<PAGE>
As filed with the Securities and Exchange Commission on March 15, 1999.
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
LEGATO SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 7372 99-3077394
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification Number)
of Incorporation or Classification Code
Organization) Number)
3210 Porter Drive
Palo Alto, CA 94304
(650) 812-6000
(Address, Including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
LOUIS C. COLE
Chairman, President and Chief Executive Officer
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, CA 94304
(650) 812-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
ROBERT V. GUNDERSON, JR., ESQ. JEFFREY D. SAPER, ESQ.
Gunderson Dettmer Stough Villeneuve Wilson, Sonsini,
Franklin & Hachigian, LLP Goodrich & Rosati, P.C.
155 Constitution Drive 650 Page Mill Road
Menlo Park, California 94025 Palo Alto, California 94304
(650) 321-2400 (650) 493-9300
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement and the
satisfaction or waiver of certain conditions under the Agreement and Plan of
Reorganization described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(3)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.0001
par value per share... 1,721,000 $53.75 $92,503,750 $25,716
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of the Registrant's common stock, $.0001
par value, issuable in connection with the Merger.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Section 6(b) under the Securities Act. The
proposed maximum offering price is based on the average of the high and
low sales prices of the Registrant's common stock on the Nasdaq National
Market on March 10, 1999.
(3) A fee of $16,779.75 was previously paid by Qualix Group, Inc. pursuant to
Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as
amended, in connection with the filing of the preliminary proxy
statement/prospectus on December 7, 1998. Pursuant to Rule 457(b) under
the Securities Act, such fee is being credited against the registration
fee, and accordingly, an additional $8,937 is being paid in connection
with the registration statement.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
[LOGO OF FULLTIME SOFTWARE]
177 Bovet Road,
2nd Floor
San Mateo, California
94402
TO THE STOCKHOLDERS OF
QUALIX GROUP, INC.
(doing business as FullTime Software, Inc.)
NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
To Be Held On
Monday, April 19, 1999 at 10 a.m.
at the offices of
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
----------------
The board of directors of Qualix Group, Inc. (which is doing business as
FullTime Software, Inc.) asks you to attend this important special meeting of
stockholders to vote on the following:
1. An Agreement and Plan of Reorganization pursuant to which FullTime
would be merged with a subsidiary of Legato Systems, Inc. In the merger,
shares of FullTime common stock would be exchanged for shares of Legato
common stock. The exchange rate would be determined at the time the merger
is completed based on the amount of then-outstanding shares and options to
acquire shares of FullTime common stock. The exchange rate is currently
0.1420 shares of Legato common stock for each share of FullTime common
stock. Legato will assume all outstanding options of FullTime at the time
the merger is completed; and
2. Any other business as may properly come before the special meeting or
any postponements or adjournments.
Your board of directors has determined that the reorganization agreement and
the merger are in your best interests and recommends that you vote to approve
the reorganization agreement and the merger at the special meeting.
<PAGE>
Only stockholders of record at the close of business on March 5, 1999 will be
entitled to notice of, and to vote at, the special meeting of stockholders or
any adjournments or postponements. A list of such stockholders will be
available for inspection at FullTime's headquarters located at 177 Bovet Road,
2nd Floor, San Mateo, California during ordinary business hours for the ten-day
period prior to the special meeting of stockholders. The merger cannot be
completed unless holders of a majority of the outstanding shares of FullTime
common stock (as of the record date) affirmatively vote to approve the
reorganization agreement and the merger.
Accompanying this notice is a proxy statement/prospectus discussing the
proposed merger and the reorganization agreement. We encourage you to read this
document carefully. Also enclosed is a proxy card so you can vote on the
reorganization agreement and the merger without attending the meeting. Please
complete, sign and date the enclosed proxy card and return it to us as soon as
possible in the postage-prepaid envelope we have provided. If you decide to
attend the special meeting of stockholders, you may vote your shares in person
whether or not you have mailed us a proxy.
By Order of the Board of Directors
/s/ Bruce C. Felt
_____________________________________
Bruce C. Felt
Secretary
San Mateo, California
Date: March 19, 1999
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE FULLTIME
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN
IT PROMPTLY IN THE ENCLOSED, POSTAGE-PREPAID ENVELOPE. YOUR PROXY MAY BE
WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. EXECUTED BUT UNMARKED
PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND THE MERGER. PLEASE DO NOT SEND ANY FULLTIME STOCK
CERTIFICATES IN YOUR PROXY ENVELOPE.
<PAGE>
PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS
PROXY STATEMENT PROSPECTUS
OF OF
QUALIX GROUP, INC. LEGATO SYSTEMS, INC.
(doing business as FullTime Software,
Inc.)
Dated March 15, 1999
In July 1998, Qualix Group, Inc. commenced doing business as FullTime Software,
Inc. References in this proxy statement/prospectus to FullTime, FullTime
stockholders and the like are references to Qualix, Qualix stockholders and the
like.
The Boards of Directors of FullTime and Legato Systems, Inc. have approved a
reorganization agreement that would merge FullTime with a subsidiary of Legato.
Upon the completion of the merger, each FullTime stockholder will receive, for
each share of FullTime common stock held by such stockholder, a fraction of a
share of Legato based on the amount of then-outstanding shares and options to
acquire shares of FullTime common stock. The exchange rate is currently 0.1420
shares of Legato common stock for each share of FullTime common stock.
Legato common stock trades on the Nasdaq National Market under the symbol LGTO.
FullTime common stock trades on the Nasdaq National Market under the symbol
FTSW.
The FullTime board of directors has called a special meeting for its
stockholders to vote on matters relating to the merger.
You may vote at the FullTime special meeting if you own shares of FullTime
common stock as of the close of business on March 5, 1999. The date, time and
place of this special meeting is as follows:
Monday, April 19, 1999
10:00 a.m. local time
At the offices of Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
We strongly urge you to read and consider carefully this joint proxy
statement/prospectus, including the "Risk Factors" section beginning on page 9.
The "Risk Factors" section describes certain risks that you should consider in
determining whether to approve the proposals at the FullTime special meeting.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this joint proxy statement/prospectus. Any
representation to the contrary is a criminal offense.
