LEGATO SYSTEMS, INC.
3210 Porter Drive
Palo Alto, California 94304
April 6, 1998
TO THE STOCKHOLDERS OF LEGATO SYSTEMS, INC.
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Legato Systems, Inc. (the "Company"), which will be held at the Cabana Hotel,
4290 El Camino Real, Palo Alto, California, on Thursday, May 14, 1998, at 9:00
a.m.
Details of the business to be conducted at the Annual Meeting are given in
the attached Proxy Statement and Notice of Annual Meeting of Stockholders.
It is important that your shares be represented and voted at the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. Returning the proxy does NOT deprive you of your right to attend the
Annual Meeting. If you decide to attend the Annual Meeting and wish to change
your proxy vote, you may do so automatically by voting in person at the meeting.
On March 16, 1998, the Company announced a two-for-one stock split of its
Common Stock (which will be effected in the form of a stock dividend) to be
effective on April 17, 1998. This stock split is more fully described in the
attached Proxy Statement. It is important to note that, except as otherwise
indicated in the Proxy Statement, all share numbers and stock values in the
Proxy Statement have been adjusted to reflect this two-for-one stock split.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company. We look
forward to seeing you at the Annual Meeting.
Sincerely,
Louis C. Cole
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
LEGATO SYSTEMS, INC
3210 Porter Drive
Palo Alto, California 94304
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held May 14, 1998
The Annual Meeting of Stockholders (the "Annual Meeting") of Legato
Systems, Inc. (the "Company") will be held at the Cabana Hotel, 4290 El Camino
Real, Palo Alto, California, on Thursday, May 14, 1998, at 9:00 a.m. for the
following purposes:
1. To elect five directors of the Board of Directors to serve until the
next Annual Meeting or until their successors have been duly elected
and qualified;
2. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of shares of Common Stock that the Company is
authorized to issue from 50,000,000 to 100,000,000;
3. To approve an amendment to the Company's 1995 Stock Option/Stock
Issuance Plan, including an increase to the number of shares available
for issuance thereunder, as set forth in the accompanying Proxy
Statement;
4. To ratify the appointment of Coopers & Lybrand L.L.P. as the Company's
independent public accountants for the fiscal year ending December 31,
1998; and
5. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the attached
Proxy Statement.
Only stockholders of record at the close of business on April 1, 1998 are
entitled to notice of, and to vote at, the Annual Meeting and at any
adjournments or postponements thereof. A list of such stockholders will be
available for inspection at the Company's headquarters located at 3210 Porter
Drive, Palo Alto, California, during ordinary business hours for the ten-day
period prior to the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
Robert V. Gunderson, Jr.
Secretary
Palo Alto, California
April 6, 1998
- --------------------------------------------------------------------------------
IMPORTANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF
YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU
MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
- --------------------------------------------------------------------------------
<PAGE>
LEGATO SYSTEMS, INC.
3210 Porter Drive
Palo Alto, California 94304
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
To be held May 14, 1998
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Legato Systems, Inc., a Delaware
corporation (the "Company"), for the Annual Meeting of Stockholders (the "Annual
Meeting") to be held at the Cabana Hotel, 4290 El Camino Real, Palo Alto,
California, on Thursday, May 14, 1998, at 9:00 a.m., and at any adjournment or
postponement of the Annual Meeting. These proxy materials were first mailed to
stockholders on or about April 6, 1998.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Stockholders. Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On April 1, 1998, the record date for determination of
stockholders entitled to vote at the Annual Meeting, there were 18,143,785
shares of Common Stock outstanding. All share numbers in this Proxy Statement
(including the number of shares outstanding on the record date for the Annual
Meeting) have been adjusted to reflect the following: (i) the two-for-one stock
split effected by the Company on July 5, 1996 (the "1996 Stock Split") and (ii)
the 1998 Stock Split (as such term is defined in the following paragraph). Each
stockholder of record on April 1, 1998 is entitled to one vote for each share of
Common Stock held by such stockholder on April 1, 1998. Shares of Common Stock
may not be voted cumulatively. All votes will be tabulated by the inspector of
election appointed for the meeting, who will separately tabulate affirmative and
negative votes, abstentions and broker non-votes.
On March 16, 1998, the Company announced a two-for-one stock split of its
Common Stock to be effective as of April 17, 1998 (the "1998 Stock Split"). The
1998 Stock Split will be effected in the form of a 100% stock dividend to be
issued to each stockholder of record as of April 3, 1998. EXCEPT AS OTHERWISE
INDICATED HEREIN, ALL SHARE NUMBERS AND STOCK VALUES IN THIS PROXY STATEMENT
HAVE BEEN ADJUSTED TO REFLECT THE 1998 STOCK SPLIT.
Quorum Required
The Company's bylaws provide that the holders of a majority of the
Company's Common Stock issued and outstanding and entitled to vote at the Annual
Meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at the Annual Meeting. Abstentions and broker
non-votes will be counted as present for the purpose of determining the presence
of a quorum.
Votes Required
Proposal 1. Directors are elected by a plurality of the affirmative votes
cast by those shares present in person, or represented by proxy, and entitled to
vote at the Annual Meeting. The five nominees for director receiving the highest
number of affirmative votes will be elected. Abstentions and broker non-votes
will not be counted toward a nominee's total. Stockholders may not cumulate
votes in the election of directors.
Proposal 2. Approval of the adoption of the amendment to the Company's
Certificate of Incorporation requires the affirmative vote of a majority of the
Company's Common Stock issued and outstanding and entitled to vote at the Annual
Meeting. Abstentions and broker non-votes are not affirmative votes and,
therefore, will have the same effect as votes against the proposal.
Proposal 3. Approval of the adoption of the amendment to the Company's 1995
Stock Option/Stock Issuance Plan requires the affirmative vote of a majority of
those shares present in person or represented by proxy, and entitled to vote at
the Annual Meeting. Abstentions are not affirmative votes and, therefore, will
have the same effect as votes against the proposal. Broker non-votes will not be
treated as entitled to vote on the matter and thus, will not affect the outcome
of the voting on the proposal.
Proposal 4. Ratification of the appointment of Coopers & Lybrand L.L.P. as
the Company's independent public accountants for the fiscal year ending December
31, 1998 requires the affirmative vote of a majority of those shares present in
person, or represented by proxy, and cast either affirmatively or negatively at
the Annual Meeting. Abstentions and broker non-votes will not be counted as
having been voted on the proposal.
Proxies
Whether or not you are able to attend the Company's Annual Meeting, you are
urged to complete and return the enclosed proxy, which is solicited by the
Company's Board of Directors and which will be voted as you direct on your proxy
when properly completed. In the event no directions are specified, such proxies
will be voted FOR the Nominees of the Board of Directors (as set forth in
Proposal No. 1), FOR Proposal Nos. 2, 3, and 4, and in the discretion of the
proxy holders as to other matters that may properly come before the Annual
Meeting. You may also revoke or change your proxy at any time before the Annual
Meeting. To do this, send a written notice of revocation or another signed proxy
with a later date to the Secretary of the Company at the Company's principal
executive offices before the beginning of the Annual Meeting. You may also
automatically revoke your proxy by attending the Annual Meeting and voting in
person. All shares represented by a valid proxy received prior to the Annual
Meeting will be voted.
Solicitation of Proxies
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the proxy,
and any additional soliciting material furnished to stockholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation material to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram, or other means by directors, officers, employees or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. The Company has also retained Beacon Hill Partners, Inc.
("Beacon Hill") to assist in the solicitation of proxies. Beacon Hill will
receive a fee for such services of approximately $5,000 plus out-of-pocket
expenses, which will be paid by the Company. Except as described above, the
Company does not presently intend to solicit proxies other than by mail.
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The directors who are being nominated for reelection to the Board of
Directors (the "Nominees"), their ages as of April 1, 1998, their positions and
offices held with the Company and certain biographical information are set forth
below. The proxy holders intend to vote all proxies received by them in the
accompanying form FOR the Nominees listed below unless otherwise instructed. In
the event any Nominee is unable or declines to serve as a director at the time
of the Annual Meeting, the proxies will be voted for any nominee who may be
designated by the present Board of Directors to fill the vacancy. As of the date
of this Proxy Statement, the Board of Directors is not aware of any Nominee who
is unable or will decline to serve as a director. The five (5) nominees
receiving the highest number of affirmative votes of the shares entitled to vote
at the Annual Meeting will be elected directors of the Company to serve until
the next Annual Meeting or until their successors have been duly elected and
qualified.
