FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-17529
Qualix Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0261239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
177 Bovet Road, 2nd Floor
San Mateo, CA 94404
(Address of principal executive offices) (Zip code)
(650) 572-0200
(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 ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of September 30, 1998.
Title Outstanding
Common stock-par value $0.001 10,708,951
This document consists of 27 pages, of which this is page 1.
<PAGE>
QUALIX GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1998 and June 30, 1998..............................3
Condensed Consolidated Statements of Operations-Three months
ended September 30, 1998 and 1997....................................4
Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 1998 and 1997.......................5
Notes to Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................8
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................22
Item 2. Changes in Securities...............................................22
Item 3. Defaults Upon Senior Securities.....................................22
Item 4. Submission of Matters to a Vote of Security Holders.................22
Item 5. Other Information...................................................23
Item 6. Exhibits and Reports on Form 8-K....................................23
SIGNATURES...................................................................24
Exhibit Index................................................................25
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
----------------- -----------------
Sept 30, June 30,
1998 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,614 $ 6,869
Temporary cash investments 5,514 5,005
Accounts receivable, net 4,795 4,236
Other current assets 954 1,052
----------------- -----------------
Total current assets 14,877 17,162
Property and equipment, net 3,641 3,772
================= =================
Total assets $ 18,518 $ 20,934
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 3,616 $ 3,594
Deferred revenue and advances 2,424 2,856
Current portion of long-term obligations 259 258
----------------- -----------------
Total current liablities 6,299 6,708
----------------- -----------------
Long-term obligations 91 87
Stockholders' Equity 12,128 14,139
================= =================
Total liabilities and stockholders' equity $ 18,518 $ 20,934
================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited )
<TABLE>
<CAPTION>
---------------------------
Three Months Ended
September 30,
---------------------------
------------ ------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Reliability software $ 3,956 $ 4,506
Other products 1,455 2,386
Support, maintenance and consulting 1,590 1,333
------------ ------------
Total Revenue 7,001 8,225
------------ ------------
Cost of revenue:
Cost of reliability software 349 64
Cost of other products 986 1,708
Cost of support, maintenance and consulting 596 483
------------ ------------
Total cost of revenue 1,931 2,255
------------ ------------
Gross profit 5,070 5,970
Operating expenses:
Sales and marketing 5,269 4,319
General and administrative 1,234 1,014
Research and development 819 848
------------ ------------
Total operating expenses 7,322 6,181
------------ ------------
Loss from operations (2,252) (211)
Interest income (expense), net 132 248
------------ ------------
Income (loss) before income taxes (2,120) 37
Provision for income taxes - -
============ ============
Net income (loss) $ (2,120) $ 37
============ ============
Basic Earnings (Loss) per share $ (0.20) $ -
============ ============
Shares used in per share computation 10,589 10,215
============ ============
Diluted Earnings (Loss) per share $ (0.20) $ -
============ ============
Shares used in per share computation 10,589 10,717
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
<CAPTION>
---------------------------------
Three Months Ended
September 30,
---------------------------------
-------------- ---------------
1998 1997
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,120) $ 37
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 365 152
Amortization of discount on long-term obligations 5 7
Changes in:
Accounts receivable (559) (281)
Other current assets 98 (81)
Accounts payable and accrued liabilities 22 (98)
Deferred revenue and advances (432) (497)
-------------- ---------------
Net cash used in operating activities (2,621) (761)
Cash flows from investing activities:
Purchases of property and equipment, net (234) (487)
Purchase of temporary cash investments (1,190) (6,594)
Proceeds from maturity of temporary cash investments 700 2,946
-------------- ---------------
Net cash used in investing activities (724) (4,135)
Cash flows from financing activities-
Proceeds from issuance of common stock, net 90 236
-------------- ---------------
Net decrease in cash and cash equivalents (3,255) (4,660)
Cash and cash equivalents, beginning of period 6,869 9,617
============== ===============
Cash and cash equivalents, end of period $ 3,614 $ 4,957
============== ===============
Cash paid during the period for income taxes $ - $ 109
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALIX GROUP, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The Company completed its initial public offering on February 12, 1997. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. The interim condensed consolidated financial statements should
be read in conjunction with the June 30, 1998 consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. The interim financial information herein is not necessarily
indicative of the results of any future period.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
2. Net Income (Loss) Per Share
Net income (loss) per basic share has been computed based upon the weighted
average number of common shares outstanding for the periods presented, adjusted
for contingently issuable shares totalling 78,000 and 110,000 for the quarters
ended September 30, 1998 and 1997, respectively.
For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive shares
outstanding. Potentially dilutive common shares consist of shares issuable upon
the assumed exercise of dilutive stock options and totalled 391,000 for the
quarter ended September 30, 1997. Due to their anti-dilutive effect, 132,760
potentially dilutive shares were excluded from the diluted loss per share
computation for the quarter ended September 30, 1998.
3. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", during the quarter ended September 30,
1998. Comprehensive income (loss) represents net income (loss) for the period as
adjusted for net unrealized gains (losses) on available-for-sale securities, net
of taxes, and was $(2,101,000) and $79,000, respectively, for the quarters ended
September 30, 1998 and 1997.
4. Effects of Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued SFAS No.131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for a company's business
segments and related disclosures about its products, services, geographic areas
and major customers. The Company has not yet identified its SFAS 131 reporting
segments. Adoption of this standard will not impact the Company's consolidated
financial position, results of operations or cash flows and is effective for the
Company for fiscal 1999.
5. Subsequent Event
The Company and Legato Systems, Inc. ("Legato") have entered into an
Agreement and Plan of Reorganization, dated as of October 25, 1998 (the
"Reorganization Agreement. Pursuant to the Reorganization Agreement, Merger Sub
will merge (the "Merger") with and into the Company, with the Company as the
surviving corporation and becoming a wholly-owned subsidiary of Legato; each
share of the Company's Common Stock issued and outstanding immediately prior to
the Effective Time of the Merger (the "effective time will be canceled and
extinguished and be converted automatically into the right to receive a fraction
of a share of Legato Common Stock (the "Exchange Ratio"), the numerator of which
is equal to (i)1,721,000 shares and the denominator of which is equal to
(ii)the sum of (A) the aggregate number of shares of the Company's Common Stock
issued and outstanding as of the Effective Time, and (B) the aggregate number of
shares of the Company's Common Stock issuable upon exercise of all outstanding
options to acquire shares of Company stock outstanding as of the Effective Time.