----------------
This joint proxy statement/prospectus is dated March 15, 1999 and is expected
to be first sent to stockholders on March 19, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY................................................................... 1
The Companies........................................................... 1
The Merger.............................................................. 2
What FullTime Stockholders Will Receive in the Merger................... 2
Voting Procedures to Approve the Merger................................. 3
Evaluating the Merits of the Merger..................................... 4
Events Which May Delay or Prevent the Merger............................ 5
Tax Consequences and Other Matters...................................... 7
Forward-Looking Statements May Prove Inaccurate......................... 7
Who Can Help Answer Your Questions...................................... 8
RISK FACTORS.............................................................. 9
WHERE YOU CAN FIND MORE INFORMATION....................................... 22
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 23
TRADEMARKS................................................................ 24
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE........................... 24
MARKET PRICE AND DIVIDEND INFORMATION..................................... 25
Legato Market Price Data................................................ 25
FullTime Market Price Data.............................................. 25
Dividend Information.................................................... 26
Recent Closing Prices................................................... 26
Number Of Stockholders.................................................. 26
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION................... 27
COMPARATIVE PER SHARE DATA................................................ 31
THE FULLTIME STOCKHOLDER MEETING.......................................... 33
Date, Time and Place of the FullTime Stockholder Meeting................ 33
Record Date and Shares Entitled to Vote................................. 33
Voting of Proxies....................................................... 33
Vote Required........................................................... 34
Quorum; Abstentions and Broker Non-Votes................................ 34
Procedure for Casting Your Vote if Your Shares are Held by Your Broker
in Street Name......................................................... 34
Solicitation of Proxies and Expenses.................................... 34
FullTime Board Recommendation........................................... 35
THE MERGER AND RELATED TRANSACTIONS....................................... 36
General................................................................. 36
Conversion of Shares.................................................... 36
Conversion of Options................................................... 36
Exchange of Certificates................................................ 37
Notification Regarding FullTime Options................................. 38
Background of the Merger................................................ 39
Reasons for the Merger.................................................. 42
Operations Following the Merger......................................... 46
Opinion of Financial Advisor............................................ 46
The Agreement and Plan of Reorganization................................ 53
Related Agreements...................................................... 62
Regulatory Matters...................................................... 65
Certain Federal Income Tax Considerations............................... 66
Accounting Treatment.................................................... 69
No Appraisal Rights..................................................... 69
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. 71
BUSINESS OF FULLTIME..................................................... 76
Overview............................................................... 76
Industry Background.................................................... 78
Systems Management Software............................................ 80
FullTime Technologies and Products..................................... 81
FullTime's Organization in Support of Revenue.......................... 85
Sales and Marketing.................................................... 86
Qualix Direct.......................................................... 88
Competition............................................................ 88
Proprietary Rights..................................................... 90
Employees.............................................................. 91
Legal Proceedings...................................................... 91
FULLTIME MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 92
Overview............................................................... 92
Results of Operations.................................................. 94
Liquidity and Capital Resources........................................ 102
Business Environment................................................... 102
Year 2000 Compliance Issues............................................ 102
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 104
FULLTIME MANAGEMENT...................................................... 105
Executive Officers and Directors....................................... 105
FullTime Board Meetings and Committees................................. 107
Compensation Committee Interlocks and Insider Participation............ 107
Director Compensation.................................................. 107
Compliance with Section 16(a) of the Exchange Act...................... 108
Executive Compensation................................................. 108
Employment Contracts and Change in Control Arrangements................ 111
Limitations on Liability and Indemnification........................... 112
Stock Plans............................................................ 112
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 114
FULLTIME CERTAIN TRANSACTIONS............................................ 117
Certain Relationships and Related Transactions......................... 117
COMPARISON OF CAPITAL STOCK.............................................. 118
Description of Legato Capital Stock.................................... 118
Description of FullTime Capital Stock.................................. 119
COMPARISON OF RIGHTS OF STOCKHOLDERS OF LEGATO,
MERGER SUB AND FULLTIME................................................. 121
Nominations for Board of Directors and Advance Notice of Stockholder
Nominees.............................................................. 121
Amendment To Governing Documents....................................... 121
Stockholder Consent in Lieu of Meeting................................. 122
Anti-Takeover Provisions............................................... 122
Cumulative Voting...................................................... 122
EXPERTS.................................................................. 122
LEGAL MATTERS............................................................ 123
INDEX TO QUALIX GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS............ F-1
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION......................... A-1
APPENDIX B--OPINION OF HAMBRECHT & QUIST LLC............................. B-1
APPENDIX C--STOCK OPTION AGREEMENT....................................... C-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
proposed merger fully and for a more complete description of the terms of the
proposed merger, you should carefully read the entire document and the
documents we have referred to you. The Agreement and Plan of Reorganization,
which is the legal document that governs the proposed merger, is attached as
Appendix A to this document. We strongly encourage you to read the
reorganization agreement. See "Where you can find more information" on page 22.
The Companies
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, California 94304
Telephone: (650) 812-6000, extension 6044
Legato develops, licenses, markets and supports a broad, integrated suite of
storage management software applications operating on multiple computer
systems. Legato's NetWorker family of software products, from which it derives
a substantial majority of its revenues, and Global Enterprise Management
Systems, support many storage management server platforms, such as UNIX and
Windows NT, and can accommodate a variety of servers, clients, applications,
databases and storage devices. Legato licenses its products through resellers
and directly to end users in North America, Europe and Asia Pacific. Legato
also licenses its source code in exchange for initial licensing fees to
original equipment manufacturers and receives ongoing royalties from the
original equipment manufacturers' product sales. Substantially all of the
original equipment manufacturers are large computer system and software
suppliers located in the United States, Europe and Asia Pacific.
Qualix Group, Inc.
(doing business as FullTime Software, Inc.)
177 Bovet Road, 2nd Floor
San Mateo, California 94402
Telephone: (650) 572-0200, extension 3422
In July 1998, Qualix Group, Inc. commenced doing business as FullTime
Software, Inc. FullTime is a leading provider of software which protects the
availability of computer data and software applications operating on UNIX and
Windows NT-based computer systems. FullTime's products make sure that data and
software applications are available whenever computer users need them,
eliminating disruptions of computer service due to computer hardware or
software malfunctions. FullTime products are designed to minimize the impact of
both unplanned and planned interruptions in computer service on critical
software applications such as financial, order entry, manufacturing and web-
based sales software.
1
<PAGE>
The Merger
Legato and FullTime entered into an Agreement and Plan of Reorganization,
which is attached as Appendix A at the back of this document. Upon completion
of the merger, you will become a stockholder of Legato and your rights as a
stockholder will be governed by Legato's certificate of incorporation and
bylaws. We encourage you to read the reorganization agreement, as it is the
legal document that governs the merger.
What FullTime Stockholders Will Receive in the Merger (page 36)
Shares of FullTime common stock will be exchanged for Legato common stock in
connection with the merger. At the time the merger is completed, each
outstanding share of FullTime common stock will be converted into the right to
receive a fraction of a share of Legato common stock based on the outstanding
shares and options to acquire shares of FullTime common stock. This share
exchange ratio will be determined at the time the merger is completed and not
at the time you vote for the merger. The exchange rate is currently
approximately 0.1420 shares of Legato common stock for each FullTime share.
The following table illustrates possible values for the Legato shares that
you would receive upon completion of the merger for each FullTime share you own
at an assumed share exchange ratio of 0.1420 shares of Legato common stock for
each FullTime share:
<TABLE>
<CAPTION>
Legato FullTime
Common Stock Equivalent
Price Per Share Price
------------ ---------------
<S> <C>
$40.00 $5.680
42.00 5.964
44.00 6.248
46.00 6.532
48.00 6.816
50.00 7.100
52.00 7.384
54.00 7.668
56.00 7.952
58.00 8.236
60.00 8.520
</TABLE>
As of March 12, 1999, the Legato common stock per share market price was
$56.625. The corresponding FullTime equivalent per share price was $8.041.
Legato's and FullTime's respective stock prices are volatile and are likely to
change. See "Risk Factors" on page 9.
FullTime stockholders will not receive fractional shares. Instead, they will
receive a check in payment for any fractional shares.
Legato will assume all outstanding options to acquire FullTime stock upon
completion of the merger. In addition, under the terms of the reorganization
agreement, there are no "walk-away" or resolicitation obligations based on the
Legato per share market price at any time. Legato and
2
<PAGE>
FullTime anticipate that the merger will become effective approximately one day
after the FullTime stockholders vote to approve the merger.
Do not send in your stock certificates now. When the merger is completed,
Legato will send you written instructions for exchanging your FullTime stock
certificates.
Voting Procedures to Approve the Merger
A. The Special Meeting of FullTime Stockholders (page 33)
FullTime will hold a special meeting of stockholders on April 19, 1999 at 10
a.m. at the offices of Wilson Sonsini Goodrich & Rosati located at 650 Page
Mill Road, Palo Alto, California. At the special meeting of stockholders,
FullTime stockholders will be asked to approve the reorganization agreement and
the merger.
B. Record Date for Voting on the Reorganization Agreement and the Merger
(page 33)
You are entitled to vote at the special meeting of stockholders if you owned
shares of FullTime common stock as of the close of business on the record date,
which has been set at March 5, 1999. On the record date, there were 10,868,835
shares of FullTime common stock outstanding. FullTime stockholders will have
one vote at the special meeting for each share of FullTime common stock they
owned on the record date.
C. Procedure for Casting Your Vote if Your Shares are Held by Your Broker in
Street Name (page 34)
Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
D. FullTime Stockholder Vote Required to Approve the Reorganization Agreement
and the Merger (page 34)
The affirmative vote of the holders of a majority of the outstanding shares
of FullTime common stock is required to approve the reorganization agreement
and the merger. Your abstention or failure to vote will have the effect of a
vote against the reorganization agreement and the merger. Legato stockholders
will not vote on the reorganization agreement or the merger.