<TABLE>
Nominees Age Positions and Offices Held with the Company
- --------------------------- ------- ------------------------------------------------------------
<S> <C> <C>
Louis C. Cole (1) 54 Chairman of the Board, President and Chief Executive Officer
Eric A. Benhamou 42 Director
Kevin A. Fong (2)(3) 44 Director
David N. Strohm (3) 49 Director
Phillip E. White(2) 55 Director
<FN>
(1) Member of Stock Option Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
</FN>
</TABLE>
Mr. Cole joined the Company as President, Chief Executive Officer and a
Director in June 1989. Since April 1995, Mr. Cole has also served as Chairman of
the Board. Before joining the Company, from March 1987 until July 1988, Mr. Cole
served as Executive Vice President responsible for all operating divisions of
Novell, Inc., a publicly held manufacturer of computer networking and software
products. Mr. Cole currently serves as a director of Qualix Group, Inc. and
Rogue Wave Software, Inc. both publicly held software companies. Mr. Cole holds
a B.S. in mathematics and education from Pennsylvania State University at
Edinboro.
Mr. Benhamou has been a Director of the Company since March 1993. Mr.
Benhamou has been President and Chief Executive Officer of 3Com Corporation
("3Com"), a publicly held computer network products company, since September
1990, and has been Chairman of the Board of 3Com since July 1994. From April
1990 until September 1990, Mr. Benhamou served as Chief Operating Officer of
3Com. Mr. Benhamou currently serves as a director of Cypress Semiconductor, a
publicly held semiconductor company, and Netscape Communications, a publicly
held Internet software company. Mr. Benhamou holds a Diplome d'Ingenieur from
Ecole Nationale Superieure d'Arts et Metiers in Paris, France, and an M.S. in
electrical engineering from Stanford University.
Mr. Fong has been a Director of the Company since December 1988. Mr. Fong
joined Mayfield Fund ("Mayfield"), a venture capital firm, in 1988 and has been
a general partner of several venture capital funds affiliated with Mayfield
since 1990. Mr. Fong currently serves as a director of Prism Solutions, Inc., a
publicly held data warehousing company, as well as several privately held
companies. Mr. Fong holds a B.S. in electrical engineering from the University
of California at Berkeley, and an M.S. in electrical engineering and an M.B.A.
from Stanford University.
Mr. Strohm has been a Director of the Company since December 1988. Mr.
Strohm joined Greylock Management Corporation ("Greylock"), a venture capital
management company, in 1980 and is a general partner of several venture capital
funds affiliated with Greylock. Mr. Strohm currently serves as a director of
Banyan Systems, Inc., a manufacturer of networking software products, and
DoubleClick, Inc., a leading provider of comprehensive Internet advertising
solutions, both publicly held, as well as several privately held technology
companies. Mr. Strohm holds a B.A. from Dartmouth College and an M.B.A. from
Harvard University.
Mr. White has been a Director of the Company since May 1995. Since August
1997, Mr. White has been providing marketing consulting services within the
high-tech industry. From January 1989 to August 1997, Mr. White served as
President, Chief Executive Officer and a director of Informix Corporation, a
publicly held database software company. From March 1986 to December 1988, Mr.
White served as President and Chief Operating Officer of Wyse Technology, Inc.,
a publicly held personal computer manufacturing company. Mr. White currently
serves as a director of Adaptec, Inc., a publicly held manufacturer and retailer
of peripheral adapters. In addition, Mr. White is a member of the Board of
Trustees of Illinois Wesleyan University. Mr. White holds a B.A. from Illinois
Wesleyan University and an M.B.A. from the University of Illinois, Urbana.
Board of Directors Meetings and Committees
During the fiscal year ended December 31, 1997, the Board of Directors held
six (6) meetings. For the fiscal year, each of the directors during the term of
their tenure attended or participated in at least 75% of the aggregate of (i)
the total number of meetings or actions by written consent of the Board of
Directors and (ii) the total number of meetings held by all committees of the
Board of Directors on which each such director served. The Board of Directors
has three (3) standing committees: the Audit Committee, the Compensation
Committee and the Stock Option Committee.
During the fiscal year ended December 31, 1997, the Audit Committee of the
Board of Directors held one (1) meeting. The Audit Committee reviews, acts on
and reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of the Company's accountants, the
scope of the annual audits, fees to be paid to the Company's accountants, the
performance of the Company's accountants and the accounting practices of the
Company. The members of the Audit Committee are Messrs. Fong and White.
During the fiscal year ended December 31, 1997, the Compensation Committee
of the Board of Directors held five (5) meetings and acted by written consent in
lieu of a meeting on two (2) occasions. The Compensation Committee reviews the
performance of the executive officers of the Company and reviews the
compensation programs for other key employees, including salary and cash bonus
levels and option grants under the 1995 Stock Option/Stock Issuance Plan. The
members of the Compensation Committee are Messrs. Fong and Strohm.
During the fiscal year ended December 31, 1997, the Stock Option Committee
of the Board of Directors acted by written consent in lieu of a meeting on
forty-four (44) occasions. The Stock Option Committee approves stock option
grants to employees and consultants of the Company who are not officers up to a
maximum number of shares set by the Board of Directors. Mr. Cole was the sole
member of the Stock Option Committee during 1997.
Director Compensation
Except for grants of stock options, directors of the Company generally do
not receive compensation for services provided as a director. The Company also
does not pay compensation for committee participation or special assignments of
the Board of Directors.
Non-employee Board members are eligible for option grants pursuant to the
provisions of the Automatic Option Grant Program under the Company's 1995 Stock
Option/Stock Issuance Plan. Under the Automatic Option Grant Program, each
individual who first becomes a non-employee Board member after the date of the
Company's initial public offering will be granted an option to purchase 48,000
shares on the date such individual joins the Board, provided such individual has
not been in the prior employ of the Company. In addition, at each Annual Meeting
of Stockholders, each individual who has served as a non-employee Board member
for at least six months prior to such Annual Meeting will receive an additional
option grant to purchase 12,000 shares of Common Stock, whether or not such
individual has been in the prior employ of the Company. The option price for
each option grant under the Automatic Option Grant Program will be equal to the
fair market value per share of Common Stock on the automatic grant date and each
automatic option grant will be immediately exercisable for all of the option
shares. The shares purchasable under the option will be subject to repurchase at
the original exercise price in the event the optionee's Board service should
cease prior to vesting. With respect to each initial grant, the repurchase right
shall lapse and the optionee shall vest in four (4) equal annual installments
from the grant date. Each annual grant shall vest in two equal and successive
annual installments. See Proposal No. 3, "Amendment of 1995 Stock Option/Stock
Issuance Plan." Pursuant to the Automatic Option Grant Program, Messrs.
Benhamou, Fong, Strohm and White were each granted options to purchase 48,000
shares of Common Stock on July 5, 1995 at an exercise price of $4.75 per share,
12,000 shares on May 16, 1996 at an exercise price of $10.9375 per share, and
12,000 shares on May 15, 1997 at an exercise price of $8.9375 per share.
Pursuant to the Automatic Option Grant Program, each of Messrs. Benhamou, Fong,
Strohm and White will be granted options to purchase 12,000 shares of Common
Stock on May 14, 1998.
Directors who are also employees of the Company are eligible to receive
options and be issued shares of Common Stock directly under the 1995 Stock
Option/Stock Issuance Plan and are also eligible to participate in the Company's
Employee Stock Purchase Plan and, if an executive officer of the Company, the
Executive Bonus Plan.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED HEREIN.
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1998, certain
information with respect to shares beneficially owned (as adjusted to reflect
the 1996 Stock Split and the 1998 Stock Split) by (i) each person who is known
by the Company to be the beneficial owner of more than five percent of the
Company's outstanding shares of Common Stock, (ii) each of the Company's
directors and the executive officers named in the Summary Compensation Table and
(iii) all current directors and executive officers as a group. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within sixty (60) days of
the date as of which the information is provided; in computing the percentage
ownership of any person, the amount of shares is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason of
such acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date.
