-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DENwB9dc8BcZ64O19uMtzzJjejy4olypqGMB/Ezl1otWzrQP+ORkp5ERD8cehTcw oG4tC8kVfm0IH8IySitCcQ== 0000859360-97-000012.txt : 19970813 0000859360-97-000012.hdr.sgml : 19970813 ACCESSION NUMBER: 0000859360-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEGATO SYSTEMS INC CENTRAL INDEX KEY: 0000859360 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943077394 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26130 FILM NUMBER: 97656614 BUSINESS ADDRESS: STREET 1: 3210 PORTER DR CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4158126000 MAIL ADDRESS: STREET 1: 3210 PORTER DRIVE CITY: PALO ALTO STATE: CA ZIP: 94304 10-Q 1 QUARTERLY REPORT ON FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 0-26130 LEGATO SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3077394 (State of incorporation) (I.R.S. Employer Identification No.) 3210 Porter Drive Palo Alto, California 94304 (Address of principal executive offices) (650) 812-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock as of July 31, 1997 was 17,473,589. LEGATO SYSTEMS, INC. INDEX Page PART I: Condensed Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 1997 and 1996 5 Notes to the Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II: Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17 PART I: Condensed Financial Information Item 1: Financial Statements LEGATO SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 1997 1996 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 30,419 $ 27,673 Short-term investments 23,599 22,391 Accounts receivable, net 14,982 9,839 Other current assets 2,639 2,870 Deferred tax asset 2,811 2,652 ---------- ----------- Total current assets 74,450 65,425 Long-term investments 5,905 7,017 Property and equipment, net 8,495 6,029 Intangible assets, net 3,983 4,470 Deposits and other assets 226 201 ---------- ----------- Total assets $ 93,059 $ 83,142 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 6,030 $ 5,919 Deferred revenues 8,816 7,581 ----------- ----------- Total current liabilities 14,846 13,500 Deferred tax liability 1,097 1,254 Stockholders' equity: Capital stock 59,012 56,580 Retained earnings 18,104 11,808 ----------- ----------- Total stockholders' equity 77,116 68,388 ----------- ----------- Total liabilities and stockholders' equity $ 93,059 $ 83,142 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. LEGATO SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----------- ----------- ---------- ------- Revenues: Product and other $ 10,986 $ 7,767 $ 19,713 $ 14,050 Royalty and license 3,631 2,682 8,034 5,563 Software subscription 3,533 2,124 7,024 3,885 ----------- ----------- ---------- ----------- Total revenues 18,150 12,573 34,771 23,498 Cost of revenues: Product and other 989 460 1,752 972 Software subscription 988 720 1,967 1,384 ----------- ----------- ---------- ----------- Total cost of revenues 1,977 1,180 3,719 2,356 ----------- ----------- ---------- ----------- Gross profit 16,173 11,393 31,052 21,142 Operating expenses: Research and development 3,490 2,087 6,599 3,949 Sales and marketing 6,510 4,267 12,056 8,066 General and administrative 1,345 1,464 2,628 2,810 Amortization of intangibles 280 276 559 542 In-process research and development -- -- -- 1,849 ----------- ----------- ---------- ----------- Total operating expenses 11,625 8,094 21,842 17,216 ----------- ----------- ---------- ----------- Income from operations 4,548 3,299 9,210 3,926 Interest and other income, net 503 411 945 865 --------- ----------- ---------- -------- Income before provision for income taxes 5,051 3,710 10,155 4,791 Provision for income taxes 1,919 1,367 3,859 2,575 ----------- ----------- ---------- ----------- Net income $ 3,132 $ 2,343 $ 6,296 $ 2,216 =========== =========== ========== =========== Net income per share $ .17 $ .13 $ .34 $ .12 =========== =========== ========== =========== Shares used in per share calculation 18,591 18,646 18,685 18,552 =========== =========== ========== ===========
