UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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: 000-26130
__________________
LEGATO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3077394
(State incorporation) (I.R.S. Employer
Identification No.)
2350 West El Camino Real, Mountain View, CA 94040
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 210-7000
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 May 4,
2001 was 88,848,905.
1
LEGATO SYSTEMS, INC
INDEX
PART I - FINANCIAL INFORMATION
Page No
-------
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
2000 - (unaudited)............................................................. 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 - (unaudited).......................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 - (unaudited).......................................... 5
Notes to Condensed Consolidated Financial Statements - (unaudited)............. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk..................... 20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.............................................................. 21
Item 2 - 5 Not applicable................................................................. 21
Item 6 Exhibits and Reports on Form 8-K............................................... 21
Signature...................................................................... 21
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEGATO SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2001 2000
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................... $161,163 $110,274
Short-term investments.............................................. 10,614 40,626
Accounts receivable, net............................................ 42,288 47,655
Deferred tax assets................................................. 43,414 35,272
Other current assets................................................ 16,873 20,465
----------- ------------
Total current assets........................................... 274,352 254,292
Long-term investments................................................. 888 14,245
Property and equipment, net........................................... 37,702 37,328
Intangible assets, net................................................ 94,864 103,900
Long-term deferred tax assets......................................... 1,154 2,788
Other assets.......................................................... 2,068 2,311
----------- ------------
$411,028 $414,864
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 9,579 $ 5,126
Accrued liabilities................................................. 30,408 33,551
Deferred revenue.................................................... 52,494 53,853
----------- ------------
Total current liabilities...................................... 92,481 92,530
Stockholders' equity.................................................. 318,547 322,334
----------- ------------
$411,028 $414,864
=========== ============
See accompanying notes to condensed consolidated financial statements.
3
LEGATO SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
(unaudited)
Revenue:
License......................................... $ 38,483 $ 40,006
Service and support............................. 22,564 20,514
-------- --------
Total revenue................................ 61,047 60,520
-------- --------
Cost of revenue:
License......................................... 726 1,562
Service and support............................. 12,354 8,624
-------- --------
Cost of revenue.............................. 13,080 10,186
-------- --------
Gross profit................................. 47,967 50,334
-------- --------
Operating expenses:
Sales and marketing............................. 29,577 27,041
Research and development........................ 14,205 15,329
General and administrative...................... 9,933 9,469
Amortization of intangibles..................... 9,054 9,523
-------- --------
Total operating expenses..................... 62,769 61,362
-------- --------
Loss from operations.............................. (14,802) (11,028)
Interest and other income, net.................... 1,128 941
-------- --------
Loss before benefit from income taxes............. (13,674) (10,087)
Benefit from income taxes......................... (3,073) (100)
-------- --------
Net loss.......................................... $(10,601) $ (9,987)
======== ========
Net loss per share:
Basic and diluted............................... $ ( 0.12) $(0.12)
======== ========
Weighted average common shares outstanding...... 87,851 86,394
======== ========
See accompanying notes to condensed consolidated financial statements.
4
LEGATO SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
(unaudited)
Cash flows from operating activities:
Net loss................................................. $ (10,601) $ (9,987)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Deferred taxes (net of effect of acquisitions)......... (6,508) (1,968)
Depreciation and amortization.......................... 13,181 12,609
Provision for doubtful accounts and product returns.... 1,149 150
Tax benefit from stock option exercises................ 1,559 1,228
Changes in assets and liabilities:
Accounts receivable................................. 4,217 5,506
Other assets........................................ 3,835 (736)
Accounts payable.................................... 4,453 3,779
Accrued liabilities................................. (3,143) (2,513)
Deferred revenue.................................... (1,359) 1,265
--------- --------
Net cash provided by operating activities.......... 6,783 9,333
--------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities............... (28,475) (14,475)
Maturities and sales of available-for-sale securities.... 72,137 13,941
Acquisition of property and equipment.................... (4,519) (13,008)
--------- --------
Net cash provided by (used for) investing
activities......................................... 39,143 (13,542)
--------- --------
Cash flows from financing activities-
Proceeds from issuance of common stock................... 4,963 9,192
--------- --------
Net change in cash and cash equivalents................... 50,889 4,983
Cash and cash equivalents at beginning of period.......... 110,274 115,222
--------- --------
Cash and cash equivalents at end of period................ $ 161,163 $120,205
========= ========
See accompanying notes to condensed consolidated financial statements.
5
LEGATO SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Legato Systems, Inc. (the "Company" or "Legato") in accordance
with the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted in accordance with
such rules and regulations. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows of the Company and its
subsidiaries. The results of operations for the interim periods presented are
not necessarily indicative of the results that may be expected for any future
interim period or for the year ending December 31, 2001, and the Company makes
no representations related thereto. These financial statements should be read in
conjunction with the annual audited consolidated financial statements and notes
as of and for the year ended December 31, 2000, included in the Company's Form
10-K dated March 28, 2001.
2. Balance Sheet Components
March 31, December 31,
2001 2000
--------- ------------
Accounts receivable:
Trade accounts receivable............................... $ 50,460 $ 55,386
Allowances for doubtful accounts and product returns.... (8,172) (7,731)
-------- --------
$ 42,288 $ 47,655
======== ========
Property and equipment:
Computer equipment and software......................... $ 47,903 $ 46,114
Furniture and fixtures.................................. 11,358 10,138
Office equipment........................................ 4,766 4,474
Leasehold improvements.................................. 12,863 11,676
-------- --------
76,890 72,402
Accumulated depreciation and amortization............... (39,188) (35,074)
-------- --------
$ 37,702 $ 37,328
======== ========
Accrued liabilities:
Accrued compensation and benefits....................... $ 9,847 $ 14,806
Income taxes payable.................................... 9,946 9,240
Other accrued liabilities............................... 10,615 9,505
-------- --------
$ 30,408 $ 33,551
======== ========
3. Revenue Recognition
Revenue is derived from primarily two sources: (i) license revenue, derived
from the sale of product licenses to resellers and end users, including large-
scale enterprises and royalty revenue, derived from initial license fees and
ongoing royalties from the licensing of source code to OEMs; and (ii) service
and support revenue, derived from providing software updates, support and
education and consulting services to end users.