E. Voting and Proxy Agreements (page 62)
As of December 31, 1998, the directors and executive officers of FullTime
owned 2,254,306 shares of FullTime common stock, including shares that can be
acquired upon stock option exercises within 60 days of December 31, 1998. These
shares represented approximately 20.9% of the outstanding shares of FullTime
common stock on December 31, 1998. Each of the directors and executive officers
of FullTime has entered into a voting agreement granting Legato a proxy to vote
all of their shares of FullTime common stock for the approval of the
reorganization agreement and the merger.
3
<PAGE>
F.No Appraisal Rights (page 69)
Under Delaware law, FullTime stockholders do not have any right to an
appraisal of the value of their FullTime common stock in connection with the
merger.
Evaluating the Merits of the Merger
A.Reasons for the Merger and Recommendation to FullTime Stockholders (page
43)
The FullTime board of directors has determined that the terms of the
reorganization agreement and the merger are in the best interests of FullTime
and its stockholders. In reaching its decision, the FullTime board of directors
identified several potential benefits of the merger. FullTime believes that
following the merger the combined company will be able to offer customers
broader integrated data protection solutions and address a broader range of
customer needs. The FullTime board of directors also considered that FullTime
stockholders would have the opportunity to participate in the potential growth
of the combined company following the merger. However, the FullTime board of
directors also recognized that the potential benefits of the merger may not be
realized and that there are a number of other risks related to the merger. See
"Risks Factors" on page 9.
The FullTime board of directors recommends that you vote FOR the approval of
the reorganization agreement and the merger.
B.Risks of the Merger (page 9)
In considering whether to approve the reorganization agreement and the
merger, you should consider all of the risks of the merger, including the risk
of fluctuations in the market price of Legato common stock and the fact that
Legato may be unable to successfully integrate FullTime's business into its own
following the merger. We encourage you to read the more detailed description of
the risks set forth in this proxy statement/prospectus beginning on page 9.
C.Opinion of Financial Advisor (page 46 and Appendix B)
In deciding to approve the merger, the FullTime board of directors considered
an opinion dated October 25, 1998 from its financial advisor, Hambrecht & Quist
LLC. The Hambrecht & Quist opinion stated that the exchange ratio was fair on
that date, from a financial point of view, to FullTime's stockholders. This
opinion is attached as Appendix B to this document. You are urged to read the
entire Hambrecht & Quist opinion carefully.
D.Other Interests of FullTime Officers and Directors in the Merger (page 61)
In considering the FullTime board of directors' recommendation that you vote
to approve the reorganization agreement and the merger, you should note that
certain FullTime officers and directors have interests in the merger that are
different from, or in addition to, your interests. Specifically, in connection
with the merger:
. Mr. Richard Thau, FullTime's chief executive officer, has signed a
separation agreement with Legato which becomes effective upon completion
of the merger;
4
<PAGE>
. Mr. David Malmstedt and Mr. George Symons, FullTime executive officers,
have signed new employment agreements with FullTime which become
effective upon completion of the merger;
. Under FullTime's stock option plan, the outside directors of FullTime
will, and the officers of FullTime may, receive accelerated vesting of
their FullTime stock options; and
. The FullTime directors and officers will receive continuing
indemnification against liabilities.
In addition, Louis C. Cole, a director of FullTime, is also the President,
Chief Executive Officer and Chairman of the Board of Legato. As a result,
FullTime's directors and officers might be more likely to vote to approve the
reorganization agreement and the merger than you and the other FullTime
stockholders generally.
Events Which May Delay or Prevent the Merger
A.Conditions to the Merger (page 55)
The merger will not be completed unless the conditions contained in the
reorganization agreement are met, including the adoption of the reorganization
agreement by FullTime stockholders. Some of these conditions may be waived by
the company entitled to assert the condition.
B.No Solicitation (page 54)
FullTime has agreed not to initiate or engage in negotiations or discussions
with another party regarding a business combination while the merger with
Legato is pending. However, FullTime may furnish non-public information, or
enter into discussions or negotiations with respect to a written unsolicited
acquisition proposal, so long as:
. the FullTime board of Directors has determined that their fiduciary
duties under applicable law require them to take those actions;
. those discussions or negotiations are reasonably likely to result in a
deal more favorable from a financial point of view than the proposed
Legato merger; and
. the other person or entity signs a confidentiality agreement similar to
the confidentiality agreement Legato and Fulltime signed.
C.Termination of the Reorganization Agreement (page 58)
The reorganization agreement may be terminated under the circumstances
described below at anytime before completion of the merger. This may occur
whether or not FullTime stockholders have approved the reorganization agreement
and the merger. The reorganization agreement may be terminated by Legato or
Fulltime if:
. the merger is not completed on or before May 31, 1999; or
. a proper court or other governmental entity issues a nonappealable final
order, decree or ruling that permanently restrains, enjoins or prohibits
the merger; or
5
<PAGE>
. at the FullTime stockholder meeting, the stockholders of FullTime do not
approve the adoption of the reorganization agreement; or
. there has been a material breach of any representation, warranty,
covenant or agreement on the part of the other party set forth in the
reorganization agreement and the breach causes the conditions in the
reorganization agreement not to be satisfied and the breach is not
timely cured following notice of the breach.
The reorganization agreement may be terminated by Legato if the FullTime
board of directors takes any of the following actions:
. Withdraws or modifies its recommendation of the reorganization agreement
or the merger;
. Fails to reaffirm its unanimous recommendation of the reorganization
agreement or the merger within ten (10) business days after Legato
requests in writing that the recommendation be reaffirmed at any time
following the public announcement of another acquisition proposal. Louis
Cole, a director of both FullTime and Legato, may abstain from voting on
any affirmation, recommendation or request;
. Recommends to the FullTime stockholders any transaction which could
result in a party other than Legato acquiring 15% or more of the equity
or assets of FullTime;
. An entity or other person other than Legato or its affiliates commences
a tender offer or exchange offer for 15% or more of the outstanding
shares of FullTime common stock, and the FullTime board of directors
fails to send to its security holders, pursuant to Rule 14e-2 of the
Securities Exchange Act within ten (10) business days after the tender
or exchange offer is first published, sent or given, a statement
disclosing that FullTime recommends rejection of the tender or exchange
offer; or
. Fails to call and hold the meeting of its stockholders to approve the
merger by the date immediately preceding May 31, 1999 and this failure
constitutes a material breach of FullTime's obligations regarding the
preparation and content of the proxy statement or the timely calling of
the FullTime stockholders meeting.
D. Break-up Fee (page 60)
FullTime is obligated to pay Legato a break-up fee of $2,000,000 if Legato
terminates the reorganization agreement because the FullTime board of directors
takes any actions described in the last paragraph of "Termination of the
Reorganization Agreement" above.
E. Legato Stock Option (page 64)
In connection with the reorganization agreement, FullTime granted Legato a
stock option to purchase up to 19.9% of FullTime's outstanding common stock at
$5.73 per share. Legato's ability to exercise the stock option is conditioned
upon Legato's termination of the reorganization under the circumstances
requiring payment of the break-up fee. However, Legato may not receive more
than $1.5 million in profit as a result of exercising the stock option. If the
reorganization agreement is terminated under circumstances in which the
termination fee is not payable, the option will terminate and may not be
exercised by Legato.
6
<PAGE>
F.Regulatory Approvals (page 65)
The Hart-Scott-Rodino Antitrust Improvements Act prohibits FullTime and
Legato from completing the merger until after:
. FullTime and Legato have furnished certain information and materials to
the Antitrust Division of the Department of Justice and the Federal
Trade Commission; and
. A required waiting period has ended or been terminated.
Both FullTime and Legato have furnished the required information and the
waiting period was terminated on December 7, 1998.