<TABLE>
<CAPTION>
Shares Beneficially Owned
as of February 28, 1998 (1) (2)
------------------------------------------------------------
Beneficial Owner Number of Shares Percentage of Class
- -------------------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Pilgrim Baxter & Associates.................... 3,307,400 9.1%
1255 Drummers Lane, Suite 300
Wayne, PA 19087
TCW Group, Inc................................. 2,281,000 6.3%
865 South Figueroa Street
Los Angeles, CA 90017
Louis C. Cole (3) ............................. 1,925,066 5.3%
3210 Porter Drive
Palo Alto, CA 94304
Nora M. Denzel (4)............................. 24,712 *
Kent D. Smith (5) ............................. 345,424 *
Stephen C. Wise (6)............................ 38,172 *
Eric A. Benhamou (7) .......................... 188,000 *
Kevin A. Fong (8) ............................. 105,496 *
David N. Strohm (8) ........................... 331,868 *
Phillip E. White (9) .......................... 112,000 *
All current directors and executive officers
as a group (9 persons) (10) ................... 3,070,738 8.2%
_______________________
<FN>
*Less than 1% of the outstanding shares of Common Stock.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock. To the Company's knowledge, the entities named in the
table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
(2) The number of shares of Common Stock deemed outstanding includes
shares issuable pursuant to stock options that may be exercised within
sixty (60) days after February 28, 1998.
(3) Includes options exercisable into 404,700 shares of Common Stock and
1,519,992 shares held by The Louis and Jolene Cole 1988 Revocable
Trust, dated November 7, 1988 (the "Cole Trust"), of which Mr. Cole is
a trustee.
(4) Includes options exercisable into 14,080 shares of Common Stock.
(5) Includes options exercisable into 325,524 shares of Common Stock.
(6) Includes options exercisable into 18,126 shares of Common Stock.
(7) Includes options exercisable into 172,000 shares of Common Stock.
(8) Includes options exercisable into 72,000 shares of Common Stock.
(9) Includes options exercisable into 112,000 shares of Common Stock.
(10) Includes options exercisable into 1,190,430 shares of Common Stock.
</FN>
</TABLE>
<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee" or the "Committee") has the exclusive authority to
establish the level of base salary payable to the Chief Executive Officer
("CEO") and certain other executive officers of the Company and to administer
the Company's 1995 Stock Option/Stock Issuance Plan and Employee Stock Purchase
Plan. In addition, the Committee has the responsibility for approving the
individual bonus programs to be in effect for the CEO and certain other
executive officers and other key employees each fiscal year.
For the 1997 fiscal year, the process utilized by the Committee in
determining executive officer compensation levels was based on the subjective
judgment of the Committee. Among the factors considered by the Committee were
the recommendations of the CEO with respect to the compensation of the Company's
key executive officers. However, the Committee made the final compensation
decisions concerning such officers.
General Compensation Policy. The Committee's fundamental policy is to offer
the Company's executive officers competitive compensation opportunities based
upon overall Company performance, their individual contribution to the financial
success of the Company and their personal performance. It is the Committee's
objective to have a substantial portion of each officer's compensation
contingent upon the Company's performance, as well as upon his or her own level
of performance. Accordingly, each executive officer's compensation package
consists of: (i) base salary, (ii) cash bonus awards and (iii) long-term
stock-based incentive awards.
Base Salary. The base salary for each executive officer is set on the basis
of general market levels and personal performance. Each individual's base pay is
positioned relative to the total compensation package, including cash incentives
and long-term incentives.
In preparing the performance graph for this Proxy Statement, the Company
has selected the Hambrecht & Quist Software Sector Index. The companies included
in the Company's informal survey are not necessarily those included in the
Hambrecht & Quist Software Sector Index, because they were determined not to be
competitive with the Company for executive talent or because compensation
information was not available.
Annual Cash Bonuses. Each executive officer has an established cash bonus
target. The annual pool of bonuses for executive officers is distributed on the
basis of the Company's achievement of the financial performance targets
established at the start of the fiscal year and personal objectives established
for each executive. Actual bonuses paid reflect an individual's accomplishment
of both corporate and functional objectives.
Long-Term Incentive Compensation. During fiscal 1997, the Committee, in its
discretion, made option grants to Messrs. Cole, Smith, Wise, and Ms. Denzel
under the 1995 Stock Option/Stock Issuance Plan. Generally, a significant grant
is made in the year that an officer commences employment and no grant is made in
the second year. Thereafter, option grants may be made at varying times and in
varying amounts in the discretion of the Committee. Generally, the size of each
grant is set at a level that the Committee deems appropriate to create a
meaningful opportunity for stock ownership based upon the individual's position
with the Company, the individual's potential for future responsibility and
promotion, the individual's performance in the recent period and the number of
unvested options held by the individual at the time of the new grant. The
relative weight given to each of these factors will vary from individual to
individual at the Committee's discretion. Applying these principles, a
significant grant was made to Ms. Denzel in connection with her commencement of
employment. In addition, a significant grant was made to Mr. Wise in 1996 in
connection with his commencement of employment. The Company adopted an option
repricing program, for which Mr. Wise was eligible, and which resulted in the
cancellation of the 1996 option grant and the grant of a new option in 1997 for
the same number of shares but with a more restrictive vesting schedule. See the
"Report on Option Repricing." The grants made to Messrs. Cole and Smith were
made in recognition of their years of service with the Company and to place a
significant portion of their total compensation at risk.
Each grant allows the officer to acquire shares of the Company's common
stock at a fixed price per share (the market price on the grant date) over a
specified period of time. The option vests in periodic installments over a two
to four year period, contingent upon the executive officer's continued
employment with the Company. The vesting schedule and the number of shares
granted are established to ensure a meaningful incentive in each year following
the year of grant. Accordingly, the option will provide a return to the
executive officer only if he or she remains in the Company's employ, and then
only if the market price of the Company's Common Stock appreciates over the
option term.
CEO Compensation. The annual base salary for Mr. Cole, the Company's
President and Chief Executive Officer, was established by the Committee on
January 27, 1997. The Committee's decision was made primarily on the basis of
Mr. Cole's personal performance of his duties.
The remaining components of the Chief Executive Officer's 1997 fiscal year
incentive compensation were entirely dependent upon the Company's financial
performance and provided no dollar guarantees. The bonus paid to the Chief
Executive Officer for the fiscal year was based on the same incentive plan for
all other officers. Specifically, a target incentive was established at the
beginning of the year using an agreed-upon formula based on Company revenue and
profit. Each year, the annual incentive plan is reevaluated with a new
achievement threshold and new targets for revenue and profit. The option grant
made to the Chief Executive Officer during the 1997 fiscal year was intended to
reflect his years of service with the Company and to place a significant portion
of Mr. Cole's total compensation at risk, because the bonus will provide little
or no compensation unless Company performance achieves agreed-upon thresholds
and the options will have no value unless there is appreciation in the value of
the Company's common stock over the option term.
Tax Limitation. Under the Federal tax laws, a publicly-held company such as
the Company will not be allowed a federal income tax deduction for compensation
paid to certain executive officers to the extent that compensation exceeds $1
million per officer in any year. To qualify for an exemption from the $1 million
deduction limitation, the stockholders were asked to approve a limitation under
the Company's 1995 Stock Option/Stock Issuance Plan on the maximum number of
shares of Common Stock for which any one participant may be granted stock
options per calendar year. Because this limitation was adopted, any compensation
deemed paid to an executive officer when he exercises an outstanding option
under the 1995 Stock Option/Stock Issuance Plan with an exercise price equal to
the fair market value of the option shares on the grant date will qualify as
performance-based compensation that will not be subject to the $1 million
limitation. Since it is not expected that the cash compensation to be paid to
the Company's executive officers for the 1997 fiscal year will exceed the $1
million limit per officer, the Committee will defer any decision on whether to
limit the dollar amount of all other compensation payable to the Company's
executive officers to the $1 million cap.
Compensation Committee
Kevin A. Fong
David N. Strohm
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed
in September 1992, and the members of the Compensation Committee are Messrs.
