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 December 31, 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 December 31, 1998.
Title Outstanding
Common stock-par value $0.001 10,801,660
This document consists of 31 pages, of which this is page 1.
<PAGE>
QUALIX GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
at December 31, 1998 and June 30, 1998................................3
Condensed Consolidated Statements of Operations-Quarter
and six months ended December 31, 1998 and 1997.......................4
Condensed Consolidated Statements of Cash Flows for the Six months
ended December 31, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk............27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................27
Item 2. Changes in Securities................................................27
Item 3. Defaults Upon Senior Securities......................................27
Item 4. Submission of Matters to a Vote of Security Holders..................27
Item 5. Other Information....................................................27
Item 6. Exhibits and Reports on Form 8-K.....................................28
SIGNATURES....................................................................29
Exhibit Index.................................................................30
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
------------------ -----------------
December 31, June 30,
1998 1998
------------------ -----------------
(unaudited)
<CAPTION>
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,049 $ 6,869
Temporary cash investments 5,300 5,005
Accounts receivable, net 3,195 4,236
Other current assets 1,025 1,052
------------------ -----------------
Total current assets 11,569 17,162
Property and equipment, net 3,489 3,772
================== =================
Total assets $ 15,058 $ 20,934
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 4,142 $ 3,594
Deferred revenue and advances 2,228 2,856
Current portion of long-term obligations 102 258
------------------ -----------------
Total current 6,472 6,708
liabilities
------------------ -----------------
Long-term obligations 0 87
Stockholders' Equity 8,586 14,139
================== =================
Total liabilities and stockholders' equity $ 15,058 $ 20,934
================== =================
See accompanying notes to condensed consolidated
financial statements.
</TABLE>
<TABLE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited )
------------------------------ ---------------------------------
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31,
------------------------------ ---------------------------------
-------------- ------------- ------------------- -----------
1998 1997 1998 1997
-------------- ------------- ------------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Reliability software $ 2,563 $ 5,541 $ 6,519 $ 10,047
Other products 1,281 2,227 2,736 4,613
Support, maintenance and consulting 1,386 1,524 2,976 2,857
-------------- ------------- ------------------- -----------
Total revenue 5,230 9,292 12,231 17,517
-------------- ------------- ------------------- -----------
Cost of revenue:
Cost of reliability software 182 438 531 502
Cost of other products 967 1,611 1,953 3,319
Cost of support, maintenance and consulting 496 516 1,092 999
-------------- ------------- ------------------- -----------
Total cost of revenue 1,645 2,565 3,576 4,820
-------------- ------------- ------------------- -----------
Gross profit 3,585 6,727 8,655 12,697
Operating expenses:
Sales and marketing 5,032 5,507 10,301 9,826
General and administrative 1,317 1,158 2,551 2,172
Research and development 998 931 1,817 1,779
-------------- ------------- ------------------- -----------
Total operating expenses 7,347 7,596 14,669 13,777
-------------- ------------- ------------------- -----------
Loss from operations (3,762) (869) (6,014) (1,080)
Interest income (expense), net 103 212 235 460
-------------- ------------- ------------------- -----------
Loss before income taxes (3,659) (657) (5,779) (620)
Provision for income taxes (40)
(40) - -
============== ============= =================== ===========
Net loss $ (3,699) $ (657) $(5,819) $ (620)
============== ============= =================== ===========
Basic Loss per share $ (0.35) $ (0.06) $ (0.55) $ (0.06)
============== ============= =================== ===========
Shares used in per share computation 10,689 10,640
10,268 10,242
============== ============= =================== ===========
Diluted Loss per share $ (0.35) $ (0.06) $ (0.55) $ (0.06)
============== ============= =================== ===========
Shares used in per share computation 10,689 10,640
10,268 10,242
============== ============= =================== ===========
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
<TABLE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
----------------------------------
<CAPTION>
Six Months Ended
December 31,
----------------------------------
--------------- ---------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,819) $ (620)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization
743 343
Amortization of discount on long-term obligations
7 14
Changes in:
Accounts receivable
1,041 (2,848)
Other current assets
27 (113)
Accounts payable and accrued liabilities
548 225
Deferred revenue and advances
(628) 124
--------------- ---------------
Net cash used in operating activities
(4,081) (2,875)
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment, net
(460) (1,112)
Purchase of temporary cash investments
(1,180) (8,342)
Proceeds from maturity of temporary cash investments
900 5,737
--------------- ---------------
Net cash used in investing activities
(740) (3,717)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net
251 239
Repayment of long term obligations
(250) -
--------------- ---------------
Net cash provided by financing activities
1 239
