, unanticipated negative consequences,
including material costs caused by undetected errors or defects in the
technology used in our internal systems may occur. The occurrence of any of the
foregoing could seriously harm our business, operating results or financial
condition.
We have funded our Year 2000 compliance review from operating cash flows
and have not separately accounted for these costs in the past. We will incur
additional amounts related to the Year 2000 compliance review including:
- Administrative personnel to manage the review; and
- Outside contractors to provide technical advice and technical support
for our products, product engineering, and customer satisfaction.
We have developed contingency plans to be implemented as part of our
efforts to identify and correct Year 2000 problems. Depending on the systems
affected, these plans include:
- Accelerated replacement of affected equipment or software;
- Short to medium-term use of backup equipment and software;
- Increased work hours for our personnel or use of contract personnel to
correct (on an accelerated schedule) any Year 2000 problems that arise
or to provide manual workarounds for information systems; and
- Other similar approaches
If we are required to implement any of these contingency plans, it could
seriously harm our business, financial condition and operating results. Our
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be seriously impacted by, among other things:
- The availability and cost of programming and testing resources;
- Vendors' ability to modify proprietary software; and
- Unanticipated problems identified in the ongoing compliance review.
RISK FACTORS
In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating our business and us:
Our Quarterly Operating Results Are Volatile.
Our quarterly operating results have varied in the past and may vary in the
future. Our quarterly operating results may vary depending on a number of
factors, many of which are outside of our control, including:
- The size and timing of orders;
- Increased competition;
- Market acceptance of our new products, applications and product
enhancements or those of our competitors;
- Changes in pricing policies of our competitors or by us;
- Our ability to timely develop, introduce and market new products,
applications and product enhancements;
- Our ability to integrate acquired businesses;
- Our ability to control costs;
- Quality control of products sold;
<PAGE>
- Lengthy sales cycles, particularly with enterprise license
transactions;
- Our success in expanding sales and marketing programs;
- Technological changes in our markets;
- The mix of sales among our channels;
- Deferrals of customer orders in anticipation of new products,
applications or product enhancements;
- Market readiness to deploy our products for distributed computing
environments;
- Changes in our strategy or that of our competitors;
- Customer budget cycles and changes in these budget cycles;
- Foreign currency and exchange rates;
- Acquisition costs or other non-recurring charges in connection with
the acquisition of companies, products or technologies;
- Personnel changes; and
- General economic factors.
Our Future Operating Results Are Uncertain.
We cannot predict our future revenue with any significant degree of
certainty for several reasons including the following:
- Product revenue in any quarter is substantially dependent on orders
booked and shipped in that quarter, since we operate with virtually no
order backlog;
- We do not recognize revenue on sales to domestic distributors until
the products are sold through to end-users;
- The storage management market is rapidly evolving;
- Our sales cycles vary substantially from customer to customer, in
large part because we are becoming increasingly dependent upon larger
company-wide enterprise license transactions to corporate customers.
Such transactions include product license, service and support
components and take a long time to complete;
- The timing of large orders can significantly affect revenue within a
quarter; and
- License and royalty revenue is difficult to forecast. Our royalty
revenue is dependent upon product license sales by OEMs of their
products that incorporate our software. Accordingly, royalty revenue
is subject to OEMs' product cycles, which are also difficult to
predict. Fluctuations in licensing activity from quarter to quarter
further impact royalty revenue, because initial license fees
generally are non-recurring and recognized upon the signing of a
license agreement.
Our expense levels are relatively fixed and are based, in part, on our
expectations of our future revenue. Consequently, if revenue levels fall below
our expectations, our net income will decrease because only a small portion of
our expenses varies with our revenue.
We believe that period-to-period comparisons of our results of operations
are not meaningful and should not be relied upon as indications of future
performance. Our operating results will be below the expectations of public
market analysts and investors in some future quarter or quarters. Our failure to
meet such expectations would likely seriously harm the market price of our
common stock.
Our Market is Highly Competitive.
We operate in the enterprise storage management market, which 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. Our major competitors according to hardware
<PAGE>
platforms include:
Novell NetWare and Windows NT platforms:
----------------------------------------
Computer Associates (Cheyenne Software); and
Veritas (Palindrome and Arcada).
