UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 40,583,638.
<PAGE>
<TABLE>
Legato Systems, Inc.
Index
<CAPTION>
PART I: Condensed Financial Information
<S> <C>
Item 1. Financial Statements: Page
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 10
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>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents
$ 86,522 $ 81,128
Short-term investments 30,627 28,472
Accounts receivable, net 41,140 36,787
Other current assets 5,924 5,034
Deferred tax asset 5,896 6,012
Total current assets 170,109 157,433
Long-term investments 12,391 9,023
Property and equipment, net 18,128 17,630
Intangible assets, net 1,963 2,243
Deposits and other assets 3,252 536
Total assets $ 205,843 $ 186,865
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 19,934 $ 22,226
Deferred revenue 23,297 19,651
Total current liabilities 43,231 41,877
Deferred tax liability 528 523
Commitments
Stockholders' equity:
Common stock 97,267 89,775
Retained earnings 64,817 54,690
Total stockholders' equity 162,084 144,465
Total liabilities and stockholders' equity $ 205,843 $ 186,865
</TABLE>
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<CAPTION>
Three Months
Ended
March 31,
<S> <C> <C>
1999 1998
Revenue:
Product license $ 30,514 $ 17,537
Royalty 4,939 4,743
Service and support 12,827 6,134
Total revenue 48,280 28,414
Cost of revenue:
Product license 1,049 754
Service and support 4,559 2,527
Total cost of revenue 5,608 3,281
Gross profit 42,672 25,133
Operating expenses:
Research and development 6,518 4,469
Sales and marketing 17,434 10,585
General and administrative 3,429 2,405
Amortization of intangibles 279 279
Total operating expenses 27,660 17,738
Income from operations 15,012 7,395
Interest and other income, net 1,322 851
Income before provision for income taxes 16,334 8,246
Provision for income taxes 6,206 3,051
Net income $ 10,128 $ 5,195
Other comprehensive, net of tax:
Unrealized gains (losses) on securities (6) 21
Comprehensive income $ 10,122 $ 5,216
Basic earnings per share $ 0.27 $ 0.14
Diluted earnings per share $ 0.25 $ 0.13
Shares used in basic earnings per share calculations 37,907 36,221
Shares used in diluted earnings per share calculations 40,882 39,155
</TABLE>
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE>
<TABLE>
LEGATO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
Three Months
Ended
March 31,
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net income $ 10,128 $ 5,195
Adjustments to reconcile net income to net cash
provided by operating activities:
Net deferred tax asset 121 (212)
Depreciation and amortization 1,927 1,255
Tax benefit from exercise of stock options 2,785 3,467
Changes in operating assets and liabilities:
Accounts receivable (4,353) 1,199
Other current assets (890) 423
Deferred revenue 3,646 286
Other current liabilities (2,292) 872
Net cash provided by operating activities 11,072 12,485
Cash flows from investing activities:
Purchase of available-for-sale securities (26,439) (8,135)
Maturities and sales of available-for-sale securities 20,911 13,810
Acquisition of property and equipment (2,146) (1,820)
Purchase of long-term assets and other (2,715) (31)
Net cash provided by (used in) investing activities (10,389) 3,824
Cash flows from financing activities:
Proceeds from issuance of common stock 4,707 3,725
Other 4 5
Net cash provided by financing activities 4,711 3,730
Net increase in cash and cash equivalents 5,394 20,039
Cash and cash equivalents at beginning of period 81,128 34,891
Cash and cash equivalents at end of period $ 86,522 $ 54,930
</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. The balance sheet at December 31, 1998 was derived from audited
financial statements; however, it does not include all disclosures required by
generally accepted accounting principles.
Note 2. Computation of Earnings Per Share
Basic net income 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 net income 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 net
income per share is provided as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1999 1998
Numerator - basic and diluted net income per share
Net income $ 10,128 $ 5,195
Denominator - basic net income per share
Weighted average common shares outstanding 37,907 36,221
Net income per share - basic $ 0.27 $ 0.14
Denominator - diluted net income per share
Weighted average common shares outstanding 37,907 36,221
Effect of dilutive securities:
Common stock options 2,975 2,934
Weighted average common and common
equivalent shares 40,882 39,155
Net income per share - diluted $ 0.25 $ 0.13
Options excluded from diluted net income
per share calculation 177 11
</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
We adopted the provisions of Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This statement establishes standards
for reporting and display of comprehensive income and its components (including
revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. Our unrealized loss on investments represents the only component of
comprehensive income which are excluded from net income for the quarter ended
March 31, 1999. Our comprehensive income has been presented in the consolidated
financial statements. The tax effects allocated to the component of other
comprehensive income and accumulated other comprehensive income balances are as
follows:
<TABLE>
<CAPTION>
Tax
Before-Tax Benefit Net of Tax
Amount (Expense) Amount
(in thousands)
<S> <C> <C> <C>
March 31, 1999:
Unrealized loss on securities........................................ $ (10) $ 4 $ (6)
Total other comprehensive income..................................... $ (10) $ 4 $ (6)
March 31, 1998:
Unrealized gains on securities....................................... $ 34 $ (13) $ 21
Total other comprehensive income..................................... $ 34 $ (13) $ 21
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Income
<S> <C>
Balance, December 31, 1998........................................... $ 56
Current period change................................................ (6)
Balance, March 31, 1999.............................................. $ 50
</TABLE>
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.......................................................... $ 32,884 $ 18,746
International.......................................................... 15,396 1,345
Total.................................................................. $ 48,280 $ 20,091
March 31, 1998:
North America.......................................................... $ 19,554 $ 13,763
International.......................................................... 8,860 730
Total.................................................................. $ 28,414 $ 14,493
</TABLE>
Note 5. Other Matters
Revenue Recognition
In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-1, or SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
companies to capitalize certain costs of computer software developed or obtained
for internal use, provided that those costs are not research and development.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are
evaluating the requirements of SOP 98-1 and the effects, if any, on our current
policies on accounting for software costs.