--------------- ---------------
Net decrease in cash and cash equivalents
(4,820) (6,353)
Cash and cash equivalents, beginning of period
6,869 9,617
=============== ===============
Cash and cash equivalents, end of period $ 2,049 $ 3,264
=============== ===============
Noncash investing and financing activities:
Net unrealized gain (loss) on investment $ 15 $ (32)
=============== ===============
Cash paid during the period for income taxes $ 57 $ 109
=============== ===============
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
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 Loss Per Share
Net loss per basic share has been computed based upon the weighted
average number of common shares outstanding for the periods presented, excluding
contingently issuable shares totaling 66,000 and 97,000 for the three months
ended December 31, 1998 and 1997, respectively, and 71,000 and 104,000,
respectively, for the six month periods ended December 31, 1998 and 1997.
For diluted net 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 have been excluded in net
loss periods as their effect is antidilutive. Options to purchase 1,250,000
shares of common stock, representing potentially dilutive securities, were
outstanding at December 31, 1998.
3. Comprehensive Income
In the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". For the three months ended December 31, 1998 and 1997, respectively,
comprehensive loss was $(3,703,000) and $(647,000), respectively; for the six
month periods ended December 31, 1998 and 1997, respectively, comprehensive loss
was $(5,804,000) and $(652,000), respectively. Comprehensive loss represents net
loss for the period as adjusted for net unrealized gains (losses) on
available-for-sale securities.
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. Potential Merger
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 Company will
continue as the surviving corporation and will become 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 (as defined in that certain Rights Agreement (the "Target
Rights Plan"), dated as of July 31, 1997, between Target and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent)) issued and outstanding
immediately prior to the Effective Time (other than any shares of the Company's
Common Stock to be canceled 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 of the merger, 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 of the merger 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 of the merger or (b) any cash
proceeds received by the Company from October 25, 1998 to the closing date of
the merger pursuant to the exercise of currently outstanding stock options (all
such actions collectively, the "Merger").
All outstanding options to purchase Qualix common stock will be assumed
by Legato and will become options to purchase shares of 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 the Company's board of
directors support for the merger and/or an alternative transaction), it will pay
to the Legato a termination fee of $2.0 million. Payment of the fees described
in this paragraph shall not be in lieu of damages incurred in the event of
material and willful breach of the Reorganization Agreement.
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.
<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 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
In July 1998, Qualix Group, Inc. commenced doing business as FullTime
Software, Inc. FullTime was incorporated under the laws of Delaware on September
21, 1990. FullTime began operating primarily as a distributor, VAR and publisher
of licensed third party client/server software products. In 1993, FullTime
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, FullTime acquired substantially all
of the assets and assumed certain liabilities of Anthill, including technology
relating to a hierarchical storage management product under development. In
August 1996, FullTime merged with Octopus Technologies, which had developed high
availability and remote data mirroring products for the Windows NT operating
environment.
In October 1996, FullTime introduced QualixHA+, currently known as HA+,
which is based on an internally developed core software engine. A key element of
FullTime'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, FullTime
ceased marketing QualixHA in February 1997. FullTime completed its IPO in
February 1997, receiving net proceeds of $14,950,000.
In July 1998, the Company expanded its strategic focus and introduced
its family of FullTime software products and solutions, which are designed to
protect computer systems from interruptions due to planned and unplanned
computing events. This broader family of service level availability software
solutions incorporates the HA+ baseline high availability solutions which the
Company continues to sell separately. In connection with this product expansion,
in July 1998 the Company commenced doing business as FullTime Software, Inc. The
Company believes that its broader service level availability products solve a
much broader market problem than traditional high availability products (which
only address unplanned computing events). This offers a potential opportunity
for the Company to dramatically expand the size of its 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 chief information officers, heads of information
technology and others responsible for maintaining service level agreements
between information technology and line-of-business organizations. Service level
agreements are contracts for information technology services between information
technology executives and the managers of divisions or groups within a
corporation. These service level agreements stipulate the level of availability
and service that business managers expect from their software applications,
which are often managed by centralized information technology organizations.