Fong and Strohm. Neither of these individuals was at any time during 1997, or at
any other time, an officer or employee of the Company. No executive officer of
the Company serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return
on the Company's Common Stock between July 6, 1995 (the date the Company's
Common Stock commenced public trading) and December 31, 1997 with the cumulative
total return of (i) the CRSP Total Return Index for the Nasdaq Stock Market
(U.S. Companies) (the "Nasdaq Stock Market-U.S. Index") and (ii) the Hambrecht &
Quist Software Sector Index (the "H&Q Software Sector Index"), over the same
period. This graph assumes the investment of $100.00 on July 6, 1995 in the
Company's Common Stock, the Nasdaq Stock Market-U.S. Index and the H&Q Software
Sector Index, and assumes the reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data.
The Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's Common Stock. Information used in the graph was obtained from
Hambrecht & Quist LLC, a source believed to be reliable, but the Company is not
responsible for any errors or omissions in such information.
Comparison of Cumulative Total Return Among Legato Systems, Inc.,
the Nasdaq Stock Market-U.S. Index and the H&Q Software Sector Index
<TABLE>
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
7/6/95 12/31/95 6/30/96 12/31/96 6/30/97 12/31/97
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Legato Systems, Inc. $100.00 $114.81 $203.70 $241.67 $137.04 $325.93
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Nasdaq Stock $100.00 $112.48 $127.35 $138.36 $154.83 $169.77
Market-U.S. Index
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
H&Q Software Sector $100.00 $107.75 $128.21 $130.97 $141.98 $158.39
Index
---------------------------------------------------------------------------------------------------------
</TABLE>
The Company effected its initial public offering of Common Stock on July 5,
1995 at a price of $4.75 per share (as adjusted to reflect the 1996 Stock Split
and the 1998 Stock Split). The graph above, however, commences with the closing
price of $6.75 per share (as adjusted to reflect the 1996 Stock Split and the
1998 Stock Split) on July 6, 1995 - the date the Company's Common Stock
commenced public trading.
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this Proxy
Statement or future filings made by the Company under those statutes, the
Compensation Committee Report and Stock Performance Graph shall not be deemed
filed with the Securities and Exchange Commission and shall not be deemed
incorporated by reference into any of those prior filings or into any future
filings made by the Company under those statutes.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the three other most highly
compensated executive officers who were serving as such at the end of 1997
(collectively, the "Named Officers"), each of whose aggregate compensation for
1997 exceeded $100,000 for services rendered in all capacities to the Company
and its subsidiaries for that fiscal year.
<TABLE>
Summary Compensation Table
<CAPTION>
Long-Term
Compensation
Number of
Securities
Annual Compensation Underlying All Other
----------------------------------
Name and Principal Position Year Salary(1) Bonus Options Compensation(2)
<S> <C> <C> <C> <C> <C>
Louis C. Cole 1997 $218,334 $107,625 100,000 $1,440
Chairman of the Board, President 1996 $200,004 $100,520 100,000 $2,864
and Chief Executive Officer 1995 $197,504 $137,264 400,000 $2,022
Nora Denzel 1997 $146,666(3) $ 84,000 300,000 $ 303
Senior Vice President Product Operations
1996 - $ - - $ -
Chief Technical Officer 1995 - $ - - $ -
Kent D. Smith 1997 $198,300 $ 86,721 50,000 $ 870
Executive Vice President, 1996 $162,000 $ 73,301 40,000 $ 1,907
Chief Operations Officer 1995 $122,123(4) $ 79,990 400,000 $ 954
Stephen C. Wise 1997 $165,831 $ 56,470 250,000(6) $ 558
Senior Vice President, Finance, Chief 1996 $ 41,231(5) $ 13,000 200,000(6) $ 128
Financial Officer, Asst Secretary 1995 - $ - - $ -
<FN>
(1) Salary includes amounts deferred under the Company's 401(k) Plan.
(2) Represents life insurance premiums paid by the Company.
(3) Ms. Denzel commenced employment on January 21, 1997.
(4) Mr. Smith commenced employment on March 31, 1995.
(5) Mr. Wise commenced employment on September 27, 1996.
(6) The option for 200,000 shares granted to Mr. Wise in 1996 was canceled and
subsequently regranted on January 27, 1997.
</FN>
</TABLE>
<PAGE>
The following table contains information concerning the stock option grants
made to each of the Named Officers for 1997. No stock appreciation rights were
granted to these individuals during such year.
<TABLE>
Option Grants in Last Fiscal Year
<CAPTION>
Individual Grants(1) Potential Realizable
------------------------------------------------------
Number of % of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees Price Expiration for Option Term(2)
Name Granted in 1997 Per Share Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Louis C. Cole......... 100,000 4.10% $11.875 1/27/07 $ 746,812 $1,892,569
Nora Denzel........... 200,000 8.20% $11.875 1/27/07 $1,493,625 $3,785,138
100,000 4.10% $16.4375 10/6/07 $1,033,746 $2,619,714
Kent D. Smith......... 50,000 2.05% $11.875 1/27/07 $ 373,406 $ 946,285
Stephen C. Wise....... 200,000(3) 8.20% $11.875 1/27/07 $1,493,625 $3,785,138
50,000 2.05% $16.4375 10/6/07 $ 516,873 $1,309,857
<FN>
(1) The options disclosed in the table were granted on January 27, 1997
and the second option, if any, was granted on October 6, 1997. The
exercise price for each option may be paid in cash, in shares of
Common Stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. The Company may also finance the option exercise by
loaning the optionee sufficient funds to pay the exercise price for
the purchased shares, together with any federal and state income tax
liability incurred by the optionee in connection with such exercise.
The plan administrator has the discretionary authority to reprice the
options through the cancellation of those options and the grant of
replacement options with an exercise price based on the fair market
value of the option shares on the regrant date. The options have a
maximum term of 10 years measured from the option grant date, subject
to earlier termination in the event of the optionee's cessation of
service with the Company. Except as otherwise noted, the options
listed in the table become exercisable for 25% of the shares after one
year of service from the designated vesting date and in equal monthly
installments over the next 3 years. Under each of the options, the
option shares will vest upon an acquisition of the Company by merger
or asset sale, unless the acquiring company assumes the options. Any
options that are assumed or replaced in the transaction and do not
otherwise accelerate at that time shall automatically accelerate (and
any unvested option shares which do not otherwise vest at that time
shall automatically vest) in the event the optionee's service
terminates by reason of an involuntary or constructive termination
within 18 months following the transaction.
(2) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance provided to any executive
officer or any other holder of the Company's securities that the
actual stock price appreciation over the 10-year option term will be
at the assumed 5% and 10% levels or at any other defined level. Unless
the market price of the Common Stock appreciates over the option term,
no value will be realized from the option grants made to the executive
officers.
(3) The option becomes exercisable for 25% of the shares after 15 months
of service from the designated vesting date and in equal monthly
installments over the next 3 years.
</FN>
</TABLE>
The following table sets forth information concerning option exercises in
1997 and option holdings as of the end of the 1997 fiscal year with respect to
each of the Named Officers. No stock appreciation rights were outstanding at the
end of that year.
<PAGE>
<TABLE>
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<CAPTION>
Number of
Value Realized Securities Underlying Value of Unexercised
Shares (Market Price at Unexercised Options in-the-Money Options
Acquired on Exercise Less at FY-End at FY-End (1)
Name Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Louis C. Cole...... 100,000 $1,199,800 135,116 392,084 $2,552,543 $6,754,907
Nora Denzel........ -- -- -- 300,000 -- $2,581,250
Kent D. Smith...... 50,000 $888,750 196,166 195,834 $3,925,588 $3,395,907
Stephen C. Wise.... -- -- 50,000 200,000 $506,250 $1,796,875
<FN>
(1) Based on the fair market value of the Company's Common Stock at year end
($22.00) per share less the exercise price payable for such shares.
</FN>
</TABLE>
COMPENSATION COMMITTEE REPRICING REPORT
On January 27, 1997, the Compensation Committee of the Board of Directors
approved a plan pursuant to which one officer and certain employees were allowed
to exchange options with exercise prices in excess of the then current fair
market value for new options having exercise prices equal to $11.875, the then
current fair market value of the Common Stock. Certain employees and Mr. Wise
exchanged their options for an aggregate of 315,100 shares. Recipients of the
repriced options were required to satisfy a 15 month vesting cliff before any
portion of the repriced option became exercisable. Any employee whose employment
terminated prior to the date that was 15 months from his/her hire date lost
his/her option. None of the other executive officers participated in the January
1997 repricing exchange.