All outstanding options to purchase Company Common Stock will be assumed
byLegato and will become options to purchase shares of the Legato's Common
Stock. The transaction is intended to be accounted for as a pooling of interests
and qualify as a tax-free reorganization. The Merger has been approved by the
Boards of Directors of the Company and Legato, but is still subject to
regulatory review and approval, approval by the stockholders of the Company and
other conditions to closing. A proxy statement and Legato prospectus will be
delivered to the stockholders of the Company in connection with the special
meeting of stockholders of the Company to, among other matters, vote on the
Merger.
The Company has agreed that if the Merger is not consummated as a result of
certain specified events (involving, in general, a change in Board support for
the Merger and/or an alternative transaction), it will pay to the Legato a
termination fee of $2.0 million. If the Merger is not consummated, expenses
incurred in connection with the proposed Merger (including the possible
"break-up" fees described above) could have a material adverse effect on the
Company's results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements and the accompanying notes.
This Form 10-Q contains forward-looking statements written in the meaning
of section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve a number of risks and uncertainties. Such
risks and uncertainties include, but are not limited to, those discussed in this
Form 10-Q. The actual results that the Company achieves may differ materially
from any anticipated results described in the forward-looking statements due to
such risks and uncertainties. See "Risk Factors."
Overview
Qualix Group, Inc. ("Qualix Group" or the "Company") is a leading provider
of proactive service level availability ("SLA") management software for UNIX and
Windows NT-based applications and information, operating in distributed
computing environments. Its service level availability solutions are designed to
minimize the impact of planned and unplanned computing events on
business-critical applications. The Company offers software products for
managing the service level availability of both packaged and proprietary
applications, as well as the data associated with these applications. In July
1998, Qualix Group commenced doing business as FullTime Software, Inc.
The Company was incorporated under the laws of Delaware on September 21,
1990. The Company began operating primarily as a distributor, value-added
reseller (VAR) and publisher of licensed third party client/server software
products. In 1993, the Company focused on the reliability market by introducing
QualixHA, its first high availability product for the UNIX operating
environment. QualixHA was based on a licensed core software engine. In May 1996,
the Company acquired substantially all of the assets and assumed certain
liabilities of Anthill Incorporated ("Anthill"), including technology relating
to a hierarchical storage management product under development. In August 1996,
the Company merged with Octopus Technologies, Inc. ("Octopus Technologies")
which had developed high availability and remote data mirroring products for the
Windows NT operating environment.
In October 1996, the Company introduced QualixHA+, currently known as HA+,
which is based on an internally developed core software engine. A key element of
the Company's strategy is to increase substantially the percentage of revenues
derived from internally developed or acquired products that typically have
higher gross margins than licensed products. Pursuant to this strategy, the
Company ceased marketing Qualix HA in February 1997. The Company completed its
initial public offering in February 1997, receiving net proceeds of $14,950,000.
In July 1998, the Company introduced FullTime software solutions. These
solutions are designed to maintain service level availability during a variety
of planned and unplanned computing events that can dramatically impact the
availability of services and information. The Company believes that its FullTime
products and solutions redefine high availability to solve a much broader market
problem, offering a potential opportunity for the Company to dramatically expand
the size of its potential market and to target enterprise-wide customers, as
well as individual departmental customers. A key element of the Company's
strategy is to sell FullTime products and solutions to strategic buyers such as
CIOs, heads of IT and others responsible for maintaining SLAs between IT and
line-of-business organizations. Increasingly, SLAs are becoming the basis on
which lines-of-business organizations measure corporate IT performance
concerning the required availability of business-critical applications and
information.
The Company's service level availability products and services are based on
internally-developed technology including (i) network data application
monitoring, (ii) system hardware/software monitoring and (iii) support for
managing and monitoring disk volumes and volume managers, and
externally-developed technology acquired in January, 1998 representing a
messaging system with a distributed persistent database, event management, rule
engine and application management.
Prior to the Octopus Technologies merger, and prior to developing
QualixHA+, the Company had minimal research and development expenditures and a
correspondingly high cost of reliability software revenue. The Company expects
its research and development expenditures to increase substantially in the
future as a result of its increasing focus on internal development of products.
See "Risk Factors-Need to Expand Product Development and Engineering
Capability."
The Company markets and sells reliability software through a combination of
its field sales organization and indirect distribution channels. In addition,
the Company sells other third party software and hardware products through its
Qualix Direct telesales organization, which has recently transitioned into
selling the Company's reliability products for Windows NT, the Octopus product
line.
The Company generally recognizes revenue from software license agreements
upon shipment of the software if no significant future contractual obligations
remain and collection of the resulting receivable is probable. Maintenance and
technical support revenue is recognized ratably over the term of the agreement,
typically 12 months. Consulting and training revenue is recognized as services
are provided.
Results of Operations
Total Revenues
Total revenues decreased to $7,001,000 in the first quarter of fiscal 1999
from $8,225,000 for the same period of fiscal 1998, a decrease of $1,224,000, or
15%. Total revenues increased $475,000 from the previous quarter ended June 30,
1998, an increase of 7%.
Reliability Software. Reliability software revenues decreased to $3,956,000
in the first quarter of fiscal 1999 from $4,506,000 for the comparable period in
the prior year, a decrease of $550,000, or 12%. The decrease from the comparable
quarter in the prior year is attributable to the recent transition of the sales
force to a new enterprise-level sales approach and the shift in focus from
selling its high availability products to selling its FullTime service level
availability products and services. The sales force spent a significant amount
of time in the first quarter of fiscal 1999 training and familiarizing itself
with the new products and introducing these new products to the marketplace.