To date, the Company's broader products and solutions have not
generated significant revenues. This result is due primarily to two sets of
factors. First is the significant amount of time and effort spent by the
Company's sales force in familiarizing itself with the new products and
introducing these products to the market and the longer sales cycle for products
marketed at the enterprise-level. Second is the loss of sales and marketing
momentum and customer delay and potential lost sales due to the announcement and
pendancy of the proposed merger with Legato. For these same reasons, the Company
expects its revenues for the quarter ended March 31, 1999 to be significantly
lower than the comparable period in 1998.
Prior to the Octopus Technologies merger, and prior to developing
QualixHA+, FullTime had minimal research and development expenditures and a
correspondingly high cost of reliability software revenue.
FullTime markets and sells reliability software through a combination of
its field sales organization and indirect distribution channels. In addition,
FullTime sells other third party software and hardware products through its
Qualix Direct telesales organization, which has recently transitioned into
selling FullTime's reliability products for Windows NT, the Octopus product
line.
FullTime 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 over the term of the agreement,
typically 12 months. Consulting and training revenue is recognized as services
are provided.
In August 1996 Qualix merged with Octopus Technologies (Octopus) in a
transaction accounted for as a pooling-of-interests. All financial statements
contained herein have been restated to reflect the transaction. Approximately
$595,000 of costs directly attributable to the business combination were
incurred in the first quarter of fiscal 1997.
Prior to Qualix's development and introduction of QualixHA+ in October
1996 and the merger with Octopus, Qualix was a reseller of products and,
consequently, had minimal research and development expenditures and higher cost
of revenues. The remote data mirroring and high availability product lines for
WindowsNT which were developed from Octopus' technology represented 11.6%, 13.0%
and 13.0% of total revenue in 1996, 1997 and 1998, respectively. These same
product lines represented 22.9%, 39.1% and 17.3% of gross profit in the
corresponding periods.
In May 1996 Qualix acquired substantially all of the assets and assumed
certain of the liabilities of Anthill Incorporated (Anthill), including certain
data access management development which resulted in the introduction of
QualixSD remote mirroring software in March, 1997. The purchase price for
Anthill was $675,000 payable in annual installments of $125,000 plus $175,000 at
the closing. The acquisition resulted in a $740,000 charge for in-process
technology in the fourth quarter of fiscal 1996. Revenues from Anthill
represented less than 1% of fiscal 1997 total revenues and were insignificant in
fiscal 1998.
Results of Operations
Total Revenues
Total revenues decreased to $5,230,000 in the second quarter of fiscal
1999 from $9,292,000 for the same period of fiscal 1998, a decrease of
$4,062,000,
or 44%. For the six months ended December 31, 1998, total revenues decreased
$5,286,000 from the six months ended December 31, 1997, a decrease of 30%.
Reliability Software. Reliability software revenues decreased to
$2,563,000 in the second quarter of fiscal 1999 from $5,541,000 for the
comparable period in the prior year, a decrease of $2,978,000, or 54%;
reliability software revenues for the six months ended December 31, 1998
decreased to $6,519,000 from $10,047,000 for the six months ended December 31,
1997, a decrease of 35%. The decrease from the comparable quarter in the prior
year is primarily attributable to a loss of sales and marketing momentum and
customer delay or lost sales due to the announcement and pendancy of the
proposed merger with Legato. The decline for the six month period was also
influenced by the 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 and second quarters of
fiscal 1999 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 $1,281,000 in the second quarter and $2,736,000 for the six
months ended December 31, 1998 from $2,227,000 and $4,613,000, respectively for
the same period of 1998, decreases of $946,000 or 42% and $1,877,000 or 41%,
respectively. The decrease from the comparable quarter of fiscal 1998 is
primarily attributable to a loss of sales and marketing momentum due to the
announcement and pendancy of the proposed merger with Legato. The decrease for
the comparable six-month periods was also impacted by 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, decreased to $1,386,000 in the second quarter of fiscal 1999 from
$1,524,000 for the same period of fiscal 1998, a decrease of $138,000, or 9%.