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
are evaluating the requirements of SOP 98-9 and the effects, if any, on our
current revenue recognition policies.
Derivative Instruments and Hedging Activities
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.
Note 6. Subsequent Event
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
720,000 shares of our common stock and provided cash consideration of $9,112,500
for all of the outstanding stock and stock rights of Intelliguard. We accounted
for the transaction as a business purchase combination.
On April 19, 1999, we completed the merger of 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. We issued 1,721,000 shares of our common stock in exchange
for all the common stock and options of Qualix Group, Inc. We accounted for the
transaction as a pooling-of-interests.
The following unaudited pro forma data summarizes the combined results of
operations of Legato and FullTime Software, Inc. as though the merger had
occurred at the beginning the period presented:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1999 1998
(in thousands)
Revenue:
Legato Systems, Inc. $ 48,280 $ 28,414
FullTime Software, Inc. 4,072 5,971
Total $ 52,352 $ 37,230
Net Income (Loss):
Legato Systems, Inc. $ 10,128 $ 5,195
FullTime Software, Inc. (1,931) (2,077)
Total $ 8,197 $ 3,118
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding 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, 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.
Selected elements of our consolidated financial statements are shown below
as a percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1999 1998
Revenue:
Product 63.2% 61.7%
Royalty 10.2 16.7
Service and support 26.6 21.6
Total revenue 100.0 100.0
Cost of revenue:
Product 2.2 2.7
Service and support 9.4 8.8
Total cost of revenue 11.6 11.5
Gross profit 88.4 88.5
Operating expenses:
Research and development 13.5 15.7
Sales and marketing 36.1 37.3
General and administrative 7.1 8.5
Amortization of intangibles 0.6 1.0
Total operating expenses 57.3 62.5
Income from operations 31.1 26.0
Interest and other, net 2.7 3.0
Income before provision for income taxes 33.8 29.0
Provision for income taxes 12.9 10.7
Net income 20.9% 18.3%
</TABLE>
<PAGE>
Revenue
Total revenue for the first quarter of 1999 increased 70% 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 was $30.5 million in the
first quarter of 1999 and $17.5 million in the first quarter of 1998. Product
license revenue increased 74 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.
Royalty Revenue. Royalty revenue was $4.9 million in the first quarter of
1999 and $4.7 million in the first quarters 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.
Service and Support Revenue. Service and support revenue was $12.8 million
in the first quarter of 1999 and $6.1 million in the first quarter of 1998.
Service and support revenue increased 109 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
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.
International product license revenue was $14.6 million in the quarter of
1999 and $7.7 million in the first quarter of 1998. International product
license revenue increased 89 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 $42.7 million in the first quarter of 1999 and $25.1
million in the first quarter of 1998, representing 88.4 percent in the first
quarter of 1999 and 88.5 percent in the first quarter of 1998. Gross profit
consists of product license and service and support revenue less related costs.
Gross profit from product license revenue was $29.5 million in the first
quarter of 1999 and $16.8 million in the first quarter of 1998, representing
96.6 percent of product license revenue in the first quarter of 1999 and 95.7
percent in the first quarter of 1998. Gross profit from product license revenue
increased 76 percent from the first quarter of 1998 to the first quarter of
1999. Gross profit from product license revenue consists of product license
revenue less the related costs. Related costs of revenue consist primarily of
product media, documentation and packaging. The rate of increase in gross profit
from product license revenue was greater than the rate of increase in the
related costs of product license revenue.