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. LEGATO SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Six Months Ended June 30, 1997 1996 Cash flows from operating activities: Net income $ 6,296 $ 2,216 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,459 979 Deferred tax asset (159) 2 Write-off of in-process research and development -- 1,849 Changes in operating assets and liabilities: Accounts receivable (5,143) (1,307) Other current assets (394) 159 Current liabilities 2,768 1,829 ----------- ----------- Net cash provided by operating activities 4,827 5,727 Cash flows from investing activities: Acquisition of property and equipment (3,524) (1,573) Purchase of available-for-sale securities (13,958) (35,246) Proceeds from maturity and sale of available- for-sale securities 13,847 36,212 Payment for purchase of subsidiaries, net of cash acquired -- (5,924) Other (96) (197) ----------- ----------- Net cash used in investing activities (3,731) (6,728) Cash flows from financing activities: Proceeds from issuance of common stock 1,641 732 Other 9 9 ----------- ----------- Net cash provided by financing activities 1,650 741 ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,746 (260) Cash and cash equivalents at beginning of period 27,673 8,444 ----------- ----------- Cash and cash equivalents at end of period $ 30,419 $ 8,184 Supplemental information: Income taxes paid $ 2,753 $ 2,554 ========== =========== Non-cash transactions: Deferred tax liability $ -- $ 1,568 ========== ===========
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. LEGATO SYSTEMS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of Legato Systems, Inc. and its subsidiaries ("Legato" or the "Company"). The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for any future interim periods or for the full fiscal year. The Notes to the Consolidated Financial Statements contained in the 1996 Report on Form 10-K should be read in conjunction with these Condensed Consolidated Financial Statements. The balance sheet at December 31, 1996 was derived from audited financial statements; however, it does not include all disclosures required by generally accepted accounting principles. Note 2. Computation of Net Income Per Share Net income per share is based upon the weighted average number of common and common equivalent shares outstanding. Common equivalent shares are included in the per share calculations where the effect of their inclusion would be dilutive. Dilutive common equivalent shares consist of the incremental common shares issuable upon conversion of stock options (using the treasury stock method). The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). This statement replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. This statement is effective for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period earnings per share data presented after the effective date. SFAS No. 128 will not have a material impact on the Company's financial position, results of operations or cash flows. Note 3. Other Matters On July 1, 1997 the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (including revenues, expenses, gains and losses) in a full set of general purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The FASB has issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 changes current practice under SFAS No. 14 by establishing a new framework on which to base segment reporting and also requires interim reporting of segment information. SFAS No. 131 is effective for fiscal years beginning after December 31, 1997 with earlier application encouraged. The statement's interim reporting disclosures would not be required until the first quarter immediately subsequent to the fiscal year in which SFAS No. 131 is effective. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this report on Form 10-Q contains forward looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading "Risk Factors" contained herein and in the Company's other filings with the Securities and Exchange Commission, including but not limited to those discussed under the heading "Risk Factors" in the Company's 1996 Report on Form 10-K. RESULTS OF OPERATIONS OVERVIEW The Company develops, markets and supports network storage management software products for heterogeneous client/server computing environments and large scale enterprises. The Company's NetWorker family of software products, from which the Company derives a substantial majority of its revenues, supports many storage management server platforms and can accommodate a variety of clients, servers and storage devices. The Company licenses its product through resellers and directly to end users in North America, Europe and Asia Pacific. The Company also licenses its source code in exchange for initial licensing fees to original equipment manufacturers ("OEMs") and receives ongoing royalties from the OEMs' product sales. Substantially all of the OEMs are large computer system and software suppliers located in the United States, Europe and Asia Pacific. Selected elements of the Company's consolidated financial statements are shown below as a percentage of total revenues.