License revenue is generally recognized when a signed contract or other
persuasive evidence of an arrangement exists, the software has been shipped or
electronically delivered, the license fee is fixed and determinable and
collection of resulting receivables is probable. For sales to domestic
distributors, license revenue is recognized upon
6
sale by the distributor to the end user, since these distributors generally have
unlimited rights of return, and Legato historically has not been able to make
reasonable estimates of product returns for these distributors. Estimated
product returns are recorded upon recognition of revenue from customers having
rights of return, including exchange rights for unsold products and product
upgrades. Provisions for estimated warranty costs and anticipated retroactive
price adjustments are recorded at the time products are shipped. License revenue
from royalty payments is recognized upon receipt of royalty reports from OEMs
related to their product sales. Revenue from subscription license agreements,
which include software, rights to future products and maintenance, is recognized
ratably over the term of the subscription period. The Company also incurs
additional internal costs to assist its distributors in selling its products to
end-users. For sales to certain value-added resellers in the fiscal years ended
December 31, 1999 and 2000, license revenue is recognized upon receipt of cash
from these certain value-added resellers since the arrangements with these
resellers may include extended payment terms, which in some cases, are
contingent upon them receiving payment from their end-user customer.
Service and support revenue consists primarily of revenue received for
providing software updates, technical support for software products, on-site
support, consulting and training. Revenue from updates and support is recognized
ratably over the term of the agreements. Revenue allocated to education and
consulting services, or derived from the separate sales of these services, is
recognized as the related services are provided.
When contracts contain multiple obligations (e.g. products, updates,
technical support and other services) wherein vendor specific objective evidence
exists for all undelivered elements, the Company accounts for the delivered
elements in accordance with the "Residual Method" prescribed by Statement of
Position 98-9. Any revenue related to updates or technical support in these
arrangements is recognized ratably over the term of the maintenance arrangement.
4. Comprehensive Income (Loss)
Comprehensive income (loss) includes unrealized gains (losses) on
investments. The impact of which is excluded from net income (loss) and is
included in stockholders' equity. A summary of comprehensive income (loss) is as
follows:
Three Months Ended
March 31,
-------------------------
2001 2000
-------- -------
Net loss...................................... $(10,601) $(9,987)
Unrealized gain on investments................ 346 28
-------- -------
$(10,255) $(9,959)
======== =======
5. Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average shares of common stock outstanding during the period.
Diluted net income per share is computed by dividing net income by the weighted
average shares of common stock and potential common shares outstanding during
the period. Potential common shares outstanding consist of dilutive shares
issuable upon the exercise of outstanding options to purchase common stock as
computed using the treasury stock method. For periods in which Legato incurs a
loss, potential common shares outstanding are excluded from the computation of
diluted net loss per share as their effect is anti-dilutive.
Options to purchase approximately 18,142,000 shares of common stock at the
weighted average price of $14.18 per share were outstanding as of March 31,
2001, but were not included in the computation of diluted net loss per share
because their effect would be anti-dilutive.
7
6. Legal Proceedings
Beginning on January 20, 2000, a number of shareholder securities class
action complaints were filed in the U.S. District Court, Northern District of
California, against certain of our directors and officers and us. On May 1,
2000, the court consolidated all of the pending cases and, on May 10, 2000,
appointed a lead plaintiff, who filed a consolidated amended complaint on August
7, 2000. Defendants filed motions to dismiss. On January 17, 2001, the Court
entered an Order granting the motions to dismiss with leave to amend. On
February 13, 2001, plaintiffs filed a second amended complaint, which generally
alleges that, between April 22, 1999 and May 17, 2000, defendants made false or
misleading statements of material fact about the Company's prospects and failed
to follow generally accepted accounting principles in violation of the federal
securities laws. The complaint seeks an unspecified amount in damages.
Defendants filed an answer to the complaint in April, 2001 denying all
allegations that they violated the federal securities laws.
On February 1, 2000, a shareholder derivative action was filed in the U.S.
District Court, Northern District of California, against certain of our officers
and directors. We are named as nominal defendant. The derivative case has been
related to the securities class action. Plaintiff moved to stay the derivative
case. On January 17, 2001, the Court denied plaintiffs' motion to stay.
Plaintiffs filed an amended complaint on February 9, 2001, which generally
alleges the same conduct as the shareholder class action, and claims that
defendants breached their fiduciary duties and engaged in improper insider
trading. The derivative complaint seeks unspecified damages and injunctive
relief. Defendants will move to dismiss the derivative complaint.
On April 13, 2000, a shareholder derivative action was filed in the
Superior Court of California, County of Santa Clara, against certain of our
officers and directors. We are named as a nominal defendant. On May 23, 2000, a
shareholder derivative action was filed in the Superior Court of California,
County of San Mateo, against certain of our officers and directors. We are named
as a nominal defendant. Both state derivative complaints generally allege the
same conduct as the derivative action filed in federal court, claiming that our
officers and directors breached their fiduciary duties for the period October
21, 1999 through April 3, 2000, and seek unspecified damages and injunctive
relief. The Santa Clara derivative case was transferred to San Mateo County and
consolidated with the San Mateo derivative case.
The Securities and Exchange Commission has entered a formal order of
investigation concerning our restatement of financial results for the first,
second, and third quarters of 1999, and our revision of financial results for
the fourth quarter and fiscal 1999. We have been voluntarily cooperating with
the Staff of the Commission in its investigation.