Other Products. Revenue from the sale of other products, which consist
primarily of ancillary hardware and software products that are resold by Qualix
Direct, decreased to $1,455,000 in the first quarter of fiscal 1999 from
$2,386,000 for the same period of 1998, a decrease of $931,000 or 39%. This
decrease is attributable to Qualix's continued focus on the sales of the
Company's internally developed higher margin reliability products as compared to
third party products.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue, primarily derived from annual maintenance agreements and training,
increased to $1,590,000 in the first quarter of fiscal 1999 from $1,333,000 for
the same period of fiscal 1998, an increase of $257,000, or 19%. This increase
has been primarily attributable to increasing renewals of support contracts and,
to a lesser extent, on increased sales of services and support contracts on new
license sales.
International Revenue. Revenue generated from sales to customers outside
the United States increased 19% to $1,462,000 in the first quarter of fiscal
1999 from $1,228,000 in the first quarter of fiscal 1998. International revenue
was 21% of total revenue for the three months ended September 30, 1998 and 15%
of total revenue for the three months ended September 30, 1997. The increase in
international revenue has been attributable primarily to the increase in field
sales offices and increases in the number of international employees. At
September 30, 1998 the Company had 23 foreign employees in 8 offices compared to
9 foreign employees in 5 offices at September 30, 1997.
Cost of Revenues
Total cost of revenues decreased to $1,931,000 in the first quarter of
fiscal 1999 from $2,255,000 for the same period of 1998, a decrease of $324,000,
or 14%.
Cost of Reliability Software. Cost of reliability software as a percentage
of reliability software revenues increased to 9% in the first quarter of fiscal
1999 from 1% in the first quarter of 1998. Gross margin on reliability software
was 92% in the three months ended September 30, 1998 and 99% in the three months
ended September 30, 1997. Cost of reliability software in the first quarter of
fiscal 1998 was minimal due to the benefit gained from converting some of the
Company's installed base from QualixHA, which had a royalty component, to
QualixHA+ with no royalty component. This conversion generated an immediate
gross margin benefit approximating 12% of reliability software revenues for the
quarter. Additionally, the current quarter was impacted by higher sales volume
of a lower margin resold reliability product.
Cost of Other Products. Cost of other products as a percentage of other
product revenues decreased to 68% in the first quarter of fiscal 1999 from 72%
in the first quarter of 1998. In general, margins for resold products are
decreasing, however these decreases were partially offset by the refocused
efforts of the Qualix Direct telesales organization on the higher margin
reliability products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance
and consulting as a percentage of support, maintenance and consulting revenues
increased to 37% for the first quarter of fiscal 1999 from 36% for the same
period of 1998. This slight increase is primarily the result of increases in the
Company's support staff.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $5,269,000
in the first quarter of fiscal 1999 from $4,319,000 for the same period of 1998,
an increase of $950,000, or 22%. These expenses increased as a percentage of
total net revenues to 75% in the first quarter of fiscal 1999 from 52% in the
first quarter of 1998. This increase on an absolute and percentage basis was
primarily attributable to the transition of the Company's sales staff from one
focused on sales at the departmental level to a sales force focused on larger
enterprise sales and national accounts. Additionally, the Company spent
approximately $355,000 during the quarter related to the rollout of the FullTime
product line and the Company's name change.
General and Administrative. General and administrative expenses increased
to $1,234,000 in the first quarter of fiscal 1999 from $1,014,000 for the same
period of 1998, an increase of $220,000, or 22%. As a percentage of total net
revenues, these expenses increased to 18% in the first three months of fiscal
1999 from 12% in the comparable period of 1998. The increase in absolute dollars
is primarily a result of increased staffing and related costs required to manage
and support the Company's operations as well as increases in depreciation
expense and other costs associated with business expansion and incremental costs
associated with being a public company.
Research and Development. Research and development expenses decreased to
$819,000 in the first quarter of fiscal 1999 from $848,000 for the same period
of 1998, a decrease of $29,000, or 3%. This slight decrease was primarily
attributable to a decrease in the use of outside consultants and was offset by
increases due to increased staffing and related expenses required to support
product development activities, including development of the FullTime service
level availability products introduced in July 1998, development and enhancement
of HA+, the Company's UNIX-based high availability products, and adding features
to the Company's Octopus family of reliability products including application
failover and support for Microsoft Cluster Server. The Company believes that
research and development expenses will increase during the remainder of fiscal
1999 as the Company continues to invest in developing new products, applications
and product enhancements.
Interest Income (Expense), net. Interest income, net, decreased to $132,000
in the first quarter of fiscal 1999 from $248,000 for the same period of 1998, a
decrease of $116,000, or 47%. This decrease reflects lower average investment
balances largely attributable to the net losses incurred in fiscal 1998.
Provision For Income Taxes. The Company recorded no provision for income
taxes for the first quarter of fiscal 1999 and the first quarter of 1998 as the
Company had taxable losses for which no significant benefit was recognized.
Net Income (Loss). Net loss for the quarter ended September 30, 1998 was
$(2,120,000) or $(0.20) per share, diluted, compared to net income of $37,000 or
$0.00 per share, diluted, for the comparable period in the prior fiscal year.
Liquidity and Capital Resources
At September 30, 1998, the Company had $9,128,000 in cash, cash equivalents
and temporary cash investments, as compared to $11,874,000 at June 30, 1998, a
decrease of $2,746,000, or 23%. At September 30, 1998, the Company had working
capital of $8,578,000 compared to $10,454,000 at June 30, 1998.
Cash Flows From Operating Activities. Cash used in operations was
$2,621,000 during the first three months of fiscal 1999 which was a $1,860,000
increase from the comparable period of the prior year. This increase is
attributed principally to the loss from operations, increases in accounts
receivable and a decrease in deferred revenue and advances offset by an increase
in depreciation and amortization. During the comparable period of fiscal 1998,
cash used in operating activities was attributable to income from operations
plus increases in depreciation and amortization offset by increases in accounts
receivable and other current assets and decreases in deferred revenues, accounts
payable and accrued liabilities. The decreases in deferred revenue and advances
are attributable to payments under support, maintenance and consulting contracts
for which revenue had not yet been recognized.