Support, maintenance and consulting revenue increased to $2,976,000 in the first
six months of fiscal 1999 from $2,857,000 for the same period in fiscal 1998, an
increase of 4%. The decrease from the comparable quarter of the prior year is
attributable primarily to the adverse impact of the proposed merger on the sales
staff and related loss of marketing momentum. The increase for the six month
period is primarily attributable to increasing renewals of support contracts as
the Company's installed base of licenses has increased.
International Revenue. Revenue generated from sales to customers
outside the United States decreased 12% to $1,777,000 in the second quarter of
fiscal 1999 from $2,039,000 in the second quarter of fiscal 1998. This decrease
is primarily attributable to the loss of sales and marketing momentum associated
with the proposed merger with Legato. International revenue increased to 33% of
total revenue for the quarter ended December 31, 1998 from 21% of total revenue
for the quarter ended December 31, 1997. The increase in international revenue
as a percentage of total revenue has been attributable primarily to the increase
in field sales offices and increases in the number of international employees.
At December 31, 1998, the Company had 20 foreign employees in 7 offices compared
to 13 foreign employees in 6 offices at December 31, 1997.
Cost of Revenues
Total cost of revenues decreased to $1,645,000 in the second quarter of
fiscal 1999 from $2,565,000 for the same period of 1998, a decrease of $920,000,
or 36%. Cost of revenues decreased to $3,576,000 in the first six months of
fiscal 1999 from $4,820,000 for the same period of fiscal 1998, a decrease of
26%.
Cost of Reliability Software. Cost of reliability software as a
percentage of reliability software revenues decreased to 7% in the second
quarter of fiscal 1999 from 8% in the second quarter of 1998 and increased to 8%
from 5% for the first six months of the respective fiscal years. The decrease
from the comparable quarter of the prior year is attributable to high sales
volume of a lower margin resold reliability product in the prior year period.
The increase in costs from the comparable six-month period of the prior year
results from minimal cost of reliability software in the first quarter of fiscal
1998. That quarter was favorably impacted by the conversion of some of the
Company's installed base from Qualix HA, which had a royalty component, to
Qualix HA+, with no royalty component.
Cost of Other Products. Cost of other products as a percentage of other
product revenues increased to 75% in the second quarter of fiscal 1999 from 72%
in the second quarter of 1998. Cost of other products as a percentage of other
product revenues decreased to 71% in the first six months of fiscal 1999 from
72% in the first six months of fiscal 1998. The increase from the comparable
quarter of the prior year is attributable to lower selling prices due to
increased competition. The percentage cost of other product revenues for the
first six months of fiscal 1998 and 1999 are virtually the same.
Cost of Support, Maintenance and Consulting. Cost of support,
maintenance and consulting as a percentage of support, maintenance and
consulting revenues increased to 36% for the second quarter of fiscal 1999 from
34% for the same period of 1998 and to 37% for the first six months of fiscal
1999 from 35% for the first six months of fiscal 1998. These slight increases
are primarily attributable to support renewal price reductions for some types of
support contracts while costs have remained stable.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased to
$5,032,000 in the second quarter of fiscal 1999 from $5,507,000 for the same
period of 1998, a decrease of $475,000, or 9%. Sales and marketing expenses
increased to $10,301,000 in the first six months of fiscal 1999 from $9,826,000
for the same period of 1998, an increase of $475,000 or 5%. These expenses
increased as a percentage of total net revenues to 84% in the second quarter of
fiscal 1999 from 56% in the second quarter of 1998. The increase in terms of
percentage of total net revenues was due to significantly reduced revenues. The
decrease in absolute dollars from the comparable quarter in the prior fiscal
year is primarily attributable to reduced staffing levels in the current year.