Gross profit from service and support revenue was $8.3 million in the first
quarter of 1999 and $3.6 million in 1998, representing 64.5 percent of the
service and support revenue in the first quarter of 1999 and 58.8 percent in
1998. Gross profit from service and support revenue increased 129 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
$6.5 million in the first quarter of 1999 and $4.5 million in the first quarter
of 1998, representing 13.5 percent of total revenue in the first quarter of 1999
and 15.7 percent in the first quarter of 1998. Research and development expenses
increased 46 percent from the first quarter of 1998 to the first quarter of
1999. The increases in research and development expenses in absolute dollars
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. 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 $17.4 million in the first quarter
of 1999 and $10.6 million in the first quarter of 1998, representing 36.1
percent of total revenue in the first quarter of 1999 and 37.3 percent in 1998.
Sales and marketing expenses increased 65 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. 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 $3.4 million in the first quarter of 1999 and $2.4
million in the first quarter of 1998, representing 7.1 percent of total revenue
in the first quarter of 1999 and 8.5 percent of total revenue in the first
quarter of 1998. General and administrative expenses increased 43 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. 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 $1.3
million in the first quarter of 1999 and $851,000 in the first quarter of 1998.
Interest and other income primarily represents 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 $6.2 million, compared to $3.1 million for the first quarter
of 1998. The effective tax rate was 38 percent for the first quarter of 1999 and
37 percent for the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and investments totaled $129.5 million at March
31, 1999, and represented 63 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 $162.1
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 $11.1
million in the first quarter of 1999. Net cash provided by operations in the
first quarter of 1999 consisted primarily of net income of $10.1 million plus
the tax benefit from exercise of stock options of $2.8 million and depreciation
and amortization of $1.9 million offset by the net change in operating assets
and liabilities of $3.9 million.
Net cash used in investing activities was $10.4 million in the first
quarter of 1999. Net cash used in investing activities primarily reflected net
purchases of marketable securities of $5.5 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. Purchases of property
and equipment increased to support the continued growth in our operations from
1998.
Net cash provided by financing activities was $4.7 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. Our computer systems and/or software will need to be
upgraded to comply with such "Year 2000" requirements. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such problems.
We have conducted Year 2000 compliance reviews for current versions of our
products. The reviews include:
-Assessment;
-Implementation;
-Validation testing;
-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 seek assurances from vendors that 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,
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 estimate we may incur an additional $150,000-$200,000 in expenses
relating to the Year 2000 compliance review, depending on the systems affected,
if any, primarily for the replacement of internal use hardware.
We are developing contingency plans to be implemented as part of our
efforts to identify and correct Year 2000 problems. We expect the plan to be
completed and tested by the end of our second quarter ended June 30, 1999.
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 o 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 or our competitors or by us;
-Our ability to timely develop, introduce and market new products,
applications and product enhancements;
-Ability to integrate acquired businesses;
-Our ability to control costs;
-Quality control of products sold;
-Lengthy sales cycles, particularly with enterprise license transactions;
-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 include:
Novell NetWare and Windows NT platforms:
Computer Associates (Cheyenne Software)
Seagate (Palindrome and Arcada)
Sun Solaris/SunOS platform:
Computer Associates (Legent/Lachman)
EMC2 (Epoch)
Spectra Logic
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 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:
-Keeppace with technological developments and emerging industry standards;
and
-Address the increasingly sophisticated needs of our customers.
We may:
-Failto 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
-Failto 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.
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 six
months, and varies substantially from transaction to transaction;
-They often include product license, service and support components;
-Theytypically 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.
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 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.
WE MUST INTEGRATE RECENT ACQUISITIONS.
On August 6, 1998, we acquired Software Moguls, Inc. ("SMI"), a developer
of advanced backup-retrieval products for the Windows NT and UNIX environments.
On April 1, 1999, we acquired Intelliguard Software, Inc., a developer of
standards-based storage management solutions for storage area networks. On April
19, 1999, we completed the merger of Qualix Group, Inc. (dba FullTime Software,
Inc.), a developer of distributed, enterprise-wide, cross-platform, adaptive
computing solutions into a wholly-owned subsidiary of Legato. 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 seriously harm our business, financial condition and
results of operations.
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 STORAGE MANAGEMENT MARKET.
All of our business is in the 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 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
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 sale and support of products we offer may entail the risk of product
liability claims. 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. Our computer systems and/or software will need to be
upgraded to comply with such "Year 2000" requirements. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such problems.
We have conducted Year 2000 compliance reviews for current versions of our
products. The reviews include:
-Assessment;
-Implementation;
-Validation testing;
-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 seek assurances from vendors that 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,
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 estimate we may incur an additional $150,000-$200,000 in expenses
relating to the Year 2000 compliance review, depending on the systems affected,
if any, primarily for the replacement of internal use hardware.
We are developing contingency plans to be implemented as part of our
efforts to identify and correct Year 2000 problems. We expect the plan to be
completed and tested by the end of our second quarter ended June 30, 1999.
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 o 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
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: May 10, 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)
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