We intend to defend all of these actions vigorously. There can be no
assurance that any of the complaints discussed above will be resolved without
costly litigation, or in a manner that is not materially adverse to our
financial position, results of operations or cash flows. No estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these contingencies.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion in this report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future, including without limitation, our financial outlook, successful
introduction of new products and expansion of operation. All forward-looking
statements included in this document are based on information available to us on
the date hereof. We assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from those indicated in
such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, fluctuations in quarterly operating
results, uncertainty in future operating results, the current challenging
information technology spending environment, litigation, competition, product
concentration, technological changes, reliance on enterprise license
transactions, modifications in the application of accounting policies, reliance
on indirect sales channels, changes in marketing strategies, dependence on
international revenue, management of our growth and expansion, the ability to
attract and retain qualified personnel, and other risks discussed in this item
under the heading "Risk Factors" and the risks discussed in our other Securities
and Exchange Commission filings.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenue:
Three Months
Ended March 31,
----------------------------
2001 2000
----------- -----------
Revenue:
License..................................... 63.0% 66.1%
Service and support........................ 37.0 33.9
------ ------
Total revenue................................ 100.0 100.0
------ ------
Cost of revenue:
License.................................. 1.1 2.6
Service and support........................... 20.4 14.2
------ ------
Total cost of revenue........................ 21.5 16.8
------ ------
Gross profit................................. 78.5 83.2
------ ------
Operating expenses:
Sales and marketing........................ 48.5 44.6
Research and development................... 23.2 25.3
General and administrative................. 16.2 15.7
Amortization of intangibles................ 14.9 15.7
------ ------
Total operating expenses.................. 102.8 101.3
------ ------
Loss from operations........................... (24.3) (18.1)
Interest and other income, net................. 1.8 1.5
------ ------
Net loss before benefit from income taxes...... (22.5) (16.6)
Benefit from income taxes...................... (5.1) -
------ ------
Net loss....................................... (17.4)% (16.6)%
====== ======
Overview
We develop, market and support software products and services for
heterogeneous client/server computing environments in mid- to large-scale
enterprises. We are a technology leader in the network storage management
software market through our commitment to open, standards-based software
development. Our software delivers to customers a solution that is scalable,
high-performance and manageable and ensures high data and application
9
availability on a wide range of servers, clients, applications, databases and
storage devices. Our data protection products, primarily the NetWorker family of
products, and our data availability products, primarily our Legato Cluster and
wanCluster products, support many server platforms and accommodate a variety of
clients, applications, databases and storage devices. Our long-term strategy is
to create an integrated set of solutions centered on information protection,
availability and storage management that enhance and simplify network computing
as a whole.
Revenue
Total revenue increased $0.5 million, or 1%, to $61.0 million in the first
quarter of 2001 from $60.5 million for the first quarter of 2000. The increase
was attributable to an increase of service and support contracts partially
offset by a decrease in license revenue.
License revenue. License revenue decreased $1.5 million, or 4%, to $38.5
million in the first quarter of 2001 from $40.0 million in the first quarter of
2000. The decrease was primarily due to sales force turnover throughout
remainder of 2000 and a change in the licensing model in the second quarter of
2000.
Service and Support Revenue. Service and support revenue increased $2.0
million, or 10%, to $22.5 million in the first quarter of 2001 from $20.5
million in the first quarter of 2000. The increase was primarily as a result of
the growth in the number of registered customers electing to subscribe to
support contracts and the renewals of software support contracts after the
initial one-year term. Our increase in internal staffing for software support
and education and consulting services helped to increase new sales and renewals
of our software support contracts, as well as sales of education and consulting
services.
International license revenue increased $3.8 million, or 26%, to $18.7
million in the first quarter of 2001 from $14.9 million in the first quarter of
2000. International license revenue increased primarily as a result of the
continued market acceptance of our products overseas as we continue to increase
the number of international sales offices, international distributors and
resellers marketing our products. The majority of international license revenue
came from Europe during these periods. We intend to continue to expand our
international operations, which requires significant management attention and
financial resources. To the extent that we are unable to effect these additions
in a timely manner, our growth, if any, in international revenue will be
limited, and our business, operating results and financial condition could be
seriously harmed. In addition, we cannot guarantee that we will be able to
maintain or increase international market demand for our products.
Gross Profit
Gross profit decreased $2.3 million, or 5%, to $48.0 million, representing
79% of total revenue, in the first quarter of 2001 from $50.3 million,
representing 83% of total revenue, in the first quarter of 2000.
Gross profit from license revenue decreased $0.7 million, or 2%, to $37.8
million, representing 98% of license revenue, in the first quarter of 2001 from
$38.4 million, representing 96% of license revenue, in the first quarter of
2000. The decrease in absolute dollars relates to the overall decrease of
license revenue. Gross profit from license revenue consists of license revenue
less the related costs of product media, documentation, third-party royalties
and packaging.
Gross profit from service and support revenue decreased $1.7 million, or
14%, to $10.2 million, representing 45% of service and support revenue, in the
first quarter of 2001 from $11.9 million, representing 58% of service and
support revenue, in the first quarter of 2000. The decrease in absolute dollars
is primarily a result of increased costs attributed to our continued investment
in developing new service and support offerings and providing consulting
services. The continued investment consists of costs associated with supporting
a larger installed base of products, as well as costs to provide higher support
levels to customers. Service and support personnel increased to 298 in 2001 from
243 in 2000. Costs of service and support revenue consist primarily of
personnel-related costs incurred in providing telephone support, consulting
services, and training to customers, costs of providing software updates and
costs of education and consulting materials.