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ------- Revenues: Product and other 60.5% 61.8% 56.7% 59.8% Royalty and license 20.0 21.3 23.1 23.7 Software subscription 19.5 16.9 20.2 16.5 ---------- ----------- ---------- ----------- Total revenues 100.0 100.0 100.0 100.0 Cost of revenues: Product and other 5.5 3.7 5.0 4.1 Software subscription 5.4 5.7 5.7 5.9 ---------- ----------- ---------- ----------- Total cost of revenues 10.9 9.4 10.7 10.0 ---------- ----------- ---------- ----------- Gross profit 89.1 90.6 89.3 90.0 Operating expenses: Research and development 19.2 16.6 19.0 16.8 Sales and marketing 35.9 33.9 34.7 34.3 General and administrative 7.4 11.6 7.5 12.0 Amortization of intangibles 1.5 2.2 1.6 2.3 In-process research and development -- -- -- 7.9 ----------- ----------- ----------- ----------- Total operating expenses 64.0 64.4 62.8 73.3 ---------- ----------- ---------- ----------- Income from operations 25.1 26.2 26.5 16.7 Interest income (net) 2.7 3.3 2.7 3.7 ---------- --------- ---------- ----------- Income before provision for income taxes 27.8 29.5 29.2 20.4 Provision for income taxes 10.5 10.9 11.1 11.0 ---------- ----------- ---------- ----------- Net income 17.3% 18.6% 18.1% 9.4% ========== =========== ========== ===========
REVENUES Revenues for the second quarter of 1997 increased 44 percent over revenues for the comparable period of 1996, and revenues for the first half of 1997 grew 48 percent from the comparable period of 1996. These increases were attributable to increased licensing of the Company's products, increased sales of software subscriptions, as well as increased royalty revenue. Product and Other Revenues. Product and other revenues were $7.8 million and $11.0 million for the second quarters of 1996 and 1997, respectively, representing an increase of 41 percent. For the first half of 1996 and 1997, product and other revenues were $14.1 million and $19.7 million, respectively, representing an increase of 40 percent. Product revenue increased over these periods primarily as a result of the continued acceptance of the Company's products. Other revenues were less than 5 percent of total revenues for the periods presented. Prior growth rates of the Company's product and other revenues may not be indicative of future product and other revenues growth rates and may not be sustainable in the future. Royalty and License Revenues. Royalty and license revenues were $2.7 million and $3.6 million for the second quarters of 1996 and 1997, respectively, representing an increase of 35 percent. The increase is primarily attributable to a 43 percent increase in royalty revenues from product sales by OEM's from $2.5 million in the second quarter of 1996 to $3.6 million for the second quarter of 1997. License fee revenue was $145,000 in the second quarter of 1996 compared to none in the same period of 1997. Royalty and license revenues were $5.6 million and $8.0 million for the first half of 1996 and 1997, respectively, representing an increase of 44 percent, due primarily to a 50 percent increase in royalty revenues on a comparable period basis. License fee revenue for the first half of 1996 and 1997 of $480,000 and $400,000, respectively, reflect licenses sold for the Company's products. Royalty revenues are recognized upon receipt of quarterly royalty reports from OEMs related to their product sales for the previous quarter. Prior growth rates of the Company's royalty and license revenues may not be indicative of future royalty and license revenues growth rates and may not be sustainable in the future. Software Subscription Revenues. Software subscription revenues were $2.1 million and $3.5 million for the second quarters of 1996 and 1997, respectively, representing an increase of 66 percent. For the first half of 1996 and 1997, software subscription revenues were $3.9 million and $7.0 million, respectively, an increase of 81 percent. This growth was primarily due to the increase in the number of registered servers for the Company's products that are covered under maintenance and support contracts, as well as the renewal of software subscriptions after the initial one-year term, and increased internal staffing for software subscription sales. Prior growth rates of the Company's software subscription revenues may not be indicative of future software subscription revenue growth rates and may not be sustainable in the future. International product sales were $2.3 million and $4.5 million for the second quarters of 1996 and 1997, respectively. International product sales accounted for 31 percent and 41 percent of total product and other revenues in the second quarters of 1996 and 1997, respectively. For the first half of 1996 and 1997, international product sales were $4.5 million and $8.2 million, respectively. International product sales accounted for 32 percent and 42 percent of total product and other revenues in the first half of 1996 and 1997, respectively. The majority of international sales during these periods were made in Europe. The Company has continued to expand its international operations, which requires significant management attention and financial resources and could materially adversely affect the Company's operating results. To the extent that the Company is unable to effect these additions in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. GROSS PROFIT Gross profit was $11.4 million and $16.2 million for the second quarters of 1996 and 1997, respectively, representing 90.6 percent and 89.1 percent of total revenues, respectively. Gross profit was $21.1 million for the first half of 1996 compared to $31.1 million in the first six months of 1997, representing 90.0 percent and 89.3 percent of total revenues, respectively. The increases in total gross profit are attributable to the higher levels of revenues from all sources, including royalties and license revenues which do not generate any material cost of revenues. Gross profit from product and other revenues increased 37 percent from $7.3 million (or 94.1 percent of product and other revenues) in the second quarter of 1996 to $10.0 million (or 91.0 percent of product and other revenues) in the second quarter of 1997. For the first half of 1996 and 1997, gross profit from product and other revenues increased 37 percent from $13.1 million (or 93.1 percent of product and other revenues) to $18.0 million (or 91.1 percent of product and other revenues), respectively. Costs of product and other revenues consist primarily of product media, documentation