Cash Flows From Investing Activities and Financing Activities. Net cash
used by investing activities was $724,000 for the first three months of fiscal
1999 primarily consisting of $234,000 in purchases of property and equipment and
$1,190,000 in net purchases of temporary cash investments offset by proceeds
from maturity of temporary cash investments of $700,000. Net cash generated by
financing activities was $90,000 for the first three months of fiscal 1998
representing proceeds from the issuance of common stock.
The Company believes that cash flows from operations, existing cash
balances and temporary cash investments will be sufficient to meet its working
capital requirements for at least the next 12 months. However, if the available
funds and cash generated from operations are insufficient to satisfy the
Company's cash needs, the Company may be required to sell additional equity or
convertible debt securities. There can be no assurance that the Company will be
able to sell such securities. Moreover, the sale of additional equity or
convertible debt securities could result in dilution to the Company's
stockholders.
Year 2000 Compliance Issues. Many currently installed computer systems and
software products are coded to accept only two digit entries in date code
fields. These date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, many companies' software and computer systems may need to be upgraded or
replace in order to comply with such "Year 2000" requirements.
The Company has tested its current products for Year 2000 compliance and
believes that its current products are Year 2000 compliant. However, the failure
of the Company's current or prior products to operate properly with regard to
the Year 2000 requirements could cause the Company to incur unanticipated
expenses to remedy any problems, could cause a reduction in sales and could
expose the Company to related litigation by its customers, each of which could
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company utilizes third party equipment and software that may not be
Year 2000 compliant. Except for suppliers of the desktop software, operating
systems and the Company's proposed new financial system (as discussed in the
following paragraph), the Company has made inquiries of all its material
equipment and software suppliers as to the Year 2000 compliance of their
products. Each such supplier has indicated that its equipment and/or software
either is, or will be by December 31, 1999, Year 2000 compliant. The Company
plans to conduct a Year 2000 compliance inquiry of the Company's suppliers of
desktop software and operating systems in the first half of fiscal 1999 and to
take such actions as are appropriate under the circumstances.
The supplier of the Company's current financial information system has been
unable to assure the Company that its software will be Year 2000 compliant. The
Company has determined that minor modifications to the current financial
information system would be required to make it Year 2000 compliant. The
estimated cost of such modifications is expected to approximate $50,000.
Nonetheless, while the Company would be affected by any such failure, the
Company believes that it could continue to operate despite any such failure of
its financial information system to be Year 2000 compliant.
The Company also has material relationships with third party suppliers and
service providers who may utilize equipment or software that may not be Year
2000 compliant, such as financial institutions, shipping companies and payroll
services. The Company has not inquired of any such material party as to their
Year 2000 status, but the Company plans to conduct a Year 2000 compliance
inquiry of such third parties in the first half of fiscal 1999. Based upon the
results of such inquiry, the Company intends to take appropriate action.
Nonetheless, while the Company would be affected by any such failure, the
Company believes that it could continue to operate despite any such failure of a
material party to be Year 2000 compliant. Failure of any third-party's equipment
or software to operate properly with regards to the Year 2000 requirements could
cause the Company to incur unanticipated expenses to remedy any problems and
could cause a reduction in sales, each of which could have a material adverse
effect on the Company's business, operating results and financial condition.
The business, operating results and financial condition of the Company's
customers could also be adversely affected to the extent that they utilize
equipment or software that is not Year 2000 compliant. Furthermore, the
purchasing patterns of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to evaluate and correct
their equipment of software for Year 2000 compliance and as they evaluate the
Year 2000 compliance of like third parties with whom they deal. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company has not established a formal contingency plan for any potential
failure of any of the Company's or any third party's equipment or software, but
the Company plans to create such a formal contingency plan prior to June 30,
1999.
The Company has, and will continue to make, certain investments in its
equipment, software systems and applications to ensure that the Company is Year
2000 compliant and to evaluate the Year 2000 preparedness of the material third
parties with whom it deals. To date, the Company has primarily used existing
personnel and spent approximately $2,000 in order to evaluate the Year 2000
exposure and expects to spend an additional $25,000 in the next twelve months.
As a result, the financial impact to the Company for Year 2000 compliance has
not been and is not anticipated to be material to its financial position,
results of operation or cash flows in any given year.
Subsequent Event
The Company and Legato Systems, Inc. ("Legato") have entered into an
Agreement and Plan of Reorganization, dated as of October 25, 1998 (the
"Reorganization Agreement"), among the Company, Legato and a wholly-owned
subsidiary of Legato (the "Merger Sub"). Pursuant to the Reorganization
Agreement, Merger Sub will merge with and into the Company (the "Merger"), with
the Company continuing as the surviving corporation and becoming a wholly-owned
subsidiary of Legato; each share of the Company's Common Stock, Par Value $0.001
(including, with respect to each such share of the Company's Common Stock, the
associated Rights issued and outstanding immediately prior to the effective time
of the Merger (the "Effective Time") will be canceled and extinguished and be
converted automatically into the right to receive a fraction of a share of
Legato Common Stock (the "Exchange Ratio"), the numerator of which is equal to
(i)1,721,000 shares and the denominator of which is equal to (ii)the sum of
(A) the aggregate number of shares of the Company's Common Stock issued and
outstanding as of the Effective Time, and (B) the aggregate number of shares of
the Company's Common Stock issuable upon exercise of all outstanding options
outstanding as of the Effective Time and assumed by Legato. No adjustment shall
be made in the number of shares of Legato Common Stock issued in the Merger as a
result of (a)any increase or decrease in the market price of Legato Common
Stock prior to the Effective Time or (b)any cash proceeds received by the
Company from the date hereof to the Closing Date pursuant to the exercise of
currently outstanding Company Stock Options.