Sales and marketing staff totaled 81 at December 31, 1998 compared to 100 at
December 31, 1997. The increase on an absolute and percentage basis from the
comparable six month period of fiscal 1998 was primarily attributable to costs
associated with the rollout of the FullTime product line in the first quarter of
fiscal 1999 approximating $355,000 plus incremental costs associated with
operating foreign offices during the period aggregating approximately $98,000.
General and Administrative. General and administrative expenses
increased to $1,317,000 in the second quarter and to $2,551,000 for the six
months ended December 31, 1998 from $1,158,000 and $2,172,000, respectively, for
the comparable periods of fiscal 1998, increases of $159,000, or 13% and
$379,000, or 17%, respectively. As a percentage of total net revenues, these
expenses increased to 25% in the second quarter of fiscal 1999 from 12% in the
comparable period of 1998. The increase in terms of percentage of total net
revenues was due to significantly reduced revenues. The increase in absolute
dollars is primarily a result of increased staffing and related costs required
to manage and support the Company's operations. General and administrative staff
increased from 22 at December 31, 1997 to 26 at December 31, 1998 and employee
related expenses increased by 32% for the second quarter and 22% for the first
six months of fiscal 1999. In addition, depreciation expense increased by 99%
and other facilities costs associated with business expansion increased by 202%
over the comparable six month period of fiscal 1998.
Research and Development. Research and development expenses increased
to $998,000 in the second quarter of fiscal 1999 from $931,000 for the same
period of 1998, an increase of $67,000, or 7%. Research and development expenses
increased to $1,817,000 in the first six months of fiscal 1999 from $1,779,000
in the first half of fiscal 1998, an increase of $38,000 or 2%. This increase
was primarily attributable 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.
Research and development staff increased from 21 at December 31, 1997 to 24 at
December 31, 1998 and employee related expenses increased by 9% for the three
months ended December 31, 1998 and 13% for the first six months of fiscal 1999
as compared to the comparative periods in fiscal 1998. During the latter part of
the first quarter of fiscal 1999, the Company opened a New England development
office, resulting in incremental costs of $24,000 and $38,000 for the three
month and six month periods ended December 31, 1998.
Interest Income (Expense), net. Interest income decreased to $103,000
in the second quarter of fiscal 1999 from $212,000 for the same period of 1998,
a decrease of $109,000, or 51%. This decrease reflects lower average investment
balances largely attributable to the net losses incurred in fiscal 1998 and
1999.
Provision For Income Taxes. The Company recorded no provision for
domestic income taxes for the second quarter and first six months of fiscal 1999
and no provision for the same periods in the prior fiscal year because the
Company had taxable losses for which no significant benefit was recognized. The
Company incurred $40,000 of income tax expense during the period related to its
operations in France and Singapore.
Net Loss. Net loss for the quarter ended December 31, 1998 was
$(3,699,000) or $(0.35) per share, diluted, compared to net loss of $(657,000)
or $(0.06) per share, diluted, for the comparable period in the prior fiscal
year. Net loss for the first six months of fiscal 1999 was $(5,819,000) or
$(0.55) per share, diluted, compared to net loss of $(620,000) or $(0.06) per
share, diluted, for the comparable six month period in the prior year.
Liquidity and Capital Resources
At December 31, 1998, the Company had $7,349,000 in cash, cash
equivalents and temporary cash investments, as compared to $11,874,000 at June
30, 1998, a decrease of $4,525,000, or 38%. At December 31, 1998, the Company
had working capital of $5,097,000 compared to $10,454,000 at June 30, 1998.
Cash Flows From Operating Activities. Cash used in operations was
$4,081,000 during the first six months of fiscal 1999 which was a $1,206,000
increase from the comparable period of the prior year. This increase is
attributed principally to the loss from operations plus a decrease in deferred
revenue and advances offset by a decrease in accounts receivable, other current
assets and an increase in depreciation and amortization and accounts payable and
accrued liabilities. During the comparable period of fiscal 1998, cash used in
operating activities was attributable to loss from operations plus increases in
accounts receivable and other current assets offset by decreases in deferred
revenues, accounts payable and accrued liabilities and increases in depreciation
and amortization. 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 $740,000 for the first six months of fiscal
1999 primarily consisting of $460,000 in purchases of property and equipment and
$1,180,000 in net purchases of temporary cash investments. Net cash used by
investing activities was $3,717,000 for the first six months of fiscal 1998
consisting of $1,112,000 in purchases of property and equipment and $2,605,000
in net purchases of temporary cash investments.