Tax Consequences and Other Matters
A.Important Federal Income Tax Consequences (page 66)
FullTime and Legato intend the exchange of FullTime common stock for Legato
common stock to be tax-free to FullTime stockholders for federal income tax
purposes. However, FullTime and Legato expect that cash paid to you and the
other FullTime stockholders for any fractional shares will be taxable.
Tax matters are very complicated and the tax consequences to you from the
merger will depend on the facts of your own circumstances. You should consult
your tax advisors for a full understanding of all of the tax consequences to
you as a result of the merger.
B.Accounting Treatment (page 69)
FullTime and Legato intend the merger to be accounted for as a pooling of
interests.
C.Comparative Per Share Market Price Information (page 31)
Shares of Legato common stock and FullTime common stock are both quoted on
the Nasdaq National Market. On October 23, 1998, the last trading day before
the announcement of the proposed merger, FullTime common stock closed at $2.00
per share and Legato common stock closed at $40.3125 per share. On March 12,
1999, FullTime common stock closed at $7.3125 per share and Legato common stock
closed at $56.625 per share.
D.Listing of Legato Common Stock
The shares of Legato common stock issued in connection with the merger will
be listed on the Nasdaq National Market.
Forward-Looking Statements May Prove Inaccurate (page 24)
Both FullTime and Legato have made forward-looking statements in this
document and in Legato documents that are incorporated by reference. These
forward-looking statements are subject to risks and uncertainties. Forward-
looking statements include expectations concerning matters that are not
historical facts. Also, when we use words such as "believes," "expects,"
"anticipates" or
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similar expressions, we are making forward-looking statements. For more
information regarding factors that could cause actual results to differ from
FullTime's or Legato's expectations, you should refer to "Risk Factors" on
page 9.
Who Can Help Answer Your Questions
If you have questions about the Merger you should contact:
FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, California 94402
Telephone: (650) 572-0200, extension 3422
Attention: Investor Relations
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RISK FACTORS
You should carefully consider the risks described below before voting on the
reorganization agreement and the merger. The risks and uncertainties described
below are not the only ones facing FullTime and Legato. Additional risks and
uncertainties not presently known to us could seriously harm the business of
Legato and FullTime.
If any of the following risks actually occur, our businesses, financial
conditions or results of operations could be seriously harmed. In such case,
the trading price of Legato common stock, before and after completion of the
merger, and FullTime common stock, before completion of the merger, could
decline, and you may lose all or part of your investment.
Risks Related to the Combined Company and the Merger
If Legato and FullTime Do Not Integrate Their Technologies and Operations
Quickly and Effectively, Some or All of the Potential Benefits of the Merger
May Not Occur.
In order to achieve the benefits of the merger, Legato must successfully
combine its business with FullTime's business. If Legato and FullTime do not
integrate their operations and technologies smoothly, serious harm to the
combined company's business, financial condition and prospects may result.
Integrating the two businesses will entail significant diversion of
management's time and attention. We may not be able to integrate our
technologies and operations quickly and smoothly. In order to obtain the
benefits of the merger, the companies must make FullTime's technology, products
and services operate together with Legato's technologies, products and
services. This integration may require the partial or wholesale conversion or
redesign of some or all of the technologies, products and services of either
Legato or FullTime. For example, Legato and FullTime may need to replace or
convert some of FullTime's management information computer systems in order to
work with Legato's computer systems. In addition, Legato may be required to
spend additional time or money on integration that would otherwise be spent on
developing its business and services or other matters.
If FullTime Employees Leave as a Result of the Merger or If the Combined
Company Cannot Attract and Retain Qualified Personnel, the Combined
Company's Business Would Be Harmed.
The success of the combined company after the merger depends in part on the
continued service of key groups of FullTime personnel. Despite Legato's efforts
to hire and retain quality employees, Legato might lose some of FullTime's key
employees following the merger. Although similar, Legato and FullTime have
different corporate cultures and FullTime employees may be unwilling to work
for a larger company. In addition, competitors may recruit FullTime employees
prior to the merger and during integration, as is common in high technology
mergers. Moreover, none of Legato's and few of FullTime's key technical or
senior management personnel are bound by employment agreements. As a result,
employees of FullTime or the combined company could leave with little or no
prior notice.
Similarly, the future performance of the combined company depends on its
continuing ability to attract and retain highly qualified technical and
managerial personnel following the merger.
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Competition for qualified management, engineering, technical, sales and
marketing employees in the computer industry is intense. Therefore, Legato and
FullTime cannot assure you that the combined company will be able to attract,
retain and integrate employees to develop and use the FullTime technology
following the merger.
The Merger May Result in Loss of FullTime Customers Which Would Harm the
Combined Company. The Announcement of the Merger Has Already Resulted in
Lower FullTime Revenues.
As a result of the merger, some FullTime customers may not continue to do
business with the combined company. For example, FullTime's customers might
cancel product orders or delay purchases as they evaluate, among other things,
the merger, or if they are uncertain about Legato's commitment to support
FullTime products. Some of FullTime's customers who cancel product orders or
delay purchases may purchase products from FullTime's competitors.
Cancellations or delays in orders for FullTime's products and cancellations or
failures to renew distribution contracts, both before and after the merger,
would seriously harm the combined company's business and operating results.
FullTime announced the proposed merger on October 26, 1998. For the three
months ending December 31, 1998, FullTime reported a 26% reduction in revenue
as compared to the comparable period in the prior year. FullTime believes that
the announcement and pendency of the merger is responsible, in significant
part, for a substantial portion of this reduction. FullTime expects a similar
impact on its operating results in the quarter ended March 31, 1999.
Legato and FullTime Will Incur Costs Associated with the Merger for Which
Legato and FullTime Will Receive No Benefit if the Merger Does Not Close.
The merger will result in total transaction costs of approximately $1.75
million to Legato and $750,000 to FullTime. These are estimates and the actual
transaction costs may be much larger. In addition to these transaction costs,
Legato and FullTime expect that, following the merger, the combined company
will incur additional significant costs associated with integrating the two
companies. At this time, the additional costs are not reasonably estimable. If
the merger is not consummated, Legato and FullTime will have incurred
significant costs for which they will have received no benefits.
You Will Receive a Pre-Determined Number of Shares of Legato Common Stock
Which Will Not Change as a Result of Market Volatility.
Legato will issue a total of 1,721,000 shares of its common stock for all of
FullTime's outstanding common stock and stock options. The exchange rate will
not increase or decrease if the market price of either Legato common stock or
FullTime common stock increases or decreases. The exchange rate of FullTime
common stock into Legato common stock will be determined at the time the merger
is completed. The share exchange rate is currently 0.1420 shares of Legato
common stock for each share of FullTime common stock. In addition, Legato will
assume all outstanding options of FullTime at the time the merger is completed.
See "The Merger and Related Transactions--Conversion of Shares" on page 36.
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As the exchange rate will not increase or decrease based on market price
fluctuations, FullTime's stockholders will not be compensated if the market
price of Legato common stock decreases before completion of the merger or if
the market price of FullTime common stock increases before completion of the
merger. If the market price of Legato common stock decreases before the merger,
the market value of the Legato common stock to be received by FullTime's
stockholders would decrease. The closing price for Legato common stock on
October 23, 1998, the last trading day prior to the public announcement of the
merger, was $40.3125. On March 12, 1999, the latest trading day before the
printing of this proxy statement/prospectus, the closing price for Legato
common stock was $56.625. You should obtain recent market quotations for Legato
common stock and FullTime common stock because these stocks have historically
been subject to substantial volatility.
The market price of Legato common stock and FullTime common stock is volatile
and may increase or decrease significantly before completion of the merger. For
example, during the period from announcement of the merger and March 12, 1999,
the market price per Legato share has ranged between a high of $65.94 per share
and a low of $35.12 per share. In addition, Legato common stock may continue to
increase or decrease significantly after the merger. As a result, your Legato
shares received in the merger in the near- and long-term may not be worth as
much as your shares of FullTime common stock before the merger.
If Several Conditions Are Not Met the Merger Will Not Close.