Sun Solaris/SunOS platform:
---------------------------
Computer Associates (Legent/Lachman);
EMC2 (Epoch);
Spectra Logic; and
Veritas.
AIX platform and the HP-UX platform:
------------------------------------
IBM; and
Hewlett Packard.
We expect to encounter new competitors as we enter new markets. In
addition, many of our existing competitors are broadening their platform
coverage. We also expect 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, since there are relatively low barriers to entry in the
software market, we expect additional competition from other established and
emerging companies. We also expect that competition will increase as a result of
future software industry consolidations. Increased competition could harm us by
causing, among other things:
- Price reductions;
- Reduced gross margins; and
- Loss of market share.
Many of our current and potential competitors have longer operating
histories and have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and a larger customer
base, than we have. As a result, certain current and potential competitors can
respond more quickly to new or emerging technologies and changes in customer
requirements. They can also devote greater resources to the development,
promotion, sale and support of their products. In addition, current and
potential competitors may establish cooperative relationships among themselves
or with third parties. If so, 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 functionality offered by our products. If
so, our products could be rendered obsolete and unmarketable. For all these
reasons, we may not be able to compete successfully, which would seriously harm
our business, operating results and financial condition.
We Must Manage Our Growth and Expansion.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of
employees, and plan to further increase our total headcount. We also plan to
expand the geographic scope of our customer base. This expansion has resulted
and will continue to result in substantial demands on our management resources.
From time to time, we receive customer complaints about the timeliness and
accuracy of customer support. We plan to add customer support personnel in order
to address current customer support needs. If we are not successful hiring such
personnel, our business, operating results and financial condition could be
seriously harmed. Our ability to compete effectively and to manage future
expansion of our operations, if any, will require us to (a) continue to improve
our financial and management controls, reporting systems and procedures on a
timely basis, and (b) expand, train and manage our employee work force. Our
failure to do so could seriously harm our business, operating results and
financial condition.
<PAGE>
We Must Integrate Recent Mergers and Acquisitions.
On April 1, 1999, we completed the acquisition of Intelliguard, a developer
of standards-based storage management solutions for storage area networks. On
April 19, 1999, we completed the merger with FullTime, a developer of
distributed, enterprise-wide, cross-platform, adaptive computing solutions that
enable customers to proactively manage application service level availability
into a wholly-owned subsidiary of Legato. On July 30, 1999, we completed the
acquisition of Vinca Corporation, a Utah-based provider of high availability and
data protection software. We may make additional acquisitions in the future.
Acquisitions of companies, products or technologies entail numerous risks,
including:
- An inability to successfully assimilate acquired operations and
products;
- Diversion of management's attention;
- Loss of key employees of acquired companies;
- Substantial transaction costs; and
- Substantial additional costs charged to operations as a result of
the failure to consummate acquisitions.
Some of the products we acquired may require significant additional
development before they can be marketed and may not generate revenue at levels
we anticipate. Moreover, our future acquisitions may result in dilutive
issuances of our equity securities, the incurrence of debt, large one-time
write-offs and the creation of goodwill or other intangible assets that could
result in amortization expense. We cannot guarantee that our efforts to
consummate acquisitions or integrate acquisitions will be successful. If our
efforts are not successful, our business, financial condition and results of
operations could be seriously harmed.
We Depend on Our NetWorker Product Line.
We currently derive, and expect to continue to derive, a substantial
majority of our revenue from our NetWorker software products and related
services. A decline in the price of or demand for NetWorker, or failure to
achieve broad market acceptance of NetWorker, would seriously harm our business,
operating results and financial condition. We cannot reasonably predict
NetWorker's remaining life for several reasons, including:
- The recent emergence of our 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.
We Must Respond to Rapid Technological Changes with New Product Offerings.
The markets for our products are characterized by:
- Rapid technological changes;
- 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 our existing products obsolete and
unmarketable.
To be successful, we need 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 our customers.
<PAGE>
We may:
- Fail to develop and market new products that respond to technological
changes or evolving industry standards;
- Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products; or
- Fail to develop new products that adequately meet the requirements
of the marketplace or achieve market acceptance
If so, our business, operating results and financial condition would be
seriously harmed.