10
Operating Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing personnel and promotional
expenses. Sales and marketing expenses increased $2.6 million, or 9%, to $29.6
million in the first quarter of 2001 from $27.0 million in the first quarter of
2000. The increase in sales and marketing expenses was primarily attributable to
the continued growth of our sales force and associated support personnel. Sales
and marketing personnel increased to 493 in 2001 from 453 in 2000. We believe
that sales and marketing expenses may continue to increase in absolute dollars
as we continue to expand our sales staff.
Research and development. Research and development expenses consist
primarily of personnel-related costs. Research and development expenses
decreased $1.1 million, or 7%, to $14.2 million in the first quarter of 2001
from $15.3 million in the first quarter of 2000. The decrease in research and
development expenses was primarily attributable to decreased staffing and
associated support. The number of research and development personnel decreased
from 400 in 2000 to 383 in 2001. We expect research and development to increase
in absolute dollars, but remain relatively flat as a percentage of total
revenue.
General and administrative. General and administrative expenses include
personnel and other costs of our finance, human resources, facilities,
information systems and other administrative departments. General and
administrative expenses increased $0.4 million, or 5%, to $9.9 million in the
first quarter of 2001 from $9.5 million in the first quarter of 2000. The
increase in general and administrative expenses was primarily attributable to
increased staffing and related costsoffset by 1.3 of professional fees related
to the restatement in 1999. General and administrative personnel increased to
171 in 2001 from 169 in 2000. We believe that general and administrative
expenses may increase in absolute dollars as we continue to invest in personnel
and infrastructure to support future growth expectations.
Amortization of intangibles. Amortization of intangibles decreased $0.4
million to $9.1 million in the first quarter of 2001 from $9.5 million in the
first quarter of 2000. We are amortizing these intangibles on a straight-line
basis over periods ranging from seventeen months to five years from the
respective dates of acquisition.
Interest and other income, net. Interest and other income, net, was $1.1
million in the first quarter of 2001 as compared to $0.9 million in the first
quarter of 2000. Interest and other income primarily represents interest income
from funds available for investment.
Benefit from income taxes. The benefit from income taxes for the first
quarter of 2001 was $3.1 million compared to a provision for income tax of $0.1
million for the first quarter of 2000. The effective tax rate was 22.5% for the
first quarter of 2001 and 1% for the first quarter of 2000. The increase in the
benefit for income taxes primarily relates to a decrease in the amount of
goodwill amortized that is non-deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and investments totaled $172.7 million as of
March 31, 2001, and represented 42% of total assets. Cash and cash equivalents
are highly liquid investments with original maturities of ninety days or less.
Investments consist mainly of short-term and long-term municipal securities and
auction rate receipts. As of March 31, 2001, we had no long-term debt and
stockholders' equity was $318.5 million.
We have financed our operations to date primarily by cash from operations
and sales of common stock. Net cash provided by operating activities was $6.8
million in the first quarter of 2001 and consisted primarily of a net change in
assets and liabilities of $8.0 million and depreciation and amortization of
$13.1 million, partially offset by the net loss of $10.6 million and deferred
taxes of $6.5 million.
Net cash provided by investing activities was $39.1 million in the first
quarter of 2001 which resulted primarily from the net maturities of marketable
securities of $43.7 million offset by purchases of property and equipment of
$4.5 million.
11
Net cash provided by financing activities was $5.0 million in the first
quarter of 2001 resulted primarily from proceeds received from the issuance of
our common stock under our employee stock purchase plan and stock option
exercises.
We believe our current cash balances and cash flow from operations, if any,
will be sufficient to meet the Company's working capital and capital expenditure
requirements for at least the next twelve months.
RISK FACTORS
The following risk factors and other information included in this report on
Form 10-Q should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem less significant also may impair
our business operations. If any of the following risks actually occur, our
business, operating results and financial condition could be materially and
negatively affected.
Our quarterly operating results are volatile.
Our quarterly operating results have varied in the past and may vary in the
future. Our quarterly operating results may vary depending on a number of
factors, many of which are outside of our control, including:
. The size and timing of orders;
. Intense competition;
. Macroeconomic uncertainty in the markets in which we operate;
. Market acceptance of our new products, applications and product
enhancements of our competitors;
. Changes in pricing policies or those of our competitors;
. Our ability to develop, introduce and market new products, applications
and product enhancements;
. Our ability to control costs;
. Quality control of products sold;
. The current challenging spending environment in our customers' IT
departments;
. Lengthy sales cycles, particularly with enterprise license transactions;
. Delay in the recognition of revenue from enterprise license and
application service provider transactions;
. Modification in reseller relationships resulting in changes to the
application of revenue recognition policies;
. Success in expanding sales and marketing programs;
. Technological changes in our markets;
. The mix of sales among our channels;
. Deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. Market readiness to deploy our products for distributed computing
environments;
. Changes in our strategy or that of our competitors;
. Customer budget cycles and changes in these budget cycles;
. Foreign currency and exchange rates;
. Our ability to effectively manage and reduce our tax liabilities;
. Acquisition costs or other non-recurring charges in connection with the
acquisition of companies, products or technologies;
. Personnel changes; and
. General economic factors.
Our future operating results are uncertain.
Our historical results of operations are not necessarily indicative of our
results for any future period. Expectations, forecasts and projections by
others or us are by nature forward-looking statements, and it is likely that
future results will vary. Forward-looking statements that were reasonable at
the time made may ultimately prove to be incorrect or false. It is our general
policy and practice not to update our forward-looking statements. Some
investors in our securities inevitably will experience gains while others will
experience losses, depending on the prices at which they purchase and sell
securities. Prospective and existing investors are strongly urged to carefully
consider the various cautionary statements and risks set forth in this report.