FullTime believes that cash, cash equivalents and temporary investments
and cash flows from operations will be sufficient to fund operations, purchases
of capital equipment and research and development programs currently planned at
least through the next twelve months; however, should the merger between
FullTime and Legato not be consummated as a result of certain specified events
(involving, in general, a change in FullTime Board support for the merger and/or
an alternative transaction), FullTime has agreed to pay to Legato a "break-up"
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 FullTime'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 believes that the announcement and pendancy
of the proposed merger with Legato adversely impacted revenues in the quarter
ended December 31, 1998 due to the related loss of sales and marketing momentum
and customer delay and potential lost sales. 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, 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 time of the merger 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, 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 fixed, the market price of the
Company's common stock will likely move in the same general direction as does
Legato's stock prior to the effective time of the merger. If the market price of
Legato common stock decreases or increases prior to the effective time of the
merger, the market value of the Legato common stock to be received by Company
stockholders at the effective time of the proposed merger would correspondingly
decrease or increase.
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 the supplier of 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 supplier that has responded has
indicated that its equipment and/or software either is, or will be by December
31, 1999, Year 2000 compliant.
The supplier of the Company's current financial information system has
indicated that the current version of its software is not, and will not 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. Additionally, the
Company is investigating migration to alternative financial information systems,
each of which have committed to being 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 made inquiries of all such material parties as to
their Year 2000 status. Each such supplier that has responded indicates that it
has a Year 2000 program underway and intends to be compliant by December 31,
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, apply software and firmware upgrades to all personal computer
operating systems and expects to spend an additional $25,000 to $35,000 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.
Risk Factors
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 plans to upgrade 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's operating results have historically
fluctuated significantly as a result of nonrecurring items, including $595,000
of nonrecurring merger expenses relating to the Octopus Technologies merger and
a $528,000 gain on sale of stock in fiscal 1997.
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 scalability, 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 24% and 23% of total revenue in the second 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 33% of total revenue for the three months ended December 31, 1998 and
21% for the three months ended December 31, 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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding quantitative and qualitative disclosures
about market risk, see Part II, Item 7a. of the Company's Annual Report on Form
10-K for the year ended June 30, 1998.
Part II. Other Information
Item 1. Legal Proceedings
The Company was involved in litigation with Anthill Incorporated
(Anthill) arising out of claimed breaches of the Asset Acquisition Agreement
entered into between the Company and Anthill as of May, 1996. Both the Company
and Anthill claimed that the other had breached the Asset Acquisition Agreement,
with the Company claiming damages in excess of $300,000 and Anthill claiming
damages in excess of $375,000. In November 1998, the parties agreed to settle
all disputes between them, pursuant to which all lawsuits and related
arbitrations between have been dismissed. In addition, Anthill has released a
security interest in the Company's property which the Company originally granted
to Anthill under the Asset Acquisition Agreement.
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 report on Form 8-K was filed by the Company on October 29, 1998 for the
announcement that Qualix Group, Inc. executed an Agreement and Plan of
Reorganization with Legato Systems, Inc.
<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:
/S/____________________________________
February 11, 1999
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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,049
<SECURITIES> 5,300
<RECEIVABLES> 3,874
<ALLOWANCES> 679
<INVENTORY> 82
<CURRENT-ASSETS> 11,569
<PP&E> 5,973
<DEPRECIATION> 2,484
<TOTAL-ASSETS> 15,058
<CURRENT-LIABILITIES> 6,472
<BONDS> 0
0
0
<COMMON> 25,720
<OTHER-SE> (17,134)
<TOTAL-LIABILITY-AND-EQUITY> 15,058
<SALES> 9,255
<TOTAL-REVENUES> 12,231
<CGS> 2,484
<TOTAL-COSTS> 3,576
<OTHER-EXPENSES> 14,669
<LOSS-PROVISION> 235
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (5,779)
<INCOME-TAX> 40
<INCOME-CONTINUING> (5,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,819)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