We currently have plans to introduce and market several potential new
products in the next twelve months. Some of our competitors currently offer
certain of these potential new products. Such potential new products are subject
to significant technical risks. We may fail to introduce such potential new
products on a timely basis or at all. In the past, we have experienced delays in
the commencement of commercial shipments of our new products. Such delays caused
customer frustrations and delay or loss of product revenue. If potential new
products are delayed or do not achieve market acceptance, our business,
operating results and financial condition would be seriously harmed. In the
past, we have also experienced delays in purchases of our products by customers
anticipating our launch of new products. Our business, operating results and
financial condition would be seriously harmed if customers defer material orders
in anticipation of new product introductions.
Software products as complex as those we offer may contain undetected
errors or failures when first introduced or as new versions are released. We
have in the past discovered software errors in certain of our new products after
their introduction. We experienced delays or lost revenue during the period
required to correct these shipments, despite testing by us and by our current
and potential customers. This may result in loss of or delay in market
acceptance of our products, which could seriously harm our business, operating
results and financial condition.
<PAGE>
We Rely on Enterprise-Level License Transactions.
In the past, we marketed our products at the department level of corporate
customers. Within the last two years, we began to pursue larger enterprise
license transactions with corporate customers. We may fail to successfully
market our products in larger enterprise license transactions. Such failure
would seriously harm our business, operating results and financial condition.
Our operating results are sensitive to the timing of such orders. Such orders
are difficult to manage and predict, because:
- The sales cycle is typically lengthy, generally lasting three to
nine months, and varies substantially from transaction to transaction;
- They often include product license, service and support components;
- They typically involve significant technical evaluation and
commitment of capital and other resources; and
- Customers' internal procedures frequently cause delays in orders.
Such internal procedures include approval large capital expenditures,
implementation of new technologies within their networks, and
testing new technologies that affect key operations.
Due to the large size of enterprise transactions, if orders forecasted for a
specific transaction for a particular quarter are not realized in that quarter,
our operating results for that quarter may be seriously harmed.
Historically, we have not had a separate large enterprise or national
accounts sales force and only within the last two years have we begun to develop
direct sales groups focused on these larger accounts. To succeed in the national
accounts market, we will be required to continue to transition our existing
sales forces into enterprise-level sales groups and attract and retain qualified
personnel. New personnel will require training to obtain knowledge of product
attributes for our products. We may not be successful in creating the necessary
sales organization or in attracting, retaining or training these individuals. To
succeed in the enterprise and national accounts market will require, among other
things, establishing and continuing to develop relationships and contacts with
senior technology officers at these accounts. Our business, financial condition
and results of operations would be seriously harmed if our sales force is not
successful in these efforts.
We Rely on Indirect Sales Channels.
We rely significantly on our distributors, systems integrators and value
added resellers (collectively, "resellers") for the marketing and distribution
of our products. Our agreements with resellers are generally not exclusive and
in many cases may be terminated by either party without cause. Many of our
resellers carry product lines that are competitive with ours. These resellers
may not give a high priority to the marketing of our products. Rather, they may
give a higher priority to other products, including the products of competitors,
or may not continue to carry our products. Events or occurrences of this nature
could seriously harm our business, operating results and financial condition. In
addition, we may not be able to retain any of our current resellers or
successfully recruit new resellers. Any such changes in our distribution
channels would seriously harm our business, operating results and financial
condition.
Our strategy is also to increase the proportion of our customers licensed
through OEMs. We may fail to achieve this strategy. We are currently investing,
and intend to continue to invest resources to develop this channel. Such
investments could seriously harm our operating margins. We depend on our 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. Our OEMs
may not effectively meet these technological challenges. These OEMs:
- Are not within our control;
- May incorporate the technologies of other companies in addition to,
or to the exclusion of, our technologies; and
- Are not obligated to purchase our products. In addition, our OEMs
generally have exclusive rights to our technology on their platforms,
subject to certain minimum royalty obligations.
<PAGE>
Our OEMs may not continue to carry our products. The inability to recruit,
or the loss of, important OEMs could serious harm our business, operating
results and financial condition.
We Depend on International Revenue.
Our continued growth and profitability will require further expansion of
our international operations. To successfully expand international operations,
we must:
- Establish additional foreign operations;
- Hire additional personnel; and
- Recruit additional international resellers.