12
We cannot predict our future revenue with any significant degree of
certainty for several reasons including:
. License and royalty revenue are difficult to forecast. Our royalty
revenue is dependent upon product license sales by OEMs of their
products that incorporate our software. Accordingly, this royalty
revenue is subject to OEMs' product cycles, which are also difficult for
Legato to predict. Fluctuations in licensing activity from quarter to
quarter further impact royalty revenue, because initial license fees
generally are non-recurring and recognized upon the signing of a license
agreement.
. Revenue in any quarter is substantially dependent on orders booked and
shipped in that quarter since we operate with virtually no order
backlog;
. We do not recognize revenue on sales to domestic distributors until the
products are sold through to end-users;
. The storage management market is rapidly evolving;
. Our sales cycles vary substantially from customer to customer, in large
part because we are becoming increasingly dependent upon larger company-
wide enterprise license transactions to corporate customers. Such
transactions include product license, service and support components and
take a long time to complete;
. Due to general economic factors that currently affect our customers'
businesses, those customers are being more deliberate in the manner in
which they make information technology spending decisions.
. Macroeconomic factors may affect our customers' decision to license our
products or procure services;
. The timing of large orders can significantly affect revenue within a
quarter;
. The timing of recognition of revenue from enterprise license and
application service provider transactions can significantly affect
revenue within a quarter;
. Modification in reseller relationships resulting in a different
application of our revenue recognition policies; and
. Our expense levels are relatively fixed and are based, in part, on our
expectations of our future revenue. Consequently, if revenue levels fall
below our expectations, our net income will decrease because only a
small portion of our expenses varies with our revenue.
We believe that period-to-period comparisons of our results of operations
may not be meaningful and should not be relied upon as indications of future
performance. Our operating results could be below the expectations of public
market analysts and investors in some future quarter or quarters. Our failure to
meet such expectations would likely cause the market price of our common stock
to decline.
We are currently subject to litigation.
Beginning on January 20, 2000, a number of shareholder securities class
action complaints were filed in the U.S. District Court, Northern District of
California, against certain of our directors and officers and the Company. On
May 1, 2000, the court consolidated all of the pending cases and, on May 10,
2000, appointed a lead plaintiff, who filed a consolidated amended complaint on
August 7, 2000. Defendants filed motions to dismiss. On January 17, 2001, the
Court entered an Order granting the motions to dismiss with leave to amend. On
February 13, 2001, plaintiffs filed a second amended complaint, which generally
alleges that, between April 22, 1999 and May 17, 2000, defendants made false or
misleading statements of material fact about the Company's prospects and failed
to follow generally accepted accounting principles in violation of the federal
securities laws. The complaint seeks an unspecified amount in damages.
Defendants filed an answer to the complaint in April 2001 denying all
allegations that they violated the federal securities laws.
On February 1, 2000, a shareholder derivative action was filed in the U.S.
District Court, Northern District of California, against certain of our officers
and directors. We are named as nominal defendant. The derivative case has been
related to the securities class action. Plaintiff moved to stay the derivative
case. On January 17, 2001, the Court denied plaintiffs' motion to stay.
Plaintiffs filed an amended complaint on February 9, 2001, which generally
alleges the same conduct as the shareholder class action, and claims that
defendants breached their fiduciary duties and engaged in improper insider
trading. The derivative complaint seeks unspecified damages and injunctive
relief. Defendants will move to dismiss the derivative complaint.
13
On April 13, 2000, a shareholder derivative action was filed in the Superior
Court of California, County of Santa Clara, against certain of our officers and
directors. We are named as a nominal defendant. On May 23, 2000, a shareholder
derivative action was filed in the Superior Court of California, County of San
Mateo, against certain of our officers and directors. We are named as a nominal
defendant. Both state derivative complaints generally allege the same conduct as
the derivative action filed in federal court, claiming that our officers and
directors breached their fiduciary duties for the period October 21, 1999
through April 3, 2000, and seek unspecified damages and injunctive relief. The
Santa Clara derivative case was transferred to San Mateo County and consolidated
with the San Mateo derivative case.
The Securities and Exchange Commission has entered a formal order of
investigation concerning our restatement of financial results for the first,
second and third quarters of 1999, and our revision of financial results for the
fourth quarter and fiscal 1999. We have been voluntarily cooperating with the
Staff of the Commission in its investigation.
The Company and the individual defendants intend to defend all of these
actions vigorously. However, there can be no assurance that any of the
complaints discussed above will be resolved without costly litigation, or in a
manner that is not materially adverse to our financial position, results of
operations or cash flows. No estimate can be made of the possible loss or
possible range of loss associated with the resolution of these contingencies.
Our market is highly competitive.
We operate in the enterprise storage management market, which is intensely
competitive, highly fragmented and characterized by rapidly changing technology
and evolving standards. Competitors vary in size and in the scope and breadth
of the products and services offered. Our major competitors include:
Windows NT and Windows 2000 platforms:
--------------------------------------
Computer Associates and
Veritas.
Unix platforms:
---------------
Computer Associates;
EMC (Epoch);
Hewlett Packard;
IBM (Tivoli); and
Veritas.
We expect to encounter new competitors as we enter new markets. In addition,
many of our existing competitors are broadening their platform coverage. We also
expect increased competition from systems and network management companies,
especially those that have historically focused on the mainframe market and are
broadening their focus to include the client/server computer market. In
addition, since there are relatively low barriers to entry in the software
market, we expect additional competition from other established and emerging
companies. We also expect that competition will increase as a result of future
software industry consolidations. Increased competition could harm us by
causing, among other things, price reductions, reduced gross margins and loss of
market share.