Stock options are intended to provide incentives to the Company's officers
and employees. The Compensation Committee believes that such equity incentives
are a significant factor in the Company's ability to attract, retain and
motivate key employees who are critical to the Company's long-term success. The
Compensation Committee further believes that, at their original exercise prices,
the disparity between the exercise price of these options and the then market
prices for the Common Stock did not provide meaningful incentives to the
employees holding the options. A review of other companies in the software
industry indicates that some of these companies have been confronted with this
problem and have made similar adjustments in option prices to motivate their
employees.
The Compensation Committee approved the repricing of options as a means of
ensuring that optionees will continue to have meaningful equity incentives to
work toward the Company's success. The adjustment was deemed by the Compensation
Committee to be in the best interests of the Company and its stockholders.
Compensation Committee
Kevin A. Fong
David N. Strohm
<PAGE>
<TABLE>
Ten-Year Option Repricings
<CAPTION>
Length of
original
Securities option term
underlying number Market price of remaining at
of options/SARs stock at time Exercise price at date of
repriced or amended of repricing or time of repricing New exercise repricing or
Name Date (#) amendment ($) or amendment ($) price ($) amendment
<S> <C> <C> <C> <C> <C> <C>
Stephen C. Wise 1/27/97 200,000 $11.875 $22.25 $11.875 116 mos.
</TABLE>
Bonus Plan. In 1996, the Company instituted an executive bonus program
pursuant to which bonuses will be paid to executive officers based on individual
and Company performance targets. In addition, certain non-executive employees
will receive year-end bonuses if the Company meets its performance targets.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
None of the Company's executive officers have employment or severance
agreements with the Company, and their employment may be terminated at any time
at the discretion of the Board of Directors, except that Mr. Ferraro, Senior
Vice President, Worldwide Sales, received an offer letter from the Company that
provides that he will receive six months of salary if his employment is
involuntarily terminated within the first 366 days of his employment.
The Compensation Committee has the authority under the 1995 Stock
Option/Stock Issuance Plan to accelerate the exercisability of outstanding
options, or to accelerate the vesting of the shares of Common Stock subject to
outstanding options, held by the Chief Executive Officer and the Company's other
executive officers. Such acceleration may be conditioned on the optionee's
termination of employment (whether involuntarily or through a forced
resignation) and may be conditioned upon the occurrence of a merger,
reorganization or consolidation or upon a hostile take-over of the Company
effected through a tender offer or through a change in the majority of the Board
as a result of one or more contested elections for Board membership.
<PAGE>
PROPOSAL NO. 2
AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION
The Board of Directors has determined that it is in the best interests of
the Company and its stockholders to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock of the
Company from 50,000,000 to 100,000,000 shares. Accordingly, the Board of
Directors has unanimously approved the proposed Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of the Company, in the form
attached hereto as Exhibit A (the "Certificate of Amendment"), and hereby
solicits the approval of the Company's stockholders of the Certificate of
Amendment. If the stockholders approve the Certificate of Amendment, the Board
of Directors currently intends to file the Certificate of Amendment with the
Secretary of State of the State of Delaware as soon as practicable following
such stockholder approval. If the Certificate of Amendment is not approved by
the stockholders, the existing Certificate of Incorporation will continue in
effect.
The objectives of the increase in the authorized number of shares of Common
Stock are to ensure that the Company has sufficient shares available for future
issuances. The Board of Directors believes that it is prudent to increase the
authorized number of shares of Common Stock to the proposed levels in order to
provide a reserve of shares available for issuance to meet business needs as
they arise. Such future activities may include, without limitation, financings,
establishing strategic relationships with corporate partners, providing equity
incentives to employees, officers or directors, or effecting stock splits or
dividends. The additional shares of Common Stock authorized may also be used to
acquire or invest in complementary businesses or products or to obtain the right
to use complementary technologies. Although the Company has no current plans or
proposals to issue additional shares of Common Stock (except pursuant to
employee stock incentive plans), the Company may continue to evaluate potential
acquisitions of or investments with third parties.
Possible Effects of the Proposed Amendment to the Certificate of Incorporation
If the stockholders approve the proposed Certificate of Amendment, the
Board of Directors may cause the issuance of additional shares of Common Stock
without further vote of the stockholders of the Company, except as provided
under Delaware corporate law or under the rules of any securities exchange on
which shares of Common Stock of the Company are then listed. Current holders of
Common Stock have no preemptive or similar rights, which means that current
stockholders do not have a prior right to purchase any new issue of Common Stock
of the Company in order to maintain their appropriate ownership thereof. The
issuance of additional shares of Common Stock would decrease the proportionate
equity interest of the Company's current stockholders and, depending upon the
price paid for such additional shares, could result in dilution to the Company's
current stockholders.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
<PAGE>
PROPOSAL NO. 3
AMENDMENT TO THE
1995 STOCK OPTION/STOCK ISSUANCE PLAN
The stockholders are being asked to approve an amendment to the Legato
Systems, Inc. 1995 Stock Option/Stock Issuance Plan (the "Option Plan"). The
Board of Directors "Board") amended the Option Plan on March 13, 1998 to
increase the share reserve by 2,000,000 shares to an aggregate of 12,450,982
shares and to impose a limit on the number of shares by which the pool would
increase each year, as discussed below. The Board believes that option grants
and the stock issuances under the Option Plan play an important role in the
Company's efforts to attract, employ and retain employees, directors and
consultants of outstanding ability.
The Company established the Option Plan on May 2, 1995 as a successor to
the 1989 Stock Option and Restricted Stock Plan ("Predecessor Plan") to provide
a means whereby eligible individuals may be given an opportunity to purchase
shares of Common Stock. The Option Plan was approved by the stockholders on June
9, 1995. The principal terms and provisions of the Option Plan are summarized
below. The summary, however, is not intended to be a complete description of all
the terms of the Option Plan. A copy of the Option Plan will be furnished by the
Company to any stockholder upon written request to the Corporate Secretary at
the executive offices in Palo Alto, California.
Structure. The Option Plan is divided into three separate components: (i)
the Discretionary Option Grant Program, under which eligible individuals may, at
the discretion of the plan administrator, be granted options to purchase shares
of Common Stock at an exercise price not less than 85% of their fair market
value on the grant date, (ii) the Stock Issuance Program, under which such
persons may, in the plan administrator's discretion, be issued shares of Common
Stock directly through the purchase of such shares at a price not less than
eighty-five percent (85%) of their fair market value at the time of their
issuance or as a bonus tied to the performance of services and (iii) the
Automatic Option Grant Program, under which option grants will automatically be
made at periodic intervals to eligible non-employee Board members to purchase
shares of Common Stock at an exercise price equal to their fair market value on
the grant date.
Administration. The Compensation Committee of the Board, which is comprised
of two (2) or more Board members, administers the Option Plan. Committee members
serve for such period of time as the Board may determine. No Board member may
serve on the Committee if he or she has received an option grant or stock award
under the Option Plan or under any other stock plan of the Company or its parent
or subsidiary corporations within the twelve (12) month period preceding his or
her appointment to the Committee, other than grants under the Automatic Option
Grant Program. The Option Plan may also be administered with respect to
optionees who are not executive officers subject to the short-swing profit rules
of the federal securities laws by the Board or a secondary committee comprised
of one or more Board members. The amendment that is the subject of this Proposal
No. 3 also amends the Option Plan to permit the Board to administer the Option
Plan with respect to all eligible persons.
The Committee (or Board or secondary committee to the extent acting as plan
administrator) has full authority (subject to the express provisions of the
Option Plan) to determine the eligible individuals who are to receive grants
under the Option Plan, the number of shares to be covered by each granted
option, the date or dates on which the option is to become exercisable, the
maximum term for which the option is to remain outstanding, whether the granted
option will be an incentive stock option ("Incentive Option") that satisfies the
requirements of Section 422 of the Internal Revenue Code (the "Code") or a
non-statutory option not intended to meet such requirements and the remaining
provisions of the option grant.