and packaging as well as the cost of providing certain training and consulting. The decrease in gross profit as a percentage of product and other revenues for the second quarter and first half of 1997 compared to the same periods of 1996 is primarily due to increases in training and consulting costs. In the first quarter of 1996, product costs included clinical research expenses, reflecting the principal activity of Innovus, Inc., which was acquired along with Innovus Technologies, Inc. in January 1996. Substantially all of the net assets of Innovus, Inc., the Company's clinical research business, were sold in September 1996 and the Company has discontinued all clinical research activities. The effect of the discontinuance did not have a significant effect on the operating results of the Company. Gross profit from software subscription revenue increased 81 percent from $1.4 million (or 66.1 percent of software subscription revenue) in the second quarter of 1996 to $2.5 million (or 72.0 percent of software subscription revenue) in the second quarter of 1997. Gross profit from software subscription revenue increased 102 percent from $2.5 million (or 64.4 percent of software subscription revenue) in the first half of 1996 to $5.1 million (or 72.0 percent of software subscription revenue) in the first half of 1996. The increases in gross profit from software subscriptions as a percentage of the related revenues were primarily attributable to the Company's leveraging of its installed base through subscription renewals, as well as more efficient utilization of resources devoted to this activity. OPERATING EXPENSES Research and Development. Research and development expenses were $2.1 million and $3.5 million in the second quarters of 1996 and 1997, respectively, an increase of 67 percent. As a percentage of total revenues, research and development increased from 16.6 percent in the second quarter of 1996 to 19.2 percent in the second quarter of 1997. Research and development expenses were $3.9 million and $6.6 million in the first six months of 1996 and 1997, or 16.8 percent and 19.0 percent of total revenues, respectively. The increases in absolute dollars are principally a result of increased staffing to support new research and development activities. The Company believes that research and development expenses will increase in absolute dollar amounts as it continues to invest in developing new products, applications, and product enhancements. Sales and Marketing. Sales and marketing expenses were $4.3 million and $6.5 million in the second quarters of 1996 and 1997, respectively. As a percentage of total revenues, sales and marketing expenses increased from 33.9 percent in the second quarter of 1996 to 35.9 percent in the comparable 1997 period. Sales and marketing expenses were $8.1 million and $12.1 million in the first half of 1996 and 1997, or 34.3 percent and 34.7 percent of total revenues, respectively. The increases in absolute dollars are principally a result of increased headcount. The Company believes that sales and marketing expenses will increase in dollar amounts as the Company continues to expand its sales and marketing staff. General and Administrative. General and administrative expenses were $1.5 million and $1.3 million in the second quarters of 1996 and 1997, respectively. As a percentage of total revenues, general and administrative expenses decreased from 11.6 percent in the second quarter of 1996 to 7.4 percent in the comparable 1997 period. General and administrative expenses were $2.8 million and $2.6 million in the first half of 1996 and 1997, respectively. As a percentage of total revenues, general and administrative expenses decreased from 12.0 percent in the first half of 1996 to 7.6 percent in the first half of 1997. The decrease, as a percentage of total revenues, is attributable to leveraging general and administrative expenses over a larger revenue base. Additional decreases, as a percentage of total revenues and actual spending, is due to allocating a greater amount of central operating expenses to benefiting organizations. The Company expects that general and administrative expenses will increase in dollar terms from the first half of 1997 level as the Company expands its staffing and other support operations. Amortization of Intangibles. Amortization of purchased technology and goodwill were $542,000 and $559,000 in the first half of 1996 and 1997, respectively. These intangibles were recorded following an acquisition in the first quarter of 1996. The Company plans to amortize these intangibles on a straight-line basis over five years. In-process Research and Development. In the quarter ended March 31, 1996, the Company expensed $1.8 million of non-tax deductible in-process research and development in connection with an acquisition. Interest and Other Income, Net. Net interest income was $411,000 and $503,000 in the second quarters of 1996 and 1997, respectively, and $865,000 and $945,000 in the first half of 1996 and 1997, respectively. Interest and other income primarily represents interest income on funds available for investment. Provision for Income Taxes. The provision for income taxes for the first half of 1996 was $2.6 million, compared to $3.9 million for the first six months of 1997. The effective tax rate for the first half of 1997 was 38 percent. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities totaled $59.9 million at June 30, 1997 and represented 64 percent of total assets. Cash and cash equivalents are highly liquid with original maturities of ninety days or less. Marketable securities consist mainly of municipal securities. At June 30, 1997, the Company had no long-term debt and stockholders' equity was $77.1 million. Cash generated from operations and sales of common stock have been sufficient to finance the Company's operations. Cash, cash equivalents and marketable securities increased $2.8 million during the first six months of 1997, primarily reflecting net cash provided by operating activities of $4.8 million and proceeds from the issuance of common stock under the Company's stock plans of $1.6 million. These amounts were partially offset by purchases of property and equipment of $3.5 million. The Company believes its current cash balances and cash flow from operations, if any, will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. RISK FACTORS In addition to other information in this Report on Form 10-Q, the following risk factors should be considered carefully in evaluating