Many of our current and potential competitors have longer operating histories
and have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base than
we have. As a result, certain current and potential competitors can respond
more quickly to new or emerging technologies and changes in customer
requirements. They can also devote greater resources to the development,
promotion, sale and support of their products. In addition, current and
potential competitors may establish cooperative relationships among themselves
or with third parties. If so, new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. In addition, network
operating system vendors could introduce new or upgrade existing operating
systems or environments that include functionality offered by our products. If
so, our products could be rendered obsolete and unmarketable. For all the
foregoing
14
reasons, we may not be able to compete successfully, which would seriously harm
our business, operating results and financial condition.
We depend on our NetWorker product line.
We currently derive, and expect to continue to derive, a substantial majority
of our revenue from our NetWorker software products and related services. A
decline in the price of, or demand for, NetWorker, or failure to achieve broad
market acceptance of NetWorker, would seriously harm our business, operating
results and financial condition. We cannot reasonably predict NetWorker's
remaining life for several reasons, including:
. The recent emergence of our market;
. The effect of new products, applications or product enhancements;
. Technological changes in the network storage management environment in
which NetWorker operates; and
. Future competition.
We must respond to rapid technological changes with new product offerings.
The markets for our products are characterized by rapid technological 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 our
existing products obsolete and unmarketable. To be successful, we need to
develop and introduce new software products on a timely basis that keep pace
with technological developments and emerging industry standards and address the
increasingly sophisticated needs of our customers. In addition, we need to
continue to integrate into our product lines the technologies of products we
acquired through the acquisitions of Intelliguard Software, Inc., Qualix Group,
Inc. (dba FullTime Software Inc.) and Vinca Corporation in 1999. We may fail to
develop and market new products that respond to technological changes or
evolving industry standards, experience difficulties that could delay or prevent
the successful development, introduction and marketing of these new products or
fail to develop new products that adequately meet the requirements of the
marketplace or achieve market acceptance. If so, our business, operating results
and financial condition would be seriously harmed.
We currently plan to introduce and market several potential new products in
the next twelve months. Some of our competitors currently offer certain of these
potential new products. Such potential new products are subject to significant
technical risks. We may fail to introduce such potential new products on a
timely basis or at all. In the past, we have experienced delays in the
commencement of commercial shipments of our new products. Such delays caused
customer frustrations and delay or loss of revenue. If potential new products
are delayed or do not achieve market acceptance, our business, operating results
and financial condition would be seriously harmed. In the past, we have also
experienced delays in purchases of our products by customers anticipating our
launch of new products. Our business, operating results and financial condition
would be seriously harmed if customers defer material orders in anticipation of
new product introductions.
Our products may contain undetected errors.
Software products as complex as those we offer may contain undetected errors
or failures when first introduced or as new versions are released. We have in
the past discovered software errors in certain of our new products after their
introduction. We experienced delays or lost revenue during the period required
to correct these shipments, despite testing by us and by our current and
potential customers. In addition, customers have in the past brought to our
attention "bugs" in our software created by the customers' unique operating
environment. Although we have been able to fix such software bugs in the past,
we may not always be able to do so. These types of circumstances may result in
loss of or delay in market acceptance of our products, which could seriously
harm our business, operating results and financial condition.
We rely on enterprise license transactions.
We have developed strategies to pursue larger enterprise license transactions
with corporate customers. However, we may not continue to successfully market
our products through larger enterprise license transactions.
15
Such failure would seriously harm our business, operating results and financial
condition. Our operating results are sensitive to the timing of such orders.
Such orders are difficult to manage and predict because:
. The sales cycle is typically lengthy, generally lasting three to six
months, and varies substantially from transaction to transaction;
. Enterprise license transactions often include multiple elements such as
product licenses and service and support;
. Recognition of revenue from enterprise license transactions may vary from
transaction to transaction;
. They typically involve significant technical evaluation and commitment of
capital and other resources;
. Our customers are being more deliberate about information technology
spending decisions due to the current state of the overall economy; and
. Customers' internal procedures frequently cause delays in orders. Such
internal procedures include approval of large capital expenditures,
implementation of new technologies within their networks, and testing new
technologies that affect key operations.
In addition, many of the large organizations that we target as customers have
lowered their rate of spending on enterprise software. Due to the large size of
enterprise transactions, if orders forecasted for a specific transaction for a
particular quarter are not realized in that quarter, our operating results for
that quarter may be seriously harmed.
We have changed certain of our licensing practices and modified the
application of our accounting policies, which results in delaying revenue
recognition.
During the past year, we have worked closely with our outside financial
auditors to ensure that our revenue recognition practices are consistent with
both our existing revenue recognition policies and the evolving guidance for the
treatment of certain software license transactions. Based upon our recent
experience with certain distributors and resellers, we began recognizing revenue
on transactions with certain channel members only upon receipt of payment from
those channel members. Further, we have modified our licensing practices in
negotiating certain of our enterprise software licenses. The consequence of
those changes is that the revenue from those licenses is recognized ratably over
the deployment term of those licenses rather than being recognized all upon
execution of the license. These are not changes in our accounting policies;
rather, they reflect a modification of our practices in conformity with our
long-standing policies and with generally accepted accounting principles.
The accumulated results of these changes could affect quarterly results by
shifting revenue out to future quarters that previously was recognized upon
acceptance of a purchase order from a channel member or upon execution of an
end-user license. Customer acceptance of the new enterprise license structure,
which was intended to build greater visibility into our longer-term revenue
stream, could also affect our quarterly results. For instance, if in a
particular quarter more customers negotiate a license structure that mandated
revenue recognition upon license execution, revenue for that quarter would be
greater; if, however, those customers accept a license structure that required
ratable recognition of license revenue, the same amount of revenue would be
spread over several quarters. We do not yet have sufficient experience to
accurately predict what the balance will be between up-front and ratable
recognition off license revenues in a given quarter on larger enterprise
transactions.
We rely on indirect sales channels.