Eligibility. Employees (including officers), consultants and independent
contractors who render services to the Company or its subsidiary corporations
(whether now existing or subsequently established) are eligible to receive
option grants under the Discretionary Option Grant Program and share issuances
under the Stock Issuance Program. A non-employee member of the Board or of the
board of directors of any parent or subsidiary corporation of the Company is
also eligible for option grants under the Discretionary Option Grant Program and
the Stock Issuance Program, providing he or she is not a member of the
Committee. A non-employee member of the Board is also eligible for option grants
under the Automatic Option Grant Program.
As of February 28, 1998, approximately 500 persons (including 5 executive
officers) were eligible to participate in the Option Plan.
Securities Subject to Option Plan. The maximum number of shares of Common
Stock that may be issued over the term of the Option Plan shall not exceed
12,450,982 shares, assuming approval of this Proposal No. 3. The number of
shares of Common Stock available for issuance under the Option Plan shall
automatically increase on the first trading day of each calendar year during the
term of the Option Plan, beginning January 1, 1997, by an amount equal to three
percent (3%) of the shares of Common Stock outstanding on December 31 of the
immediately preceding calendar year, not to exceed 1,500,000 shares in any
calendar year. Accordingly, the pool was increased by 1,016,302 shares effective
January 1, 1997 and by 1,066,448 shares effective January 1, 1998. Prior to the
amendment which is the subject of this Proposal No. 3, there was no limit on the
number of shares by which the pool could increase each year pursuant to the 3%
annual increase and therefore no Incentive Options could be granted under the
Option Plan on the basis of such annual increases.
No one person participating in the Option Plan may receive options and
direct stock issuances for more than 400,000 shares of Common Stock per calendar
year, beginning with the 1995 calendar year; provided that for the calendar year
in which such person first commences services, the limit shall be 800,000
shares.
Should an option expire or terminate for any reason prior to exercise in
full, including options incorporated from the Predecessor Plan, the shares
subject to the portion of the option not so exercised will be available for
subsequent option grants under the Option Plan.
Discretionary Option Grant Program
Price and Exercisability. The option exercise price per share in the case
of an Incentive Option may not be less than one hundred percent (100%) of the
fair market value of the Common Stock on the grant date and, in the case of a
non-statutory option, eighty-five percent (85%) of the fair market value of the
Common Stock on the grant date. Options granted under the Discretionary Option
Grant Program become exercisable at such time or times and during such period as
the Committee may determine and set forth in the instrument evidencing the
option grant.
The exercise price may be paid in cash or in shares of Common Stock.
Options may also be exercised through a same-day sale program, pursuant to which
a designated brokerage firm is to effect the immediate sale of the shares
purchased under the option and pay over to the Company, out of the sale proceeds
on the settlement date, sufficient funds to cover the exercise price for the
purchased shares plus all applicable withholding taxes. The Committee may also
assist any optionee (including an officer or director) in the exercise of his or
her outstanding options by (a) authorizing a Company loan to the optionee or (b)
permitting the optionee to pay the exercise price in installments over a period
of years. The terms and conditions of any such loan or installment payment will
be established by the Committee in its sole discretion. The Committee has the
discretionary authority to reprice options through the cancellation of those
options and the grant of replacement options with an exercise price based on the
fair market value of the option shares on the regrant date.
No optionee is to have any stockholder rights with respect to the option
shares until the optionee has exercised the option, paid the exercise price and
become a holder of record of the shares. Options are not assignable or
transferable other than by will or the laws of descent and distribution, and
during the optionee's lifetime, the option may be exercised only by the
optionee.
Termination of Service. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the designated
post-service exercise period. Under no circumstances, however, may any option be
exercised after the specified expiration date of the option term. Each such
option will normally, during such limited period, be exercisable only to the
extent of the number of shares of Common Stock in which the optionee is vested
at the time of cessation of service. The Committee has complete discretion to
extend the period following the optionee's cessation of service during which his
or her outstanding options may be exercised and/or to accelerate the
exercisability of such options in whole or in part. Such discretion may be
exercised at any time while the options remain outstanding, whether before or
after the optionee's actual cessation of service.
The shares of Common Stock acquired upon the exercise of one or more
options may be subject to repurchase by the Company at the original exercise
price paid per share upon the optionee's cessation of service prior to vesting
in such shares. The Committee has complete discretion in establishing the
vesting schedule to be in effect for any such unvested shares and may cancel the
Company's outstanding repurchase rights with respect to those shares at any
time, thereby accelerating the vesting of the shares subject to the canceled
rights.
Incentive Options. Incentive Options may only be granted to individuals who
are employees of the Company or its parent or subsidiary corporation. During any
calendar year, the aggregate fair market value (determined as of the grant
date(s)) of the Common Stock for which one or more options granted to any
employee under the Option Plan (or any other option plan of the Company or its
parent or subsidiary corporations) may for the first time become exercisable as
incentive stock options under Section 422 of the Code shall not exceed $100,000.
Limited Stock Appreciation Rights. One or more officers of the Company
subject to the short-swing profit restrictions of the federal securities laws
may, at the discretion of the Committee, be granted limited stock appreciation
rights in connection with their option grants under the Option Plan. Any option
with such a limited stock appreciation right in effect for at least six (6)
months will automatically be canceled, to the extent exercisable for one or more
vested option shares, upon the successful completion of a hostile tender offer
for more than 50% of the Company's outstanding voting stock. In return, the
officer will be entitled to a cash distribution from the Company in an amount
per canceled option share equal to the excess of (i) the highest price per share
of Common Stock paid in the tender offer over (ii) the option exercise price.
Tandem Stock Appreciation Rights. The Committee is authorized to issue
tandem stock appreciation rights in connection with option grants under the
Discretionary Option Grant Program. Tandem stock appreciation rights provide the
holders with the right to surrender their options for an appreciation
distribution from the Company equal in amount to the excess of (a) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (b) the aggregate exercise price payable for such shares. Such
appreciation distribution may, at the discretion of the Committee, be made in
cash or in shares of Common Stock.
Automatic Option Grant Program
Under the Automatic Option Grant Program, non-employee Board members will
receive option grants at specified intervals over their period of Board service.
These special grants may be summarized as follows:
o Each individual who was a non-employee Board member on the date of the
initial public offering and each individual who becomes a non-employee Board
member after such date, whether through election by the stockholders or
appointment by the Board, will automatically be granted, at the time of the
offering, or if later, at the time of such initial election or appointment, a
non-statutory stock option to purchase 48,000 shares of Common Stock.
o On the date of each Annual Stockholders Meeting beginning with the 1996
Annual Meeting, each individual who is reelected as a non-employee Board member
will receive an additional grant of a non-statutory stock option under the
Option Plan to purchase 12,000 shares of Common Stock, provided such individual
has been a member of the Board for at least six months.
Each option grant under the Automatic Option Grant Program will be subject
to the following terms and conditions:
1. The option price per share will be equal to the fair market value per
share of Common Stock on the automatic grant date and each option is
to have a maximum term of ten years from the grant date.
2. Each automatic option grant will be immediately exercisable for all of
the option shares; the shares purchasable under the option shall be
subject to repurchase at the original exercise price in the event the
optionee's Board service should cease prior to vesting. With respect
to each initial grant, the repurchase right shall lapse and the
optionee vest in four (4) equal annual installments from the grant
date. Each annual grant shall vest in two equal and successive annual
installments.
3. The option will remain exercisable for a 12-month period following the
optionee's termination of service as a Board member for any reason and
may be exercised following the Board members death by the personal
representatives of the optionee's estate or the person to whom the
grant is transferred by the optionee's will or the laws of
inheritance. In no event, however, may the option be exercised after
the expiration date of the option term. During the applicable exercise
period, the option may not be exercised for more than the number of
shares (if any) for which it is exercisable at the time of the
optionee's cessation of Board service.
4. The option shares will become fully vested in the event of a Corporate
Transaction (as defined below) or a Change in Control (as defined
below). The option shares will become fully vested in the event of the
optionee's cessation of Board service by reason of death or permanent
disability.
5. Upon the occurrence of a hostile tender offer, the optionee shall have
a thirty (30) day period in which to surrender to the Company each
automatic option that has been in effect for at least six (6) months
and the optionee will in return be entitled to a cash distribution
from the Company in an amount per canceled option share (whether or
not the optionee is otherwise vested in those shares) equal to the
excess of (i) the highest reported price per share of Common Stock
paid in the tender offer over (ii) the option exercise price payable
per share.