All outstanding Company Stock Options will be assumed by Legato and will
become options to purchase shares of the Legato's Common Stock. The transaction
is intended to be accounted for as a pooling of interests and qualify as a
tax-free reorganization. The Merger has been approved by the Boards of Directors
of the Company and Legato, but is still subject to regulatory review and
approval, approval by the stockholders of the Company and other conditions to
closing. A proxy statement and Legato prospectus will be delivered to the
stockholders of the Company in connection with the special meeting of
stockholders of the Company to, among other matters, vote on the Merger.
Pursuant to Section 7.1 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. The
Company has agreed that if the Merger is not consummated as a result of certain
specified events (involving, in general, a change in Board support for the
Merger and/or an alternative transaction), it will pay to the Legato a
termination fee of $2.0 million.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break-up" fees described above)
could have a material adverse effect on the Company's results of operations.
BUSINESS RISKS
The following is a summary of risks affecting the business and results of
operations of the Company and should be read in conjunction with the description
of the Company's business contained in the Company's Form 10-K for the year
ended June 30, 1998 (the "1998 10-K") and in other documents filed by the
Company with the Securities and Exchange Commission.
Announcement of the Proposed Business Combination With Legato. Various
risks related to the announcement of the proposed Merger with Legato could have
a material adverse effect on the Company's business, operating results and
financial condition. Among other things, there can be no assurance customers of
the Company will continue their current or historical buying patterns without
regard to the proposed Merger, or that certain customers will not defer
purchasing decisions as they evaluate, among other things, the proposed Merger,
or that certain existing and prospective customers will not decide to purchase
products from the Company's competitors instead of purchasing the Company's
products. The Company's continued success depends to a significant degree upon
the continuing contribution of key employees in management, development, sales,
technical support and administration. Existing employees are likely to have
uncertainty as to their future roles in the combined company. Persons being
recruited for positions in the Company may have similar uncertainty and defer or
reverse decisions to become employed by the Company. In addition, competitors of
the Company may use this uncertainty to attempt to recruit such employees or
prospective employees and make it more difficult for the Company to retain and
attract key employees. In addition, the Company expects to incur significant
expenses in connection with the proposed Merger, whether or not it is
consummated. If the Merger is not consummated, such expenses, which may include
the "break-up" fees described under "Subsequent Event" above, could have a
material adverse effect on the Company's results of operations.
If the proposed Merger occurs, each share of the Company's Common Stock
outstanding at the Effective Time will be converted into the right to receive
approximately 0.14 of a share (the "Exchange Ratio") of Legato common stock.
Because the Exchange Ratio is fixed (based on a total of 1,721,000 shares of
Legato Common Stock payable in the Merger), it will not increase or decrease due
to fluctuations in the market price of either Legato or the Company's Common
Stock. However, because the Exchange Ratio is so fixed, the market price of the
Company's Common Stock will likely move in the same general direction as does
Legato's Common Stock prior to the Effective Time. If the market price of Legato
Common Stock decreases or increases prior to the Effective, the market value of
the Legato Common Stock to be received by Company stockholders at the Effective
Time would correspondingly decrease or increase. In addition, to a lesser
extent, the Exchange Ratio to be received at the Effective Time will be subject
to reduction as a result of any additional Company Stock Option grants prior to
the Effective Time.
Recent Transition to New Business Model. The Company believes that the
strategic nature of its new products and solutions for maintaining service level
availability requires a new enterprise-level sales approach. During fiscal year
1998, in conjunction with its FullTime product development activities, the
Company changed its sales and marketing management and currently is upgrading
its direct sales force with a focus on enterprise-level sales. The Company's
future profitability, if any, will be heavily dependent on the successful
implementation of its enterprise sales and marketing strategy and the market
acceptance of the FullTime products and solutions. There can be no assurance
that the Company will successfully implement this strategy. See "-Dependence on
Qualix Direct" and "Need to Develop Enterprise Sales Force."
Risk of Significant Fluctuations in Quarterly Operating Results. The
Company has experienced, and expects to continue to experience, significant
fluctuations in operating results, on an annual and a quarterly basis, as a
result of a number of factors, many of which are outside the Company's control,
including the size and timing of orders; lengthy sales cycles; customer budget
changes; introduction or enhancement of products by the Company or its
competitors; changes in pricing policy of the Company or its competitors; the
mix of products sold, including particularly the mix of owned, licensed and
resold products; increased competition; technological changes in computer
systems and environments; the ability of the Company to timely develop or
acquire, introduce and market new products; quality control of products sold;
market readiness to deploy reliability products for distributed computing
environments; market acceptance of new products and product enhancements;
seasonality of revenue; customer order deferrals in anticipation of new products
and product enhancements; the Company's success in expanding its sales and
marketing programs; personnel changes; foreign currency exchange rates; mix of
sales channels; acquisition costs or other nonrecurring charges in connection
with the acquisition of companies, products or technologies; and general
economic conditions.
The Company believes that operating results in the near-term will be
particularly dependent upon the success or failure of its new enterprise-level
sales approach, achieving significant market acceptance of its FullTime products
and solutions and continued market acceptance of its high availability products,
as well as the timing and size of orders received. The Company's gross margin
will be affected by a number of factors, including the mix of owned, licensed
and resold products, the percentage of total revenue from service contracts,
product pricing, the percentage of total revenue from direct sales and indirect
distribution channels and the percentage of sales by the Qualix Direct telesales
organization. Internally developed or acquired products generally have higher
gross margins than licensed products because lower or no royalties must be paid.
Service revenues generally have lower margins than revenues from sales of owned
products because of the costs incurred to generate service revenues. Revenues
from products resold by the Qualix Direct telesales organization generally have
lower gross margins than revenues from owned and licensed products sold by the
Company's other direct and indirect distribution channels.