We rely significantly on our distributors, systems integrators and value added
resellers, or collectively, resellers, for the marketing and distribution of our
products. Our agreements with resellers are generally not exclusive and in many
cases may be terminated by either party without cause. Many of our resellers
carry product lines that are competitive with ours. These resellers may not give
a high priority to the marketing of our products. Rather, they may give a higher
priority to other products, including the products of competitors, or may not
continue to carry our products. Events or occurrences of this nature could
seriously harm our business, operating results and financial condition. In
addition, we may not be able to retain any of our current resellers or
successfully recruit new resellers. Any such changes in our distribution
channels could seriously harm our business, operating results and financial
condition.
16
Our strategy is also to increase the proportion of our customers licensed
through OEMs. We may fail to achieve this strategy. We are currently investing,
and will continue to invest, resources to develop this channel. Such investments
could seriously harm our operating margins. We depend on our OEMs' abilities to
develop new products, applications and product enhancements on a timely and
cost-effective basis that will meet changing customer needs and respond to
emerging industry standards and other technological changes. Our OEMs may not
effectively meet these technological challenges. These OEMs are not within our
control, may incorporate the technologies of other companies in addition to, or
to the exclusion of, our technologies, and are not obligated to purchase
products from us. Our OEMs may not continue to carry our products. The inability
to recruit, or the loss of, important OEMs could seriously harm our business,
operating results and financial condition.
We are modifying some of our marketing strategies.
As noted above, we rely significantly upon resellers as part of our overall
marketing strategy. We are currently realigning our approach to working with our
strategic allies and other resellers. The objective of our new approach is to
form stronger ties with specific companies with whom we have global alliances.
We are also restructuring our reseller networks in order to create greater
rewards for distributors and resellers that demonstrate a greater commitment to
Legato, as measured in net sales, technical certification and other factors. As
a result of these changes, we may negatively affect the volume of sales through
our strategic alliances or our resellers. If a significant number of resellers
were to cease doing business with us as a result of these changes, and sales
through the remaining resellers failed to compensate for the lost resellers,
this strategic change could seriously harm our business, operating results and
financial condition.
We depend on international revenue.
Our continued growth and profitability will require further expansion of our
international operations. To successfully expand international operations, we
must establish additional foreign operations, hire additional personnel and
recruit additional international resellers. This will require significant
management attention and financial resources and could seriously harm our
operating margins. If we fail to further expand our international operations in
a timely manner, our business, operating results and financial condition could
be seriously harmed. In addition, we may fail to maintain or increase
international market demand for our products. Our international sales are
currently denominated in U.S. dollars. An increase in the value of the U.S.
dollar relative to foreign currencies could make our products more expensive
and, therefore, potentially less competitive in those markets. In some markets,
localization of our products and license documents is essential to achieve or
increase market penetration. We may incur substantial costs and experience
delays in localizing our products and license language. We also may fail to
generate significant revenue from localized products.
Additional risks inherent in our international business activities generally
include:
. Significant reliance on our distributors and other resellers who do not
offer our products exclusively;
. Unexpected changes in regulatory requirements;
. Tariffs and other trade barriers;
. Lack of acceptance of localized products, if any, in foreign countries;
. Longer accounts receivable payment cycles;
. Difficulties in managing international operations;
. Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. The burdens of complying with a wide variety of foreign laws; and
. The risks related to the global economic turbulence.
The occurrence of such factors could seriously harm our international sales
and, consequently, our business, operating results and financial condition.
17
We must manage our growth and expansion and hire and retain qualified
personnel.
We have recently hired a significant number of new senior executives as well
as other employees throughout the Company. We also plan to expand the geographic
scope of our customer base. This expansion has resulted, and will continue to
result, in substantial demands on our management resources.
From time to time, we receive customer complaints about the timeliness and
accuracy of customer support. We plan to add customer support personnel in order
to address current customer support needs. If we are not successful in hiring
and retaining such personnel, our business, operating results and financial
condition could be seriously harmed. Our ability to compete effectively and to
manage future expansion of our operations, if any, will require us to continue
to improve our financial and management controls, reporting systems and
procedures on a timely basis, and to expand, train and manage our employees in
all areas of the business. Our failure to do so would seriously harm our
business, operating results and financial condition.
Our investment in goodwill and intangibles resulting from our acquisitions
could become impaired.
As a result of our acquisitions in 1999, we recorded goodwill and intangibles
of $167.2 million, which is being amortized over a period of two to five years.
We will amortize $31.8 million in 2001, $29.5 million in 2002, $28.6 million in
2003 and $14.0 million in 2004. To the extent we do not generate sufficient cash
flows to recover the net amount of the investment recorded, the investment could
be considered impaired and could be subject to earlier write-off. In such event,
our results of operations in any given period could be negatively impacted, and
the market price of our stock could decline.
We rely on our key personnel.
Our future performance depends on the continued service of our key technical,
sales and senior management personnel. Most of our technical, sales or senior
management personnel are not bound by employment agreements. The loss of the
services of one or more of our officers or other key employees could seriously
harm our business, operating results and financial condition.
We recently experienced a period of high employee turnover and have hired a
number of new executives at the levels of director, vice president and above.
Our future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and managerial personnel. Competition for such
personnel is intense, and we may fail to retain our key technical, sales and
managerial employees or attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.
Our revenue recognition could be impacted by the unauthorized actions of our
personnel.
The recognition of our revenue depends on, among other things, the terms
negotiated in our contracts with our customers. Our personnel may act outside of
their authority and negotiate additional terms without our knowledge. To the
extent that our sales personnel have negotiated terms that are extraneous to the
contract and of which we are unaware, whether the additional terms are written
or verbal, could prevent us from recognizing revenue in accordance with our
plans.
We rely on our sales personnel.