The merger will not close unless several conditions are met, including:
. The reorganization agreement and the merger must be approved by holders
of a majority of the outstanding FullTime common stock;
. Each representation and warranty made by Legato and FullTime must be
materially accurate;
. The events specified in the reorganization agreement must occur, or not
occur; and
. Legato and FullTime must materially satisfy (or have waived by the
other) each covenant specified in the reorganization agreement.
We cannot assure you that the conditions to the merger will be satisfied or
waived in a timely manner or at all. In that case, the merger will be delayed
or may not occur at all, and some or all of the potential benefits of the
merger may be lost.
If the Merger Does Not Close, FullTime Would Be Harmed.
If the merger does not close, it would seriously harm FullTime's business
because the announcement of the merger and FullTime's efforts to close the
merger will:
. Deplete its cash;
. Disrupt its sales and marketing efforts;
. Increase employee turnover; and
. Diminish FullTime's ability to successfully locate an alternative
strategic partner.
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In addition, depending on the circumstances, FullTime may be required to pay
a $2 million "break-up" fee to Legato.
Risks Related to Legato and FullTime
Legato's and FullTime's Quarterly Operating Results Are Volatile and
Uncertain. Legato's or FullTime's Failure to Meet Public Market Analysts'
Expectations Would Harm the Market Price of the Combined Company's Common
Stock.
Legato's and FullTime's respective quarterly operating results have varied in
the past and are likely to vary in the future. We also believe that Legato's
and FullTime's respective operating results may be below the expectations of
public market analysts and investors in some future quarter or quarters. In the
past, Legato's and FullTime's common stock prices have on occasion declined
following earnings announcements. Legato's or FullTime's failure to meet
analyst or investor expectations would likely seriously harm the respective
market price of Legato's or FullTime's common stock.
Legato and FullTime cannot predict their future revenues with any significant
degree of certainty for several reasons, including the following:
. Product revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter, since Legato and FullTime operate
with virtually no order backlog;
. Legato does not recognize revenues on sales to domestic distributors
until the products are sold to end-users;
. The storage management market is rapidly evolving;
. Legato's and FullTime's sales cycles vary substantially from customer to
customer, in large part because they have become or are becoming
increasingly dependent upon larger company-wide enterprise license
transactions to corporate customers. These transactions include product
license, service and support components, and take a long time to
complete;
. The timing of large orders can significantly affect revenues within a
quarter; and
. License and royalty revenue are difficult to forecast. In Legato's case,
its royalty revenues are substantially dependent upon product license
sales by original equipment manufacturers (OEMs) of their products that
incorporate Legato's software. Accordingly, these royalty revenues are
subject to OEMs' product cycles, which are also difficult to predict.
Fluctuations in licensing activity from quarter-to-quarter further
impact royalty revenues, because initial license fees generally are non-
recurring and recognized upon the signing of a license agreement.
Legato's and FullTime's expense levels are relatively fixed and are based, in
part, on their expectations as to their respective future revenues.
Consequently, if revenue levels fall below Legato's or FullTime's expectations,
the companies' respective net income (loss) will decrease (increase) because
only a small portion of Legato's and FullTime's expenses vary with their
respective revenues.
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Our Markets Are Highly Competitive and If We Are Unable to Compete
Successfully the Combined Company's Business Will Be Harmed.
Legato operates in the storage management market and FullTime operates in the
service level availability market. These markets are intensely competitive,
highly fragmented and characterized by rapidly changing technology and evolving
standards. If the combined company is unable to compete successfully, our
business, operating results and financial condition will be seriously harmed.
Increased competition could harm the combined company by causing, among other
things:
. Price reductions;
. Reduced gross margins; and
. Loss of market share.
The software industry has relatively low barriers to entry. In addition many
current and potential competitors have longer operating histories and greater
name recognition and financial resources. Legato and FullTime expect
competition to increase as, among other things:
. Legato and FullTime enter new markets;
. Existing competitors broaden their operating platform coverage and
product lines;
. Companies that previously focused on the mainframe computer market focus
on the client/server computer market; and
. The software industry consolidates.
In addition, network operating system vendors could introduce new, or upgrade
existing operating systems or environments, that include the same functions
offered by Legato's or FullTime's products. If so, Legato's or FullTime's
products could be rendered obsolete and unmarketable.
Legato Depends on Its NetWorker Product Line. A Decline in the Price of,
Demand for or Market Acceptance of Networker Would Harm the Combined
Company's Business.
Legato currently derives, and expects to continue to derive, a substantial
majority of its revenues from its NetWorker software products and related
services. A decline in the price of or demand for NetWorker, or failure to
achieve broad market acceptance of NetWorker, would seriously harm Legato's
business, operating results and financial condition. Legato cannot predict
NetWorker's life cycle for several reasons, including:
. The recent emergence of Legato's market;
. The effect of new products, applications or product enhancements;
. Technological changes in the network storage management environment in
which NetWorker operates; and
. Future competition.
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FullTime Depends on Reliability Software Products and a Decline in the Price
or Demand for These Products Would Harm FullTime's Business.
FullTime currently derives a significant majority of its revenues from the
sale of reliability software products and related services for distributed
computing environments, and expects this trend to continue or accelerate. A
decline in the price of or demand for these products and services would harm
FullTime's business. Demand for these products will depend in large part upon:
. Increasing market acceptance of computing systems distributed throughout
an enterprise, particularly for business-critical applications;
. The need for reliability software products and services for these
computing systems; and
. Market acceptance of FullTime's computer system availability and
reliability products.
If Legato and FullTime Do Not Respond to Rapid Technological Changes Their
Existing Products Could Become Obsolete.
The introduction of products embodying new technologies and the emergence of
new industry standards could render Legato's or FullTime's existing products
obsolete and unmarketable. In addition, Legato or FullTime may:
. Fail to develop and market products that respond to rapid technological
changes or rapidly evolving industry standards;
. Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; or
. Fail to develop products that adequately meet the requirements of the
marketplace or achieve market acceptance.
As of December 31, 1998, Legato had 193 employees engaged in research and
development which represented 29% of Legato's total workforce. If potential new
products are delayed or do not achieve market acceptance, Legato's or
FullTime's respective businesses, operating results and financial conditions
would be seriously harmed. Legato and FullTime plan to introduce and market
several new products in the next twelve months. Some of Legato's and FullTime's
respective competitors currently offer several of these potential new products.
These potential new products are subject to significant technical risks. Legato
or FullTime may fail to introduce these potential new products on a timely
basis or at all. In the past, both Legato and FullTime have experienced delays
in the commencement of commercial shipments of their new products. Such delays
caused customer frustration and resulted in delay or lost product revenues. In
the past, Legato and FullTime have also experienced delays in purchases of its
products by customers who were anticipating new product launches by Legato or
FullTime. Legato's or FullTime's respective businesses, operating results and
financial conditions would be seriously harmed if customers defer material
orders in anticipation of new product introductions.
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Legato and FullTime Rely on Enterprise-Level License Transactions and Failure
to Successfully Market Our Products in Enterprise-Level Transactions Would
Harm the Combined Company's Business.
In the past, Legato and FullTime both marketed their products at the
department-level of corporate customers. Within the last year, Legato and
FullTime developed strategies to pursue larger enterprise license transactions
with corporate customers. Legato and FullTime may fail to successfully market
their products in larger enterprise license transactions. This failure would
seriously harm Legato's or FullTime's respective businesses, operating results
and financial conditions. Legato's and FullTime's operating results are
sensitive to the timing of these orders. These orders are difficult to manage
and predict, because:
. The sales cycle is typically lengthy, generally lasting three to six
months, and varies substantially from transaction to transaction;
. These orders often include product license, service and support
components;
. These orders typically involve significant technical evaluation and
commitment of capital and other resources; and
. Customers' internal procedures frequently cause delays in orders. Such
internal procedures include approval of large capital expenditures,
implementation of new technologies within their networks and testing new
technologies that affect key operations.