Large sales of certain reliability products, including the FullTime
products and solutions and HA+ often have long cycles and are subject to a
number of significant risks over which the Company has little or no control. The
timing of large sales can cause significant fluctuations in the Company's
operating results, and delivery schedules may be canceled or delayed. Because
sales orders are typically shipped shortly after receipt, order backlog as of
any particular date is not necessarily indicative of the Company's future
revenues. Accordingly, total revenues in any quarter are substantially dependent
on orders booked and shipped during that quarter. Historically, the Company has
often recognized a significant portion of its revenues in the last weeks, or
even days, of a quarter. As a result, the magnitude of quarterly fluctuations
may not become evident until late in, or after the close of, a particular
quarter. Further, to the extent that the Company is successful in licensing its
FullTime products and solutions (particularly to large enterprise and national
accounts), the size of its orders and the length of its sales cycle are likely
to increase. In addition, the Company's expense levels are based in significant
part on expectations as to future revenues and as a result are relatively fixed
in the short run. If revenues are below expectations in any given quarter, net
income is likely to be disproportionately affected, particularly because the
Company relies heavily on a relatively high cost direct sales channel.
Based upon all of the foregoing, the Company believes that the Company's
annual and quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its results of
operations are not necessarily meaningful and that, in any event, such
comparisons should not be relied upon as indications of future performance. In
addition, it is likely that in future quarters the Company's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Intense Competition. The market for reliability software for distributed
computing environments is intensely competitive, fragmented and characterized by
rapid technological developments, evolving standards and rapid changes in
customer requirements. To maintain and improve its position in this market, the
Company must continue to enhance current products and develop new products in a
timely fashion. Although the Company believes that the reliability segment of
the market is in the early stages of development, the Company competes, or may
compete, with four types of vendors: (i) independent vendors that provide
reliability products; (ii) host-based systems management software companies
migrating their products to the distributed computing market; (iii) distributed
computing systems management software companies that incorporate reliability
products as a part of integrated systems management solutions; and (iv) hardware
and operating system vendors that incorporate high availability solutions into
their products.
Many of the Company's 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
the Company. The Company's current and future competitors could introduce
products with more features, higher scaleability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring or
forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. Any material reduction in the price of the Company's
products would negatively affect gross margins and would require the Company to
increase software unit sales in order to maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is in an early stage of development.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources
than the Company, and the failure to do so would have a material adverse effect
upon the Company's business, financial condition and results of operations.
Need to Develop Enterprise Sales Force. As part of the Company's evolving
strategy of offering enterprise level software products and solutions, the
Company has recently reorganized its sales force. The Company historically has
not had a separate large enterprise or national accounts sales force and only
recently developed a direct sales group focused on these larger accounts. To
succeed in the national accounts market, the Company will be required to
transition its existing sales force into the enterprise level sales group, and
attract and retain qualified personnel, which personnel will require training
about, and knowledge of, product attributes for the Company's FullTime suite of
products. There can be no assurance that the Company will be successful in
creating the necessary sales organization or in attracting, retaining or
training these individuals. Historically, the Company has sold its products at
the departmental level. To succeed in the enterprise and national accounts
market will require, among other things, establishing relationships and contacts
with senior technology officers at these accounts. There can be no assurance
that the Company or its sales force will be successful in these efforts.
Dependence on Qualix Direct. Through its Qualix Direct telesales
organization, the Company has historically derived and expects to continue to
derive a significant portion of its total revenue from reselling ancillary
software and hardware products for distributed computing systems. Qualix Direct
accounted for 20% and 29% of total revenue in the first quarter of fiscal 1999
and fiscal 1998, respectively. The Company's reliance on Qualix Direct entails a
number of risks. Qualix Direct's product line is updated frequently in response
to changes in vendor offerings. Qualix Direct has no long-term supply contracts
with its vendors and many resold products are acquired pursuant to purchase
orders or contracts that can be terminated with little or no notice. In
addition, Qualix Direct generally has little or no control over the marketing,
support and enhancement of its resold products by its vendors and faces
significant competition from distributors and other distribution channels.
Moreover, gross margins on products resold by Qualix Direct are generally lower
than gross margins on owned and licensed products sold by the Company's field
sales organization. In addition, the Company's net revenues may be adversely
impacted if sales by Qualix Direct decline or do not grow at anticipated rates,
even though the Company's gross margins may be less significantly impacted.
Although the Company has recently begun to sells its lower priced reliability
products through Qualix Direct, there can be no assurance that it will be
successful or that such activities will not create conflicts with the Company's
other direct or indirect distribution channels. Any adverse development at
Qualix Direct could have a material adverse impact on the Company's business,
financial condition and results of operations.
Uncertainty of Success of Recently Introduced and Planned Products. A key
element of the Company's strategy is to increase substantially market awareness
and acceptance of the Company's recently introduced products and solutions for
service level availability. There are a number of risks associated with the
successful development or acquisition and introduction of the Company's existing
and planned products. There can be no assurance that the Company can
successfully market, sell or support any such products or enhancements or that
they will achieve significant market acceptance. Failure of the Company to
successfully develop, market, sell or support existing and planned products or
enhancements would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company needs to continue to
expand and enhance its product development and engineering resources in order to
successfully implement its product development program. See "--Need to Expand
Product Development and Engineering Capability." The Company has in the past
experienced delays in the development of new products and enhancements to
existing products. There can be no assurance that the Company can successfully
develop any additional products or enhance existing products. Even if developed
or acquired, such products or enhancements may contain undetected difficulties
or defects that are not discovered before they are released. See "--Risk of
Software Defects."