6. Option grants under the Automatic Option Grant Program will be made in
strict compliance with the express provisions of that program. The
remaining terms and conditions of the option will in general conform
to the terms described below for option grants under the Discretionary
Option Grant Program and will be incorporated into the option
agreement evidencing the automatic grant.
Stock Issuance Program
Shares may be sold under the Stock Issuance Program at a price per share
not less than eighty-five percent (85%) of fair market value, payable in cash or
through a promissory note payable to the Company. Shares may also be issued
solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Committee will, however, have the discretionary authority
at any time to accelerate the vesting of any and all unvested shares outstanding
under the Option Plan.
General Provisions
Acceleration of Options/Termination of Repurchase Rights. Upon the
occurrence of either of the following transactions (a "Corporate Transaction"):
(i) the sale, transfer, or other disposition of all or substantially
all of the Company's assets in complete liquidation or
dissolution of the Company, or
(ii) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to a person
or persons different from the persons holding those immediately
prior to such transaction,
each outstanding option under the Option Plan will, immediately prior to the
effective date of the Corporate Transaction, become fully exercisable for all of
the shares at the time subject to such option. However, an outstanding option
shall not accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent) or to be replaced with a comparable option to purchase
shares of the capital stock of the successor corporation (or parent), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation that preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option or (iii) the
acceleration of such option is subject to other limitations imposed by the
Committee at the time of the option grant. Immediately following the
consummation of the Corporate Transaction, all outstanding options will
terminate and cease to be exercisable, except to the extent assumed by the
successor corporation.
Also upon a Corporate Transaction, the Company's outstanding repurchase
rights applicable to options granted under the Discretionary Option Grant
Program or shares issued under the Stock Issuance Program will terminate
automatically unless assigned to the successor corporation.
Any options that are assumed or replaced in the Corporate Transaction and
do not otherwise accelerate at that time shall automatically accelerate (and any
of the Company's outstanding repurchase rights that do not otherwise terminate
at the time of the Corporate Transaction shall automatically terminate and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full) in the event the optionee's service should subsequently terminate by
reason of an involuntary termination within eighteen (18) months following the
effective date of such Corporate Transaction. Any options so accelerated shall
remain exercisable for fully-vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the involuntary termination
Upon the occurrence of the following transactions("Change in Control"):
(i) any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company)
acquires beneficial ownership of more than fifty percent
(50%) of the Company's outstanding voting stock without the
Board's recommendation, or
(ii) there is a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such
that a majority of the Board members ceases by reason of a
proxy contest, to be comprised of individuals who (a) have
been Board members continuously since the beginning of such
period or (b) have been elected or nominated for selection
as Board members by a majority of the continuing Board
members,
then the Committee has the discretion to accelerate outstanding options and
terminate the Company's outstanding repurchase rights.
The Committee also has the discretion to accelerate outstanding options
and/or terminate the Company's outstanding repurchase rights upon a Corporate
Transaction or Change in Control, which acceleration or termination may or may
not be conditioned upon the subsequent termination of the optionee's service
within a specified period following the transaction. The acceleration of options
in the event of a Corporate Transaction or Change in Control may be seen as an
anti-takeover provision and may have the effect of discouraging a merger
proposal, a takeover attempt, or other efforts to gain control of the Company.
Valuation. For purposes of establishing the option price and for all other
valuation purposes under the Option Plan, the fair market value of a share of
Common Stock on any relevant date will be the closing price per share of Common
Stock on that date, as such price is reported on the Nasdaq National Market. The
market value of the Common Stock as reported on the Nasdaq Stock Market as of
February 27, 1998 was $24.50 per share.
Changes in Capitalization. In the event any change is made to the Common
Stock issuable under the Option Plan by reason of any stock split, stock
dividend, combination of shares, exchange of shares, or other change affecting
the outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Option Plan, (ii) the maximum
number and/or class of securities for which any one person may be granted
options and direct stock issuances per calendar year, (iii) the maximum number
and/or class of securities for which the share reserve is to increase
automatically each year, (iv) the number and/or class of securities for which
automatic option grants are to be subsequently made per director under the
Automatic Option Grant Program and (v) the number and/or class of securities and
the exercise price per share in effect under each outstanding option (including
any option incorporated from the Predecessor Plan) in order to prevent the
dilution or enlargement of benefits thereunder.
Each outstanding option that is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities that would otherwise have been issued, in consummation
of such Corporate Transaction, to the option holder had the option been
exercised immediately prior to the Corporate Transaction. Appropriate
adjustments will also be made to the option price payable per share and to the
class and number of securities available for future issuance under the Option
Plan on both an aggregate and a per-participant basis.
Option Plan Amendments. The Board may amend or modify the Option Plan in
any and all respects whatsoever. The approval of the Company's stockholders will
be obtained to the extent required by applicable law. Prior to the amendment
that is the subject of this Proposal No. 3, the Board could not amend the Option
Plan without stockholder approval if such amendment would (i) materially
increase the maximum number of shares issuable under the Option Plan,
(ii) materially modify the eligibility requirements for option grants, or (iii)
increase materially the benefits accruing to participants under the Option Plan.
Unless sooner terminated by the Board, the Option Plan will in all events
terminate on April 30, 2005. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.
As of February 28, 1998, options covering 5,820,638 shares were outstanding
under the Option Plan, 736,134 shares remained available for future option
grant, without giving effect to the increase which is the subject of this
Proposal No. 3, and 3,894,210 shares have been issued under the Option Plan. The
expiration dates for all such options range from December 6, 2001 to
February 23, 2008.
New Plan Benefits and Option Grant Table
Because the Option Plan is discretionary, benefits to be received by
individual optionees are not determinable. However, each of Messrs. Benhamou,
Fong, Strohm, and White will receive an option grant to purchase 12,000 shares
under the Automatic Option Grant Program on the date of the Annual Meeting with
an exercise price per share equal to the closing price per share of Common Stock
on the date of the Annual Meeting. The table below shows, as to each of the
executive officers named in the Summary Compensation Table and the various
indicated groups, (i) the number of shares of Common Stock for which options
have been granted under the Option Plan (including options granted under the
Predecessor Plan), for the one (1)-year period ending December 31, 1997 plus the
period through February 28, 1998 and (ii) the weighted average exercise price
per share. No direct stock issuances have been made under the Option Plan to
date.
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Exercise
Number Of Option Price Of
Name And Position Shares Granted Options
<S> <C> <C>
Louis C. Cole...................................................... 300,000 $18.98
Chairman of the Board, President and Chief Executive Officer
Nora Denzel........................................................ 300,000 $13.395
Senior Vice President of Product Development, Chief Technical
Officer
Kent D. Smith...................................................... 150,000 $18.98
Executive Vice President, Chief Operating Officer
Stephen C. Wise.................................................... 250,000 $12.79
Senior Vice President, Finance, Chief Financial Officer
All current executive officers as a group (5 persons).............. 1,260,000 $16.015
All current directors (other than executive officers) as a 48,000 $8.94
group (4 persons) ............................................
All employees, including current officers who are not 2,355,300 $16.74
executive officers, as a group (500 persons) .................
</TABLE>
Federal Income Tax Consequences of Options Granted under the Option Plan
Options granted under the Option Plan may be either incentive stock options
that satisfy the requirements of Section 422 of the Code or non-statutory
options that are not intended to meet such requirements. The federal income tax
treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. However, the excess of the fair market value
of the purchased shares on the exercise date over the exercise price paid for
the shares generally is includable in alternative minimum taxable income. The
optionee will recognize taxable income in the year in which the purchased shares
are sold or otherwise made the subject of disposition.
For federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, then the excess of (i) the fair market value of those shares on
the date the option was exercised over (ii) the exercise price paid for the
shares will be taxable as ordinary income. Any additional gain recognized upon
the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction for the taxable
year in which such disposition occurs equal to the excess of (i) the fair market
value of such shares on the date the option was exercised over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
The Company anticipates that any compensation deemed paid by the Company upon
one or more disqualifying dispositions of incentive stock option shares by the
Company's executive officers will remain deductible by the Company and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee will be required to satisfy
the tax withholding requirements applicable to such income.