the Company and its business. Fluctuations in Quarterly Operating Results; Future Operating Results Uncertain The Company's quarterly operating results have in the past varied and may in the future vary significantly depending on a number of factors, including the size and timing of significant orders; increased competition; market acceptance of new products, applications and product enhancements; changes in pricing policies by the Company and its competitors; the ability of the Company to timely develop, introduce and market new products, applications and product enhancements and to control costs; the Company's success in expanding its sales and marketing programs; technological changes in the network storage management market; the mix of sales among the Company's channels; deferrals of customer orders in anticipation of new products, applications or product enhancements; changes in Company strategy; personnel changes; and general economic factors. The Company's future revenues are difficult to predict. The Company operates with virtually no order backlog because its software products typically are shipped shortly after orders are received. In addition, the Company does not recognize revenues on sales to domestic distributors until the products are sold through to end users. As a result, product revenues in any quarter are substantially dependent on orders booked and shipped and on sell-through to end users in that quarter. Revenues for any future quarter are not predictable with any significant degree of certainty. Product and software subscription revenues are also difficult to forecast because the network storage management market is rapidly evolving and the Company's sales cycle varies substantially from customer to customer. Royalty and license revenues are substantially dependent upon sales by OEMs of their products that incorporate the Company's software. Accordingly, royalty and license revenues are subject to OEMs' product cycles, which are also difficult to predict. Royalty and license revenues are further impacted by fluctuations in licensing activity from quarter-to-quarter, because initial license fees generally are non-recurring and recognized upon the signing of the license agreement. The Company's expense levels are based, in part, on its expectations as to future revenues. If revenue levels are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenues because a proportionately smaller amount of the Company's expenses varies with its revenues. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Product Concentration The Company currently derives a substantial majority of its revenues from its NetWorker software products and related services, and the Company expects that revenues from NetWorker will continue to account for a majority of the Company's revenues for the foreseeable future. Broad market acceptance of NetWorker is, therefore, critical to the Company's future success. As a result, a decline in unit prices of or demand for NetWorker, or failure to achieve broad market acceptance of NetWorker, as a result of competition, technological change or otherwise, would have a material adverse effect on the business, operating results and financial condition of the Company. The life cycle of NetWorker is difficult to estimate due in large measure to the recent emergence of the Company's market, the effect of new products, applications or product enhancements, technological changes in the network storage management environment in which NetWorker operates and future competition. The Company's future financial performance will depend in part on the successful development, introduction and market acceptance of new products, applications and product enhancements. There can be no assurance that the Company will continue to be successful in marketing NetWorker or any new products, applications or product enhancements. Competition The network storage management market is intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. Competitors vary in size and in the scope and breadth of the products and services offered. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and support of their products than the Company. The Company also expects that competition will increase as a result of future software industry consolidations, which have occurred in the network storage management market in the past. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, network operating system vendors could introduce new or upgrade existing operating systems or environments that include storage management functionality offered by the Company's products, which could render the Company's products obsolete and unmarketable. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. Dependence on New Software Products; Rapid Technological Change The network storage management market is characterized by rapid technological change, changing customer needs, frequent new software product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. The Company's future success will depend upon its ability to develop and introduce new software products (including new releases, applications and enhancements) on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing new products that respond to technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products, or that its new products will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially adversely affected. The Company currently has plans to introduce and market several potential new products in the next twelve months. Some of the Company's competitors currently offer certain of the functionality expected to be offered by these potential new products. Due to the complexity of client/server software and the difficulty in gauging the engineering effort required to produce these potential new products, such potential new products are subject to significant technical risks. There can be no assurance that such potential new products will be introduced on a timely basis or at all. In the past, the Company has experienced delays in the commencement of commercial shipments of its new products, resulting in customer frustrations and delay or loss of product revenues. If potential new products are delayed or do not achieve market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. The Company has also, in the past, experienced delays in purchases of its products by customers anticipating the launch of new products by the Company. There can be no assurance that material order deferrals in anticipation of new product introductions