This will require significant management attention and financial resources
and could seriously harm our operating margins. If we fail to further expand our
international operations in a timely manner, our business, operating results and
financial condition could be seriously harmed. In addition, we may fail to
maintain or increase international market demand for our products. Our
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 our
products more expensive and, therefore, potentially less competitive in those
markets. In some markets, localization of our products is essential to achieve
market penetration. We may incur substantial costs and experience delays in
localizing our products. We may fail to generate significant revenue from
localized products.
Additional risks inherent in our international business activities
generally include:
- Significant reliance on our distributors and other resellers who do
not offer our products exclusively;
- 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;
- The burdens of complying with a wide variety of foreign laws; and
- The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.
The occurrence of such factors could seriously harm our international sales and,
consequently, our business, operating results and financial condition.
We Rely on Our Key Personnel.
Our future performance depends on the continued service of our key
technical and senior management personnel. None of the our key technical or
senior management personnel is bound by an employment agreement. The loss of the
services of one or more of our officers or other key employees could seriously
harm our business, operating results and financial condition.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and we may fail to retain our key technical and managerial
employees or attract, assimilate or retain other highly qualified technical and
managerial personnel in the future.
We Depend on Growth in the Enterprise Storage Management Market.
All of our business is in the enterprise storage management market. The
storage management market is still an emerging market. Our future financial
performance will depend in large part on continued growth in the number of
organizations adopting company-wide storage and management solutions for their
client/server computing environments. The market for enterprise storage
management may not continue to grow. If the enterprise storage management market
<PAGE>
fails to grow or grows more slowly than we currently anticipate, our business,
operating results and financial condition would be seriously harmed.
We Are Affected by General Economic and Market Conditions.
During recent years, segments of the computer industry have experienced
significant economic downturns characterized by:
- Decreased product demand;
- Product overcapacity;
- Price erosion;
- Work slowdowns; and
- Layoffs.
Our operations may 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. The occurrence of such factors could
seriously harm our business, operating results or financial condition.
Protection of Our Intellectual Property is Limited.
Our success depends significantly upon proprietary technology. To protect
our proprietary rights, we rely on a combination of:
- Patents;
- Copyright and trademark laws;
- Trade secrets;
- Confidentiality procedures; and
- Contractual provisions.
We seek to protect our software, documentation and other written materials
under patent, trade secret and copyright laws, which afford only limited
protection. However,
- We may not develop proprietary products or technologies that are
patentable;
- Any issued patent may not provide us with any competitive advantages
or may be challenged by third parties; or
- The patents of others may seriously impede our ability to do business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and software piracy can be expected to be a persistent problem. In
licensing our products, other than in enterprise license transactions, we rely
on "shrink wrap" licenses that are not signed by licensees. Such licenses may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate. Our competitors may independently
develop similar technology, duplicate our products or design around patents
issued to us or other intellectual property rights of ours.
From time to time, we have received claims that we are infringing third
parties' intellectual property rights. In the future, we may be subject to
claims of infringement by third parties with respect to current or future
products, trademarks or other proprietary rights. We expect that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
<PAGE>
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements with third parties. If such royalty or licensing
agreements, if required, are not available on terms acceptable to us, our
business, operating results and financial condition could be seriously harmed.
Defects in Our Products Would Harm Our Business.
Our products can be used to manage data critical to organizations. As a
result, the risk of product liability claims is inherent in the sale and support
of the products we offer. A successful product liability claim brought against
us could seriously harm our business, operating results and financial condition.
Year 2000 Issues Could Affect Our Business.
Many currently installed computer systems and software products include
coding 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. 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 problems.
We have conducted Year 2000 compliance reviews for current versions of our
products. The reviews include:
- Assessment;
- Implementation;
- Validation testing; and
- Contingency planning.
We respond to customer concerns about our products on a case-by-case basis.
Although we have performed validation testing to ensure our products are Year
2000 compliant and believe our software products are Year 2000 compliant, our
software products may not contain all the necessary software routines and
programs for the accurate calculation, display, storage and manipulation of data
involving dates. Failures of our software products to contain all the necessary
software routines and programs for the accurate calculation, display, storage
and manipulation of data involving dates would seriously harm our business,
operating results and financial condition.