Special provisions of the Internal Revenue Code apply to the acquisition of
Common Stock under a non-statutory option if the purchased shares are subject to
repurchase by the Company. These special provisions may be summarized as
follows:
(i) If the shares acquired upon exercise of the non-statutory
option are subject to repurchase by the Company at the
original exercise price in the event of the optionee's
termination of service prior to vesting in such shares, the
optionee will not recognize any taxable income at the time
of exercise but will have to report as ordinary income, as
and when the Company's repurchase right lapses, an amount
equal to the excess of (a) the fair market value of the
shares on the date such repurchase right lapses with respect
to such shares over (b) the exercise price paid for the
shares.
(ii) The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the
year of exercise of the non-statutory option an amount equal
to the excess of (a) the fair market value of the purchased
shares on the exercise date (determined as if the shares
were not subject to the Company's repurchase right) over (b)
the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any
additional income as and when the repurchase right lapses.
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of non-statutory options with exercise prices equal to
the fair market value of the option shares on the grant date will remain
deductible by the Company and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.
Stock Issuances. The tax principles applicable to direct stock issuances
under the Option Plan will be substantially the same as those summarized above
for the exercise of non-statutory option grants.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE 1995 STOCK OPTION/STOCK ISSUANCE PLAN.
<PAGE>
PROPOSAL NO. 4
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Company is asking the stockholders to ratify the appointment of Coopers
& Lybrand L.L.P. as the Company's independent public accountants for the fiscal
year ending December 31, 1998. The affirmative vote of the holders of a majority
of shares present or represented by proxy and voting at the Annual Meeting will
be required to ratify the appointment of Coopers & Lybrand L.L.P.
In the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the appointment is ratified,
the Board of Directors, in its discretion, may direct the appointment of a
different independent accounting firm at any time during the year if the Board
of Directors feels that such a change would be in the Company's and its
stockholders' best interests.
Coopers & Lybrand L.L.P. has audited the Company's financial statements
since 1989. Its representatives are expected to be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
SELECTION OF COOPERS & LYBRAND L.L.P. TO SERVE AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than 10% of the Company's outstanding Common
Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, which require them to file reports
with respect to their ownership of the Company's Common Stock and their
transactions in such Common Stock. Based upon (i) the copies of Section 16(a)
reports that the Company received from such persons for their 1997 fiscal year
transactions in the Common Stock and their Common Stock holdings and (ii) the
written representations received from one or more of such persons that no annual
Form 5 reports were required to be filed by them for the 1997 fiscal year, the
Company believes that all reporting requirements under Section 16(a) for such
fiscal year were met in a timely manner by its executive officers, Board members
and greater than ten-percent stockholders, except that John Ferraro filed a
Form 3 late.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 1997, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULE AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO LEGATO
SYSTEMS, INC., 3210 PORTER DRIVE, PALO ALTO, CALIFORNIA 94304, ATTN: EDMOND MOK,
CORPORATE FINANCE.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Stockholder proposals that are intended to be presented at the 1999 Annual
Meeting that are eligible for inclusion in the Company's proxy statement and
related proxy materials for that meeting under the applicable rules of the
Securities and Exchange Commission must be received by the Company not later
than December 7, 1998, in order to be included. Such stockholder proposals
should be addressed to Legato Systems, Inc., 3210 Porter Drive, Palo Alto,
California 94304, Attn: Edmond Mok, Corporate Finance.
OTHER MATTERS
The Board knows of no other matters to be presented for stockholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in accordance
with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
Robert V. Gunderson, Jr.
Secretary
Palo Alto, California
April 6, 1998
- --------------------------------------------------------------------------------
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF
YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU
MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
- --------------------------------------------------------------------------------
THANK YOU FOR YOUR ATTENTION TO THIS MATTER. YOUR PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE ANNUAL MEETING.
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
LEGATO SYSTEMS, INC.
Legato Systems, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors adopted a resolution setting forth a
proposed amendment to the Amended and Restated Certificate of Incorporation of
said Corporation and declaring said amendment advisable and directing that said
amendment be submitted to the stockholders of said Corporation entitled to vote
in respect thereof for their approval. The resolution setting forth said
amendment is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation of
the Corporation be amended by replacing the first paragraph of Article IV
thereof so that such paragraph shall be and read as follows:
"This corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock "Preferred
Stock"). The number of shares of Common Stock authorized to be issued is One
Hundred Million (100,000,000), par value $0.0001 per share, and the number of
shares of Preferred Stock authorized to be issued is Five Million (5,000,000),
par value $0.0001 per share."
SECOND: That thereafter said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law by obtaining a
majority vote of the Common Stock in favor of said amendment in the manner set
forth in Section 222 of the General Corporation Law.
IN WITNESS WHEREOF, this Certificate of Amendment of the Amended and
Restated Certificate of Incorporation has been signed by the President and the
Secretary of the Corporation this ____ day of May, 1998.
LEGATO SYSTEMS, INC.
By:________________________________
Louis C. Cole, President
ATTEST:
By: ___________________________________
Robert V. Gunderson, Jr., Secretary
<PAGE>
PROXY LEGATO SYSTEMS, INC. PROXY
3210 Porter Drive, Palo Alto, CA 94304
This Proxy is Solicited on Behalf of the
Board of Directors of Legato Systems, Inc.
for the Annual Meeting of Stockholders to be held May 14, 1998
The undersigned holder of Common Stock, par value $.0001, of Legato
Systems, Inc. (the "Company") hereby appoints Louis C. Cole and Stephen C. Wise,
or either of them, proxies for the undersigned, each with full power of
substitution, to represent and to vote as specified in this Proxy all Common
Stock of the Company that the undersigned stockholder would be entitled to vote
if personally present at the Annual Meeting of Stockholders (the "Annual
Meeting") to be held on Thursday May 14th, 1998 at 9:00 a.m. local time, at the
Cabana Hotel, 4290 El Camino Real, Palo Alto, California, and at any
adjournments or postponements of the Annual Meeting. The undersigned stockholder
hereby revokes any proxy or proxies heretofore executed for such matters.
This proxy, when properly executed, will be voted in the manner as directed
herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE DIRECTORS, FOR PROPOSALS 2, 3 AND 4, AND IN THE
DISCRETION OF THE PROXIES AS TO ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE
THE MEETING. The undersigned stockholder may revoke this proxy at any time
before it is voted by delivering to the Corporate Secretary of the Company
either a written revocation of the proxy or a duly executed proxy bearing a
later date, or by appearing at the Annual Meeting and voting in person.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
DIRECTORS AND "FOR" PROPOSALS 2, 3 AND 4.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
RETURN ENVELOPE. If you receive more than one proxy card, please sign and return
ALL cards in the enclosed envelope.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
(Reverse)
LEGATO SYSTEMS, INC.
Please mark votes
as in this example
<TABLE>
<S> <C> <C>
1. To elect the following directors to serve for a term 2. To approve the amendment to FOR AGAINST ABSTAIN
ending upon the 1999 Annual Meeting of Stockholders the Company's Certificate of
or until their successors are elected and qualified: Incorporation as set forth
in the accompanying Proxy
Nominees: Louis C. Cole, Eric A. Benhamou, Kevin A. Statement.
Fong, David N. Strohm and Phillip E. White
FOR WITHHELD For all nominees, 3. To approve the amendment to FOR AGAINST ABSTAIN
except for the Company's 1995 Stock
nominees written below. Option/Stock Issuance Plan,
including an increase to the
number of shares available
as set forth in the
accompanying Proxy Statement.
_______________________
Nominee exception(s).
4. To ratify the appointment of FOR AGAINST ABSTAIN
Coopers & Lybrand L.L.P., as
the Company's independent
accountants for the fiscal
year ending December 31,
1998.
In their discretion, the proxies are authorized to vote
upon such other business as may properly come before the
Annual Meeting.
</TABLE>
The undersigned acknowledges receipt of the accompanying Notice of Annual
Meeting of Stockholders and Proxy Statement.
Signature: Signature (if held jointly): Date: , 1998
Please date and sign exactly as your name(s) is (are) shown on the share
certificate(s) to which the Proxy applies. When shares are held as
joint-tenants, both should sign. When signing as an executor, administrator,
trustee, guardian, attorney-in fact or other fiduciary, please give full title
as such. When signing as a corporation, please sign in full corporate name by
President or other authorized officer. When signing as a partnership, please
sign in partnership name by an authorized person.