Due to the large size of enterprise transactions, if orders forecasted for a
specific transaction for a particular quarter are not realized in that
quarter, Legato's or FullTime's respective operating results for that quarter
may be seriously harmed.
Legato and FullTime historically have not had a separate large enterprise or
national accounts sales force and only within the last year have begun to
develop direct sales groups focused on these larger accounts. To succeed in
the national accounts market, Legato and FullTime will be required to continue
to transition their existing sales forces into enterprise-level sales groups
and attract and retain qualified personnel. New personnel will require
training to obtain knowledge of product attributes for Legato's and FullTime's
products. Legato or FullTime may not be successful in creating the necessary
sales organization or in attracting, retaining or training these individuals.
To succeed in the enterprise and national accounts market will require, among
other things, establishing and continuing to develop relationships and
contacts with senior technology officers at these accounts. Legato's and
FullTime's respective operating results and financial conditions would be
seriously harmed if their respective sales forces do not succeed in these
efforts.
Legato Relies on Indirect Sales Channels and If These Indirect Sales Channels
Do Not Perform Adequately, Legato's Revenues Would Decline.
Legato relies significantly on its distributors, systems integrators and
value added resellers for the marketing and distribution of its products.
Legato's agreements with resellers are generally not exclusive and in many
cases may be terminated by either party without cause. Many of Legato's
resellers carry product lines that are competitive with those of Legato. These
resellers may not give a high priority to the marketing of Legato's products.
In addition, Legato may not be able to retain any of
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its current resellers or successfully recruit new resellers. Any such changes
in Legato's distribution channels would seriously harm Legato's business,
operating results and financial condition.
Legato's strategy is also to increase the proportion of Legato's customers
licensed through OEMs. Legato may fail to achieve this strategy. Legato is
currently investing, and intends to continue to invest, resources to develop
this channel. Such investments could seriously harm Legato's operating margins.
Legato depends on its OEMs' abilities to develop new products, applications and
product enhancements on a timely and cost-effective basis that will meet
changing customer needs and respond to emerging industry standards and other
technological changes. Legato's OEMs may not effectively meet these
technological challenges. These OEMs:
. Are not within Legato's control;
. May incorporate into their products the technologies of other companies
in addition to, or to the exclusion of, those of Legato; and
. Are not obligated to purchase products from Legato. In addition,
Legato's OEMs generally have exclusive rights to Legato's technology on
their respective platforms, subject to certain minimum royalty
obligations.
Legato's OEMs may not continue to carry Legato's products. The inability to
recruit, or the loss of, important OEMs would seriously harm Legato's business,
operating results and financial condition.
Legato and FullTime Depend on International Revenues and Therefore the
Combined Company's Business is Susceptible to Numerous Risks Associated With
International Operations.
Legato's and FullTime's continued growth and profitability will require
further expansion of their respective international operations. To successfully
expand international sales, both Legato and FullTime must:
. Establish additional foreign operations,
. Hire additional personnel, and
. Recruit additional international resellers.
These efforts will require significant management attention and financial
resources and could seriously harm Legato's or FullTime's respective operating
margins. If Legato or FullTime fail to further expand their respective
international operations in a timely manner, Legato's or FullTime's respective
businesses, operating results and financial condition would be seriously
harmed. In addition, Legato or FullTime may fail to maintain or increase
international market demand for their respective products. Legato's
international sales are currently denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make Legato's
and FullTime's products more expensive and, therefore, potentially less
competitive in those markets. In some markets, localization of Legato's and
FullTime's products are essential to achieve market penetration. Legato and
FullTime may incur substantial costs and experience delays in localizing their
products. Legato and FullTime may fail to generate significant revenues from
localized products.
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Additional risks inherent in Legato's and FullTime's respective international
business activities generally include:
. Significant reliance on distributors and other resellers who do not
offer Legato's or FullTime's respective products exclusively;
. Unexpected changes in regulatory requirements;
. Tariffs and other trade barriers;
. Lack of acceptance of localized products, if any, in foreign countries;
. Longer accounts receivable payment cycles;
. Difficulties in managing international operations;
. Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. The burdens of complying with a wide variety of foreign laws; and
. The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.
The occurrence of such factors could seriously harm Legato's or FullTime's
respective international sales and, consequently, Legato's or FullTime's
respective businesses, operating results and financial conditions.
In Order to Properly Manage Its Growth and Expansion, Legato May Need to
Improve and Implement New Systems, Procedures and Controls.
Legato has recently experienced a period of significant expansion of its
operations. Legato's headcount increased from 303 at December 31, 1996 to 660
at December 31, 1998. This growth placed a significant strain upon its
management systems and resources. Legato also plans to expand the geographic
scope of its customer base and operations. This expansion has resulted and will
continue to result in substantial demands on Legato's management resources.
From time to time, Legato receives customer complaints about the timeliness
and accuracy of customer support. Legato plans to add customer support
personnel in order to address current customer support needs. If Legato is not
successful in hiring such personnel, Legato's business, operating results and
financial condition could be seriously harmed. Legato's ability to compete
effectively and to manage future expansion of its operations, if any, will
require Legato to:
. Continue to improve its financial and management controls, reporting
systems and procedures on a timely basis; and
. Expand, train and manage its employees.
Legato's failure to do so would seriously harm its business, operating
results and financial condition.
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If Legato Does Not Successfully Integrate Pending Acquisitions, the Combined
Company's Business Would Be Harmed.
Legato expects that it will face numerous challenges in integrating its
pending acquisitions into Legato. If this integration is not successful,
Legato's business, operating results and financial condition would be
seriously harmed. On January 28, 1999 Legato announced that it had signed a
definitive agreement to purchase all of the outstanding stock of Intelliguard
Software, Inc. and its related development company, O.R.P., Inc.
(collectively, "Intelliguard"). The consideration payable in the Intelliguard
acquisition is 720,000 shares of Legato common stock plus the cash equivalent
of 180,000 shares of Legato common stock on the trading day preceding the
completion of the acquisition. Intelliguard, based in Dublin, California,
develops and licenses standards-based storage management solutions for storage
area networks and had approximately 140 employees as of February 28, 1999.
Legato may make acquisitions in the future. Acquisitions of companies,
products or technologies entail numerous risks, including:
. An inability to successfully assimilate acquired operations and
products;
. Diversion of management's attention;
. Loss of key employees of acquired companies; and
. Substantial transaction costs.
Some of the products acquired may require significant additional development
before they can be marketed and may not generate revenue at levels anticipated
by Legato. Moreover, future acquisitions by Legato may result in dilutive
issuances of its equity securities, the incurrence of debt, large one-time
write-offs and the creation of goodwill or other intangible assets that could
result in amortization expenses. Any such problems or factors could seriously
harm Legato's business, financial condition and results of operations.
If the Storage Management Market Does Not Continue to Grow, the Combined
Company's Sales Opportunities Would Be Limited.
All of Legato's business is in the storage management market and FullTime
expects that a substantial majority of its future revenues will also be
derived from this market. The storage management market is still an emerging
market and may not continue to grow. Legato's and the combined company's
future financial performance will depend in large part on continued growth in
the number of organizations adopting company-wide storage and management
solutions for their client/server computing environments. If this market fails
to grow or grows more slowly than Legato and FullTime currently anticipate,
their respective businesses, operating results and financial conditions would
be seriously harmed.
Protection of Legato's and FullTime's Intellectual Property Is Limited.
Both Legato and FullTime are technology companies. The success of Legato and
FullTime depends significantly on protecting their intellectual property which
are their most important assets. Despite Legato's and FullTime's efforts to
protect their proprietary rights, unauthorized parties may
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attempt to copy aspects of their products or to obtain and use information that
Legato or FullTime regard as proprietary. Policing unauthorized use of Legato's
or FullTime's products is difficult, and software piracy can be expected to be
a persistent problem. In licensing its products (other than in enterprise
license transactions), Legato relies primarily on "shrink wrap" licenses that
are not signed by licensees. FullTime relies on "shrink wrap" licenses for
sales of certain of its products. Such licenses may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of some foreign countries
do not protect Legato's or FullTime's proprietary rights to as great an extent
as do the laws of the United States. Legato's and FullTime's means of
protecting their proprietary rights may not be adequate. Legato's or FullTime's
competitors may independently develop similar technology, duplicate Legato's or
FullTime's products or design around patents issued to Legato or FullTime or
other intellectual property rights of Legato or FullTime.