We experienced a number of voluntary resignations in our sales force during
the past year, including some of our senior level sales employees. Our future
success depends on our continuing ability to attract and retain highly qualified
sales personnel. Competition for such personnel is intense, and we may fail to
retain our sales personnel or attract, assimilate or retain other highly
qualified sales personnel in the future. Any further disruption to our sales
force could seriously harm our business, operating results and financial
condition.
18
We depend on growth in the enterprise storage management market.
All of our business is in the enterprise storage management market. The
enterprise storage management market is still an emerging and dynamic market.
Our future financial performance will depend in large part on continued growth
in the number of organizations adopting company-wide storage and management
solutions for their client/server computing environments. The market for
enterprise storage management may not continue to grow at historic rates or at
all. If this market fails to grow or grows more slowly than we currently
anticipate and we are unable to capture market share from our competitors, our
business, operating results and financial condition would be seriously harmed.
We are affected by general economic and market conditions.
Segments of the computer industry have recently experienced significant
economic downturns characterized by decreased product demand, product
overcapacity, price erosion, work slowdowns, and layoffs. Our operations may
experience substantial fluctuations from period-to-period as a consequence of
such industry trends, general economic conditions affecting the timing of orders
from major customers and other factors affecting capital spending. The
occurrence of such factors could seriously harm our business, operating results
or financial condition.
Protection of our intellectual property is limited.
Our success depends significantly upon proprietary technology. To protect our
proprietary rights, we rely on a combination of patents, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions. We
seek to protect our software, documentation and other written materials under
patent, trade secret and copyright laws, which afford only limited protection.
However, we may not develop proprietary products or technologies that are
patentable, any issued patent may not provide us with any competitive advantages
or may be challenged by third parties, or the patents of others may seriously
impede our ability to do business.
Despite our efforts to protect our proprietary rights, we are aware that
unauthorized parties have attempted to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, and software piracy can be expected to be a
persistent problem. In licensing our products, other than in enterprise license
transactions, we rely on "shrink wrap" licenses that are not signed by
licensees. Such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States. Our means of protecting our proprietary rights may not be adequate.
Our competitors may independently develop similar technology, duplicate our
products or design around patents issued to us or other intellectual property
rights of ours.
From time to time, we have received claims that we are infringing third
parties' intellectual property rights. In the future, we may be subject to
claims of infringement by third parties with respect to current or future
products, trademarks or other proprietary rights. We expect that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements with third parties. If such royalty or licensing
agreements, if required, are not available on terms acceptable to us, our
business, operating results and financial condition could be seriously harmed.
Defects in our products would harm our business.
Our products can be used to manage data critical to organizations. As a
result, the licensing and support of products we offer may entail the risk of
product liability claims. Although we generally include provisions in our
license agreements that are intended to limit our liability, a successful
product liability claim brought against us could seriously harm our business,
operating results and financial condition.
19
Our trading price is volatile.
The trading of our common stock historically has been highly volatile, and we
expect that the price of our common stock will continue to fluctuate
significantly in the future. An investment in our common stock is subject to a
variety of significant risks, including, but not limited to the following:
. Quarterly fluctuations in financial results or results of other software
companies;
. Changes in our revenue growth rates or our competitors' growth rates;
. Announcements that our revenue or income are below analysts' expectations;
. Changes in analysts' estimates of our performance or industry performance;
. Announcements of new products by our competitors or by us;
. Announcements of disappointing financial results from our competitors,
strategic allies or major end users;
. Developments with respect to our patents, copyrights, or proprietary rights
or those of our competitors;
. Sales of large blocks of our common stock;
. Conditions in the financial markets in general;
. Litigation; and
. General business conditions and trends in the distributed computing
environment and software industry.
In addition, the stock market may experience extreme price and volume
fluctuations, which may affect the market price for the securities of technology
companies without regard to their operating performance or any of the factors
listed above. These broad market fluctuations may seriously harm the market
price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. While we are exposed with respect
to interest rate fluctuations in many countries, our interest income is most
sensitive to fluctuations in the general level of U.S. interest rates. In this
regard, changes in the U.S. interest rates affect the interest earned on our
cash, cash equivalents, short-term and long-term investments. We invest in high
quality credit issuers and, by policy, limit the amount of our credit exposure
to any one issuer. As stated in our policy, our first priority is to reduce the
risk of principal loss. Consequently, we seek to preserve our invested funds by
limiting default risk, market risk and reinvestment risk. We mitigate default
risk by investing in only high quality credit securities that we believe to be
low risk and by positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or guarantor.
The portfolio includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity.
The table below presents the carrying value and related weighted average
interest rates for our interest bearing instruments as of March 31, 2001
(dollars in millions).
Carrying Interest
Value Rate
-------- ---------
Interest bearing instruments:
Short-term investments--fixed rate.............. $5.1 5.1%
Long-term investments--fixed rate............... 0.8 5.2
----
$5.9 5.1
====
Foreign Currency Risk. As a global concern, we face exposure to adverse
movements in foreign currency exchange rates. These exposures may change over
time as business practices evolve and could seriously harm our financial
results. Substantially all of our international sales are currently denominated
in U.S. dollars. An increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and therefore, reduce
the demand for our products. Reduced demand for our products could seriously
harm our financial results. Currently, we do not hedge against any foreign
currencies and as a result, could incur unanticipated gains or losses.
20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information concerning legal proceedings is incorporated herein by reference
to Note 6 of the condensed consolidated financial statements in Part I of this
Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: The Company did not file any Reports on Form
8-K during the quarter ended March 31, 2001.
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.
LEGATO SYSTEMS, INC.
By: /s/ Andy J. Brown
-----------------
Andy J. Brown
Executive Vice President, Finance and
Chief Financial Officer
By: /s/ Cory J. Sindelar
----------------------
Cory J. Sindelar
Vice President, Corporate Controller and
Principal Accounting Officer
Date: May 14, 2001
21