will not occur. Software products as complex as those offered by the Company may contain undetected errors or failures when first introduced or as new versions are released. The Company has in the past discovered software errors in certain of its new products after their introduction and has experienced delays or lost revenues during the period required to correct these errors. Although the Company has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. Risks Associated with Strategy of Expanding OEM Channel; Reliance on Resellers An integral part of the Company's strategy is to increase the proportion of the Company's customers licensed through OEMs. There can be no assurance that such customers will continue to account for a significant percentage of the Company's revenues in the future. The Company is currently investing, and intends to continue to invest, significant resources to develop this channel, which could materially adversely affect the Company's operating margins. There can be no assurance that the Company will be successful in its efforts to increase the revenues represented by this channel. The Company is dependent upon its OEMs' ability to develop new products, applications and product enhancements on a timely and cost-effective basis that will meet changing customer needs and respond to emerging industry standards and other technological changes. There is no assurance that the Company's OEMs will effectively meet these technological challenges. These OEMs are not within the control of the Company, may incorporate into their products the technologies of other companies in addition to those of the Company and are not obligated to purchase products from the Company. In addition, the Company's OEMs generally have exclusive rights to the Company's technology on their respective platforms, subject to certain minimum royalty obligations. There can be no assurance that any OEM will continue to carry the Company's products, and the inability to recruit, or the loss of, important OEMs could materially adversely affect the Company's business, operating results and financial condition. The Company also relies significantly on its distributors, systems integrators and value added resellers (collectively, "resellers") for the marketing and distribution of its products. The Company's agreements with resellers are generally not exclusive and in many cases may be terminated by either party without cause. Many of the Company's resellers carry product lines that are competitive with those of the Company. There can be no assurance that these resellers will give a high priority to the marketing of the Company's products (they may, in fact, give a higher priority to other products, including the products of competitors) or that they will continue to carry the Company's products. Events or occurrences of this nature could materially adversely affect the Company's business, operating results and financial condition. The Company's results of operations could also be materially adversely affected by changes in reseller inventory strategies, which could occur rapidly, and in many cases, may not be related to end user demand. There can be no assurance that the Company will retain any of its current resellers, nor can there be any assurance that, in such event, the Company will be successful in recruiting replacement or new organizations to represent it. Any such changes in the Company's distribution channels could materially adversely affect the Company's business, operating results and financial condition. International Operations; Risks Associated with International Sales The Company believes that its continued growth and profitability will require further expansion of its international operations. In order to successfully expand international sales, the Company must establish additional foreign operations, hire additional personnel and recruit additional international resellers. This will require significant management attention and financial resources and could materially adversely affect the Company's operating margins. To the extent that the Company is unable to effect these additions in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for the Company's products. The Company's international sales are currently denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. In some markets, localization of the Company's products is essential to achieve market penetration. The Company may incur substantial costs and experience delays in localizing its products, and there can be no assurance that any localized product will ever generate significant revenues. In addition, the Company relies significantly on its distributors and other resellers in international sales efforts. Since these distributors and other resellers are not employees of the Company and typically do not offer the Company's products exclusively, there can be no assurance that they will continue to market the Company's products. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, lack of acceptance of localized products, if any, in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's business, operating results and financial condition. Management of Expanding Operations The Company has recently experienced a period of significant expansion of its operations that has placed a significant strain upon its management systems and resources. In addition, the Company has recently hired a significant number of employees, and plans to further increase its total headcount. The Company also plans to expand the geographic scope of its customer base and operations. This expansion has resulted and will continue to result in substantial demands on the Company's management resources. From time to time, the Company receives customer complaints about the timeliness and accuracy of customer support. Although the Company plans to add customer support personnel in order to address current customer support needs and intends to closely monitor progress in this area, there can be no assurance that these efforts will be successful. If the Company's efforts are not successful, the Company's business, operating results and financial condition could be materially adversely affected. The Company's ability to compete effectively and to manage future expansion of its operations, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. There can be no assurance that the Company will be able to do so successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. Dependence Upon Key Personnel The Company's future performance also depends in significant part upon the continued service of its key technical and senior management personnel, none of whom is bound by an employment agreement. The loss of the services of one or more of the Company's officers or other key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical and managerial employees or that it can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. Dependence on Growth in the Network Storage Management Market; General Economic and Market Conditions All of the Company's business is in the network storage management market, which is still an emerging market. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting network storage management solutions for their client/server computing environments. There can be no assurance that the market for network storage management will continue to grow. If the network storage management market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially 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 operations may in the future experience substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on the Company's business, operating results or financial condition. Dependence on Proprietary Technology; Risks of Infringement The Company depends significantly upon proprietary technology. The Company relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company presently holds two patents. There can be no assurance that the Company will develop additional proprietary products or technologies that are patentable, that any issued patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material 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, if patents are issued to the Company, design around the patents issued to the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. 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 primarily on "shrink wrap" licenses that are not signed by licensees, and, therefore, such licenses may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting 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 patents issued to the Company or other intellectual property rights of the Company. There has also been substantial amounts of litigation in the software industry regarding intellectual property rights. The Company has from time to time received claims that it is infringing third parties' intellectual property rights, and there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, trademarks or other proprietary rights. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. Product Liability The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. In selling its products, the Company relies primarily on "shrink wrap" licenses that are not signed by licensees, and, therefore, such licenses may be unenforceable under the laws of certain jurisdictions. As a result of these and other factors, the limitation of liability provisions contained in the Company's license agreements may not be effective. The Company's products can be used to manage data critical to organizations, and, as a result, the sale and support of products by the Company may entail the risk of product liability claims. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Possible Volatility of Stock Price The trading price of the Company's Common Stock has been subject to wide fluctuations. The trading price of the Company's Common Stock could be subject to wide fluctuations in the future in response to quarterly variations in operating results, announcements of technological innovations or new products, applications or product enhancements by the Company or its competitors, changes in financial estimates by securities analysts and other events or factors. In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. PART II: Other Information Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on May 15, 1997 in Palo Alto, California. Of the 17,237,703 shares outstanding as of the record date, 15,921,604 shares were present or represented by proxy at the meeting. The following matters were submitted to a vote of security holders: (1) To elect the following to serve as Directors of the Company: Votes For Votes Abstaining Louis C. Cole 15,894,980 26,624 Eric A. Benhamou 15,897,146 24,458 Kevin Fong 15,897,146 24,458 David N. Strohm 15,897,146 24,458 Phillip E. White 15,897,146 24,458 (2) To ratify the Company's appointment of Coopers and Lybrand L.L.P. as independent accountants for the Company for the fiscal year ending December 31, 1997: Votes for: 15,910,631 Votes against: 1,480 Votes abstaining: 9,493 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement of Computation of Net Income Per Share 27.1 Financial Data Schedule (b) Reports on Form 8-K On June 6, 1997, the Registrant filed a report on Form 8-K to file the Registrant's amended and restated Bylaws. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEGATO SYSTEMS, INC. Date: August 7, 1997 /s/ Stephen C. Wise ------------------- Stephen C. Wise V.P. of Finance and Chief Financial Officer (Duly authorized officer and principal financial and accounting officer) Exhibit 11.1 LEGATO SYSTEMS, INC. STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 -------- -------- -------- -------- Primary: Weighted average common shares outstanding 17,331 16,409 17,218 16,328 Weighted average common equivalent shares 1,260 2,237 1,467 2,224 -------- -------- -------- -------- Total weighted average common and common equivalent shares 18,591 18,646 18,685 18,552 -------- -------- -------- -------- Net income $ 3,132 $ 2,343 $ 6,296 $ 2,216 ======== ======== ======== ======== Net income per share $ .17 $ .13 $ .34 $ .12 ======== ======== ======== ======== Fully Diluted: Weighted average common shares outstanding 17,331 16,409 17,218 16,328 Weighted average common equivalent shares 1,284 2,330 1,461 2,301 -------- -------- -------- -------- Total weighted average common and common equivalent shares 18,615 18,739 18,679 18,629 -------- -------- -------- -------- Net income $ 3,132 $ 2,343 $ 6,296 $ 2,216 ======== ======== ======== ======== Net income per share $ .17 $ .13 $ .34 $ .12 ======== ======== ======== ========
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED AND CONDENSED CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 0000859360 LEGATO SYSTEMS, INC. 1000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 30,419 29,504 14,982 0 0 74,450 8,495 0 93,059 14,846 0 0 0 0 77,116 93,059 0 34,771 3,719 25,561 0 0 0 10,155 3,859 6,296 0 0 0 6,296 0.34 0.34
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