Each of Legato and FullTime from time to time has received claims that it is
infringing third parties' intellectual property rights. In the future, Legato
or FullTime may be subject to claims of infringement by third parties with
respect to current or future products, trademarks or other proprietary rights.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require Legato or FullTime
to enter into royalty or licensing agreements with third parties. If such
royalty or licensing agreements, if required, are not available on terms
acceptable to Legato or FullTime, Legato's or FullTime's respective businesses,
operating results and financial conditions would be seriously harmed.
Defects in Legato's or FullTime's Products Would Harm Our Business.
Legato's and FullTime's products can be used to manage computer data critical
to organizations. As a result, the sale and support of products by Legato or
FullTime may entail the risk of product liability claims. A successful product
liability claim brought against Legato or FullTime would seriously harm
Legato's or FullTime's respective businesses, operating results and financial
conditions.
Year 2000 Issues Could Affect Our Business.
Many currently installed computer systems and software products include
coding to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Legato's computer systems and/or software will need to
be upgraded to comply with such "Year 2000" requirements. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such problems.
Legato has conducted Year 2000 compliance reviews for current versions of
Legato's products. The reviews include:
. Assessment;
. Implementation;
. Validation testing; and
. Contingency planning.
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Legato responds to customer concerns about its products on a case-by-case
basis. Although Legato believes its software products are Year 2000 compliant,
Legato's software products may not contain all the necessary software routines
and programs for the accurate calculation, display, storage and manipulation of
data involving dates. Failure of Legato's software products to contain all the
necessary software routines and programs for the accurate calculation, display,
storage and manipulation of data involving dates would seriously harm Legato's
business, operating results and financial condition.
To the extent information is publicly available we have assessed the Year
2000 compliance status of its customers. If Legato's current or future
customers fail to achieve Year 2000 compliance or if they divert technology
expenditures to address Year 2000 compliance problems, Legato's business,
results of operations, or financial condition would be seriously harmed.
Legato has tested software obtained from third parties that is incorporated
into Legato's products, and seeks assurances from vendors that licensed
software is Year 2000 compliant. Despite such testing and assurances, products
incorporated into Legato's products may contain undetected errors or defects
associated with Year 2000 date functions. Known or unknown errors or defects in
Legato's products may result in:
. Delay or loss of revenue;
. Diversion of development resources;
. Damage to Legato's reputation; or
. Increased service and warranty costs.
The occurrence of any of the foregoing would seriously harm Legato's business,
operating results, or financial condition.
Legato believes the software and hardware it uses internally complies with
Year 2000 requirements. In addition, Legato is not aware of any material
operational issues or costs associated with preparing its internally used
software and hardware for the Year 2000. However, serious, unanticipated
negative consequences, including material costs caused by undetected errors or
defects in the technology used in its internal systems, may occur. The
occurrence of any of the foregoing would seriously harm Legato's business,
operating results or financial condition.
Legato has funded its Year 2000 compliance review from operating cash flows
and has not separately accounted for these costs in the past. Legato will incur
additional amounts related to the Year 2000 compliance review including:
. Administrative personnel to manage Legato's review;
. Administrative personnel to manage the review of the combined company
after the merger, including compliance reviews of FullTime's operating
systems and customers; and
. Outside contractors to provide technical advice and technical support
for its products, product engineering, and customer satisfaction.
Legato is currently developing contingency plans to be implemented as part of
its efforts to identify and correct Year 2000 problems. Legato expects to
complete its contingency plans by the first quarter of 1999. Depending on the
systems affected, these plans could include:
20
<PAGE>
. Accelerated replacement of affected equipment or software;
. Short to medium-term use of backup equipment and software;
. Increased work hours for company personnel or use of contract personnel
to correct, possibly on an accelerated schedule, any Year 2000 problems
that arise or to provide manual workarounds for information systems; and
. Other similar approaches.
If Legato is required to implement any of these contingency plans, it would
seriously harm Legato's business, financial condition and results of
operations. Legato's ability to achieve Year 2000 compliance, and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things:
. The availability and cost of programming and testing resources;
. Vendors' ability to modify proprietary software; and
. Unanticipated problems identified in the ongoing compliance review.
For a similar FullTime discussion of Year 2000 issues, See "FullTime
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000 Compliance Issues" on page 102.
Upon completion of the merger, each of the following will have to be reviewed
by Legato's Year 2000 compliance personnel for Year 2000 compliance issues:
. FullTime's internal operating systems;
. FullTime's customers; and
. Software obtained from third parties and incorporated into FullTime's
products.
If Legato is unable to complete such a review, or if any of FullTime's
operating systems, customers or third party software is found to be non-
compliant with Year 2000 requirements, the combined company's business,
financial condition and results of operations would be seriously harmed.
21
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
In July 1998, Qualix Group, Inc. commenced doing business as FullTime
Software, Inc. without changing its legal name. Qualix and Legato file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information filed by either company at the Commission's
public reference rooms in Washington, D.C., New York City and Chicago. Please
call the Commission at 1-800-SEC-0330 for further information on the public
reference rooms. The companies' filings are also available to the public from
commercial document retrieval services and at the Internet web site maintained
by the Commission at http://www.sec.gov.
Legato filed a registration statement on Form S-4 to register with the
Commission the Legato common stock to be issued to you and the other FullTime
stockholders in the merger. This proxy statement/prospectus is a part of that
registration statement and constitutes a prospectus of Legato in addition to
being a proxy statement of FullTime for a special meeting of FullTime
stockholders to be held on April 19, 1999, as described herein. As allowed by
the Commission's rules, this proxy statement/prospectus does not contain all of
the information you can find in the registration statement or the exhibits to
the registration statement. This proxy statement/prospectus summarizes some of
the documents that are exhibits to the registration statement, and you should
refer to the exhibits for a more complete description of the matters covered by
those documents.
The Commission allows Legato to "incorporate by reference" information into
this proxy statement/prospectus. This means that Legato may disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is considered to be
part of this proxy statement/prospectus. This proxy statement/prospectus
incorporates by reference additional documents that Legato may file with the
Commission between the date of this proxy statement/prospectus and the date of
the FullTime special meeting of stockholders.
Legato has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to Legato, and FullTime has supplied
all such information contained in this proxy statement/prospectus relating to
FullTime.
22
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following Legato documents filed with the Commission are incorporated by
reference in this proxy statement/prospectus:
1. Legato's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
2. The description of Legato's capital stock contained in Legato's
registration statement on Form 8-A, dated May 24, 1995, including any
amendment or report filed for the purpose of updating such description.
3. The description of Legato's capital stock contained in Legato's
registration statement on Form 8-A, dated May 23, 1997, including any
amendment or report filed for the purpose of updating such description.
4. The information regarding Legato's directors from the section
entitled "Election of Directors" of Legato's definitive proxy statement
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 for
Legato's annual meeting of stockholders held on May 14, 1998. For
information regarding Legato's executive officers, see the information
appearing under the caption "Executive Officers of the Registrant" in part
I, item 4a of Legato's Form 10-K.
5. Information regarding executive compensation from the section
entitled "Executive Compensation" of Legato's proxy statement.
6. Information regarding security ownership of certain beneficial
owners and management from the section entitled "Stock Ownership of Certain
Beneficial Owners and Management" of Legato's proxy statement.
7. Information regarding certain relationships and related transactions
from the section entitled "Certain Relationships and Related Transactions"
of Legato's proxy statement.