We have tested software obtained from third parties that is incorporated
into our products and believe that such licensed software is Year 2000
compliant. Despite such testing and assurances, products incorporated into our
products may contain undetected errors or defects associated with Year 2000 date
functions. Known or unknown errors or defects in our products may result in:
- Delay or loss of revenue;
- Diversion of development resources;
- Damage to our reputation; or
- Increased service and warranty costs.
The occurrence of any of the foregoing could seriously harm our business,
operating results, or financial condition.
We do not currently have any information concerning the Year 2000
compliance status of our customers. If our current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures to
address Year 2000 compliance problems, our business, results of operations, or
financial condition could be seriously harmed.
We believe the software and hardware we use internally comply with Year
2000 requirements. During 1998, we replaced or upgraded much of our internal use
hardware and software. In addition, we are not aware of any material operational
issues or costs associated with preparing our internal use software and hardware
for the Year 2000. However, serious, unanticipated negative consequences,
<PAGE>
including material costs caused by undetected errors or defects in the
technology used in our internal systems may occur. The occurrence of any of the
foregoing could seriously harm our business, operating results or financial
condition.
We have funded our Year 2000 compliance review from operating cash flows
and have not separately accounted for these costs in the past. We will incur
additional amounts related to the Year 2000 compliance review including:
- Administrative personnel to manage the review; and
- Outside contractors to provide technical advice and technical support
for our products, product engineering, and customer satisfaction.
We have developed contingency plans to be implemented as part of our
efforts to identify and correct Year 2000 problems. Depending on the systems
affected, these plans include:
- Accelerated replacement of affected equipment or software;
- Short to medium-term use of backup equipment and software;
- Increased work hours for our personnel or use of contract personnel to
correct (on an accelerated schedule) any Year 2000 problems that arise
or to provide manual workarounds for information systems; and
- Other similar approaches
If we are required to implement any of these contingency plans, it could
seriously harm our business, financial condition and operating results. Our
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be seriously impacted by, among other things:
- The availability and cost of programming and testing resources;
- Vendors' ability to modify proprietary software; and
- Unanticipated problems identified in the ongoing compliance review.
Our Trading Price is Volatile.
The market price of our common stock may decrease significantly. A number
of factors could significantly affect the market price of our common stock
including:
- Quarterly fluctuations in financial results or results of other
software companies;
- Changes in our revenue growth rates or our competitors' growth rates;
- Announcements that our revenue or income are below analysts'
expectations;
- Changes in analysts' estimates of our performance or industry
performance;
- Announcements of new products by our competitors or by us;
- Developments with respect to our patents, copyrights, or proprietary
rights or those of our competitors;
- Sales of large blocks of our common stock;
- Conditions in the financial markets in general;
- General business conditions and trends in the distributed computing
environment and software industry;
- Deferred purchases of our products as a result of customers needs to
expend available resources to become Year 2000 compliant;
- Costs and resources required to address potential Year 2000 problems
relating to our products or our internal use software and hardware;
and
- Changes in prices of our products.
In addition, the stock market may experience extreme price and volume
fluctuations, which may affect the market price for the securities of technology
companies without regard to their operating performance or any of the factors
listed above. These broad market fluctuations may seriously harm the market
<PAGE>
price of our common stock. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of such company's securities. Such litigation may occur in the
future with respect to us and could result in substantial costs and diversion of
management's attention and resources, which could seriously harm our business,
financial condition and results of operations.
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEGATO SYSTEMS, INC.
Date: November 30, 1999 /S/ Stephen C. Wise
--------------------------------------------
Stephen C. Wise
Senior V.P. of Finance and
Chief Financial Officer
(Duly authorized officer and
principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
271. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET - UNAUDITED AND CONDENSED CONSOLIDATED STATEMENT OF
INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000859360
<NAME> LEGATO SYSTEMS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 92,835
<SECURITIES> 43,018
<RECEIVABLES> 43,063
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 186,004
<PP&E> 21,164
<DEPRECIATION> 0
<TOTAL-ASSETS> 224,896
<CURRENT-LIABILITIES> 50,198
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 174,170
<TOTAL-LIABILITY-AND-EQUITY> 224,896
<SALES> 0
<TOTAL-REVENUES> 52,352
<CGS> 6,887
<TOTAL-COSTS> 40,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,039
<INCOME-TAX> 4,842
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,197
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