Dependence on Licensed Products. The Company has historically derived a
substantial majority, and expects to continue to derive a portion, of its total
revenue from the sale of Licensed Products. There are a number of disadvantages
and risks associated with the sale of Licensed Products. The Company is
frequently unable to obtain exclusive rights to sell a licensed product, in
which case the Company competes against the licensor and potentially other third
party licensees. The licenses are typically for a specified period. For example,
the Company's right to sell FireWall-1 (and HA/HA+ for Firewalls, which
incorporates FireWall-1) is subject to annual renewal. The Company must
typically pay a significant per copy royalty that reduces gross margins realized
by the Company from the sale of Licensed Products and may put the Company at a
competitive disadvantage against the licensor or other third party licensees
paying lower royalty rates. In addition, the Company may have little or no
control over the timing, functionality and quality of enhancements and upgrades
to the product and may be restricted in the method and manner, including
distribution channels, by which the Company may sell the product. The Company
may from time to time need to enforce its rights under licenses. See "--Legal
Proceedings." Notwithstanding these factors, the Company anticipates it will
derive a significant percentage of its revenues from Licensed Products for the
foreseeable future. Any loss in the right to sell Licensed Products or any
adverse change in the terms upon which it sells Licensed Products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Reliability Products. The Company currently derives the
majority of its revenues from the sale of reliability products and related
services for distributing computing environments. Notwithstanding the
introduction of the FullTime products, continued market acceptance of the
Company's reliability products is critical to the Company's revenue in the near-
and long-term. Demand for the Company's reliability products will depend in
large part on increasing market acceptance of distributed computing systems,
particularly for business-critical applications, and the need for reliability
systems management software products and services for these computing systems.
There can be no assurance that market acceptance of distributed computing
systems will increase for business-critical applications or that market
acceptance of reliability products and services will increase. If reliability
products fail to achieve broad market acceptance in distributed computing
environments, the Company's business, operating results and financial condition
would be materially and adversely affected. During recent years, segments of the
computer industry have experienced significant economic downturns characterized
by decreased product demand, production overcapacity, price erosion, work
slowdowns and layoffs. The Company's financial performance may in the future
experience substantial fluctuations as a consequence of such industry patterns.
There can be no assurance that such factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Need to Expand Product Development and Engineering Capability. The
Company's future success is critically dependent on expanding and integrating
its product development and engineering capability. In order to maintain its
market and technological leadership, the Company must maintain and upgrade its
products, develop new products and attract and retain development engineers with
the necessary expertise. There can be no assurance that the Company's product
development efforts will be successful or that future products will be available
on a timely basis or at all or achieve market acceptance. Moreover, expansion of
the Company's product development program will increase the Company's operating
expenses, and there can be no assurance that actual spending increases will not
exceed anticipated amounts or that such increases will result in sufficient
revenues to justify such increases. Failure to successfully implement the
Company's product development program would have a material adverse effect on
its business, financial condition and results of operations.
Dependence on Indirect Distribution Channels. An important element of the
Company's sales and marketing strategy is to continue to sell its products and
services through indirect distribution channels, including distributors, system
integrators, VARs, systems management software vendors and OEMs. Selling through
indirect channels may limit the Company's contacts with its customers. As a
result, the Company's ability to accurately forecast sales, evaluate customer
satisfaction and recognize emerging customer requirements may be hindered.
Marketing products through the Company's field sales force and through indirect
distribution channels may result in distribution channel conflicts. There can be
no assurance that channel conflicts will not materially adversely affect its
field sales efforts as well as its relationships with existing or future
distributors, system integrators, VARs, systems management software vendors and
OEMs. The Company's reliance on indirect distribution increases the risks
associated with the introduction of new products, including risks of delays in
adoption and the risk that resellers will evaluate and potentially adopt
competitive products. There can be no assurance that the Company's current
resellers will adopt or successfully market any of the Company's new products.
In addition, these relationships are frequently terminable at any time without
cause. Therefore, there can be no assurance that any such party will continue to
represent the Company's products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Integration of Acquisitions. The Company may make 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 and substantial transaction costs. Some of the products acquired may
require significant additional development before they can be marketed and may
not generate revenue at levels anticipated by the Company. There can be no
assurance that the Company will not incur these problems in the future.
Moreover, future acquisitions by the Company may result in dilutive issuances of
equity securities, the incurrence of additional debt, large one-time write-offs
and the creation of goodwill or other intangible assets that could result in
amortization expense. Any such problems or factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Key Personnel; Management of Growth; The Company's future
operating results depend significantly on the continued service of its key
technical and senior management personnel. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. The Company's future success is particularly
dependent on increasing its product development personnel. See "--Need to Expand
Product Development and Engineering Capability." The Company has relied in the
past on consultants as well as employees for its product development programs.
Competition for such personnel is intense, and there can be no assurance that
the Company will retain its key managerial and technical employees or that it
will be successful in attracting or retaining other highly qualified technical
and managerial employees and consultants in the future. The Company has at times
experienced difficulty in recruiting qualified personnel, and there can be no
assurance that the Company will not experience such difficulties in the future.
If the Company were to experience such difficulties in the future, it may have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the growth in the Company's business has
placed, and is expected to continue to place, a significant strain on the
Company's management and operations. To manage its future growth, if any,
effectively, the Company must continue to strengthen its operational, financial
and management information systems and expand, train and manage its employee
work force. Failure to do so effectively and on a timely basis could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends in part upon its proprietary technology. Although the Company
has recently been issued a United States patent covering certain aspects of the
technology included in its Octopus Technologies data mirroring product, there
can be no assurance that any issued patent will provide meaningful protection
for the Company's technology, that any issued patent will provide the Company
with any competitive advantages or will not be challenged by third parties.
Moreover, there can be no assurance that the Company will develop additional
proprietary products or technologies that are patentable or that the patents of
others will not have an adverse effect on the Company's ability to do business.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate the Company's products or design around the
patents issued to the Company. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and corporate partners, and license agreements with respect to its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. Policing unauthorized use of the
Company's products is difficult and although the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem. In selling its products, the Company
relies on "shrink wrap" licenses for sales of certain products that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries.
Additionally, the Company relies on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect its proprietary rights relating to its licensed and
internally developed products. The Company's rights to market and sell Licensed
Products are generally governed by license agreements of specified duration. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" - "Dependence on Qualix Direct" and '-Dependence on Licensed
Products." There can be no assurance that the Company's protection of its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's products or
design around any patents issued to the Company or other intellectual property
rights.
International Sales. Net revenue from customers outside the United States
was 21% of total revenue for the three months ended September 30, 1998 and 15%
for the three months ended September 30, 1997. The Company intends to continue
to expand its operations outside of the United States and enter additional
international markets, which will require significant management attention and
financial resources. There can be no assurance, however, that the Company will
be able to maintain or increase international market demand for the Company's
products. The Company's international revenues are currently denominated in U.S.
dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in foreign markets. Additional risks inherent in
the Company's international business activities generally include unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs and
risks of localizing products for foreign countries, adverse tax consequences,
restrictions on repatriating earnings and the burdens of complying with a wide
variety of foreign laws. These risks, and in particular risks related to the
recent global economic turbulence and adverse economic circumstances in Asia,
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that such factors
will not have a material adverse effect upon the Company's future export
revenues and, consequently, the Company's business, financial condition and
results of operations.
Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Despite testing by
the Company and by current and potential customers, there can be no assurance
that defects and errors will not be found in existing products or in new
products, versions or enhancements after commencement of commercial shipments.
Any such defects and errors could result in adverse customer reactions,
particularly because the Company focuses on selling reliability products, delays
in market acceptance, expensive product changes or loss of revenue, any of which
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Product Liability. The Company's license agreements with customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. A significant portion of the Company's
products are licensed pursuant to "shrink wrap" licenses. To the extent the
Company relies on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions, the
limitation of liability provisions contained in such license agreements may not
be effective. The Company's products generally provide systems management
software that is used for business-critical applications, and, as a result, the
sale and support of products by the Company may entail the risk of product
liability claims. Although the Company maintains errors and omissions product
liability insurance, a successful liability claim brought against the Company
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Year 2000 Compliance Issues. Many currently installed computer systems and
software products are coded to accept only two digit entries in date code
fields. These date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements.
The Company has tested its current products for Year 2000 compliance and
believes that its current products are Year 2000 compliant. However, the failure
of the Company's current or prior products to operate properly with regard to
the Year 2000 requirements could cause the Company to incur unanticipated
expenses to remedy any problems, could cause a reduction in sales and could
expose the Company to related litigation by its customers, each of which could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company and third parties with whom it
conducts business may utilize equipment or software that may not be Year 2000
compliant. Failure of the Company's or any such third party's equipment or
software to operate properly with regard to the Year 2000 requirements could
cause, among other things, the Company or any such third party to incur
unanticipated expenses or efforts to remedy any problems, which could have a
material adverse effect on its or their respective business, operating results
and financial condition. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to evaluate and to correct their equipment or software for
Year 2000 compliance and as they simultaneously evaluate the preparedness of the
third parties with whom they deal. These expenditures may result in reduced
funds available to purchase products and services such as those offered by the
Company, which could have a material adverse effect on the Company's business,
operating results and financial condition.
Potential Volatility of Stock Price. The market price for the Company's
stock has been subject to significant fluctuations and may be volatile in the
future. The Company believes that factors such as actual or anticipated
fluctuations in the Company's results of operations, announcements of
technological innovations, new products by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the distributed computing environment and other
technology industries, general market conditions and other factors may affect
the market price for the Company's stock. In addition, the stock market has from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In the past, following periods of volatility in
the market price of a particular company's securities, securities class action
litigation has often been brought against that company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Control by Directors, Executive Officers and Principal Stockholders. The
present directors, executive officers and principal stockholders, and their
affiliates and related persons, beneficially own approximately 20% of the
outstanding shares of the Company's Common Stock. These stockholders are able to
elect all of the Company's directors, have the voting power to approve all
matters requiring stockholder approval, and continue to exert significant
influence over the affairs of the Company. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of the
Company.
Part II. Other Information
Item 1. Legal Proceedings
Pursuant to an acquisition agreement between Anthill Incorporated (Anthill)
and the Company, the Company purchased certain software and other assets of
Anthill in May 1996. The purchase price totaled approximately $675,000, of which
$175,000 was paid at the closing of the transaction with the remaining purchase
price to be paid in four annual installments of $125,000 each. At September 30,
1998, the Company has a remaining obligation to pay three annual installments of
$125,000 each. The Company has granted a security interest in the software
technology acquired from Anthill in order to secure the obligation.
The Company filed a lawsuit against Anthill in May 1998; in the suit the
Company contends that the software did not function as had been represented by
Anthill, and it seeks a declaration that it need not make any more payments to
Anthill under the Agreement, rescission of the Agreement and damages of $300,000
or more based upon payments already made to Anthill.
On August 12, 1998, Anthill commenced arbitration proceedings against the
Company alleging that the Company breached its agreement with Anthill by not
making the annual installment payment due in May 1998. Anthill seeks damages of
$375,000, plus interest, for the three remaining payments allegedly due under
the agreement.
The Company has denied the claims made by Anthill in the arbitration and
intends to vigorously defend those claims. The Company has also submitted a
counterclaim in the arbitration, in which it seeks the same relief it is
demanding in its lawsuit. Management does not believe that the disposition of
these actions will have a material adverse effect on the Company's business,
financial condition or results of operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 --Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on October 29, 1998 for the announcement that Qualix
Group, Inc. executed an Agreement and Plan of Reorganization with Legato
Systems, Inc. (See Note 5-Subsequent Event of Notes to Condensed Consolidated
Financial Statements (Unaudited)).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Qualix Group, Inc.
By:
November 12, 1998
Date Bruce C. Felt, Vice President, Finance
and Chief Financial Officer
(duly authorized officer and principal
financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 --Financial Data Schedule.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,614
<SECURITIES> 5,514
<RECEIVABLES> 5,527
<ALLOWANCES> 732
<INVENTORY> 126
<CURRENT-ASSETS> 14,877
<PP&E> 5,701
<DEPRECIATION> 2,060
<TOTAL-ASSETS> 18,518
<CURRENT-LIABILITIES> 6,299
<BONDS> 0
0
0
<COMMON> 25,559
<OTHER-SE> (13,431)
<TOTAL-LIABILITY-AND-EQUITY> 18,518
<SALES> 5,411
<TOTAL-REVENUES> 7,001
<CGS> 1,335
<TOTAL-COSTS> 1,931
<OTHER-EXPENSES> 7,322
<LOSS-PROVISION> 205
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (2,120)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,120)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