All reports and definitive proxy or information statements filed by Legato
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this proxy statement/prospectus and prior to the date of the
special meeting of FullTime stockholders shall be deemed to be incorporated by
reference into this proxy statement/prospectus from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein shall be deemed to be modified or superseded for purposes
of this proxy statement/prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this proxy
statement/prospectus.
This proxy statement/prospectus incorporates documents by reference that are
not represented herein or delivered herewith. There will be provided without
charge to each person, including any beneficial owner, to whom a proxy
statement/prospectus is delivered, upon oral or written request of any such
person, a copy of any or all documents incorporated by reference herein,
excluding exhibits
23
<PAGE>
unless such exhibits are specifically incorporated by reference herein.
Requests should be directed to Legato Systems, Inc., Investor Relations Office,
3210 Porter Drive, Palo Alto, California 94304 or by telephone at (650) 812-
6000. In order to ensure timely delivery of the documents in advance of the
special meeting to which this proxy statement/prospectus relates, any such
request should be made by April 12, 1999.
No documents relating to FullTime are incorporated by reference.
TRADEMARKS
This proxy statement/prospectus contains trademarks and trade names of
Legato, FullTime and other companies, which are the property of their
respective owners. Legato's trademarks include Legato, Legato NetWorker and the
Legato logo. FullTime's trademarks include FullTime Software, FullTime,
FullTime Cluster, FullTime Data, FullTime Department, FullTime Enterprise,
Qualix and Octopus.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document, the documents of Legato incorporated by reference herein, and
other communications to stockholders of Legato and FullTime may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to future events or the
future performance of Legato, FullTime and the combined company. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential," or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." You should also consider the cautionary statements contained in the
reports filed with the Commission by Legato and FullTime. These factors may
cause the actual results of Legato, FullTime and the combined company to differ
materially from any forward-looking statements.
Although Legato and FullTime believe that the expectations reflected in the
forward-looking statements are reasonable, neither can guarantee that these
expectations will prove to have been correct. Moreover, neither Legato,
FullTime nor any other person assumes responsibility for the accuracy and
completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this proxy statement/prospectus to
conform such statements to actual results.
In addition, neither Legato nor FullTime makes any express or implied
representation or warranty as to the attainability of the projected or
estimated financial information set forth in this document or as to the
accuracy or completeness of the assumptions from which such projected or
estimated information is derived. Projections or estimations of Legato's and
FullTime's future performance are necessarily subject to a high degree of
uncertainty and may vary materially from actual results. You should read the
particular discussions set forth under "Risk Factors" on page 9, and "FullTime
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 92.
24
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Legato Market Price Data
Legato's common stock is traded on the Nasdaq National Market under the
symbol "LGTO." The following table sets forth the range of high and low closing
sales prices reported on the Nasdaq National Market for Legato common stock for
the periods indicated, adjusted to reflect the two-for-one stock splits
effected on July 5, 1996 and April 17, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Quarter Ended March 31, 1996.................................. $10.75 $ 5.82
Quarter Ended June 30, 1996................................... 13.75 8.75
Quarter Ended September 30, 1996.............................. 24.00 9.13
Quarter Ended December 31, 1996............................... 23.50 13.38
1997
Quarter Ended March 31, 1997.................................. $16.44 $ 8.07
Quarter Ended June 30, 1997................................... 12.44 5.50
Quarter Ended September 30, 1997.............................. 17.88 8.69
Quarter Ended December 31, 1997............................... 23.32 16.13
1998
Quarter Ended March 31, 1998.................................. $29.94 $20.06
Quarter Ended June 30, 1998................................... 39.50 25.75
Quarter Ended September 30, 1998.............................. 54.75 35.13
Quarter Ending December 31, 1998.............................. 65.94 30.25
1999
Quarter Ended March 31, 1999 (through March 12, 1999)......... $65.50 $41.50
</TABLE>
FullTime Market Price Data
FullTime's common stock is traded on the Nasdaq National Market under the
symbol "FTSW." The following table sets forth the range of high and low closing
prices reported on the Nasdaq National Market for FullTime common stock for the
periods since the initial public stock offering on February 12, 1997 as
indicated:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1997
Quarter Ended March 31, 1997 (From February 12, 1997)........... $9.25 $5.25
Quarter Ended June 30, 1997..................................... 9.00 5.38
Quarter Ended September 30, 1997................................ 6.50 4.13
Quarter Ended December 31, 1997................................. 5.44 2.88
1998
Quarter Ended March 31, 1998.................................... $3.75 $2.75
Quarter Ended June 30, 1998..................................... 4.00 1.25
Quarter Ended September 30, 1998................................ 2.47 1.28
Quarter Ending December 31, 1998................................ 9.13 1.03
1999
Quarter Ended March 31, 1999 (through March 12, 1999)........... $8.44 $5.50
</TABLE>
25
<PAGE>
Dividend Information
Neither Legato nor FullTime has ever paid any cash dividends on its stock,
and both anticipate that for the foreseeable future they will continue to
retain any earnings for use in the operation of their respective businesses.
Recent Closing Prices
The following table sets forth (1) the closing prices per share of Legato
common stock and FullTime common stock on the Nasdaq National Market on October
23, 1998, the last trading day before announcement of the proposed merger, and
on March 12, 1999, the latest practicable trading day before the printing of
this proxy statement/prospectus, and (2) the equivalent per share prices for
FullTime common stock based on the corresponding Legato common stock prices and
an assumed exchange rate of 0.1420 shares of Legato common stock for each share
of FullTime common stock:
<TABLE>
<CAPTION>
FullTime
Legato FullTime Equivalent
Common Stock Common Stock Per Share
Price Price Price(1)
------------ ------------ ----------
<S> <C> <C> <C>
October 23, 1998........................... $40.3125 $ 2.00 $5.73
March 12, 1999............................. $ 56.625 $7.3125 $8.04
</TABLE>
The actual exchange rate in the merger cannot be calculated until the closing
of the merger. The share exchange ratio will be calculated at the time the
merger is completed based on the amount of then-outstanding shares and options
to acquire shares of FullTime common stock. The exchange rate is currently
0.1420 shares of Legato common stock for each share of FullTime common stock.
Since the market price of Legato common stock is subject to fluctuation, the
market value of the shares of Legato common stock that holders of FullTime
common stock will receive in the merger may increase or decrease prior to and
following the merger. See "The Merger and Related Transactions--Conversion of
Shares" on page 36 for the calculation of the share exchange ratio.
You are urged to obtain current market quotations for Legato common stock and
FullTime common stock. Legato and FullTime cannot give you any assurances as to
the future prices or markets for Legato common stock or FullTime common stock.
Number Of Stockholders
As of March 5, 1999, the record date, there were 10,868,835 stockholders of
record who held shares of FullTime common stock (although FullTime has been
informed that there are in excess of 1,324 beneficial owners), as shown on the
records of FullTime's transfer agent for such shares.
26
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following selected historical financial information of Legato as of
December 31, 1997 and 1998 and for the each of the three years in the period
ended December 31, 1998 has been derived from audited historical consolidated
financial statements and should be read in conjunction with such financial
statements and the notes incorporated herein by reference. The following
selected historical financial information of FullTime as of June 30, 1997 and
1998 and for the each of the three years in the period ended June 30, 1998 has
been derived from audited historical consolidated financial statements and
should be read in conjunction with such financial statements and the notes
included elsewhere herein. Historical operating information for periods prior
to January 1, 1996 and balance sheet data prior to December 31, 1997, for
Legato, are derived from financial statements not incorporated herein by
reference. Historical operating information for the periods prior to July 1,
1995, and balance sheet data prior to June 30, 1997, for FullTime are derived
from financial statements not included herein. The selected pro forma combined
financial information of Legato and FullTime is derived from the unaudited pro
forma combined condensed consolidated financial statements and should be read
in conjunction with such pro forma statements and notes thereto included
elsewhere in this proxy statement/prospectus. FullTime's results of operations
for the six months ended June 30, 1998 are included in the pro forma combined
results of operations for both the years ended December 31, 1998 and 1997.
FullTime's revenues and net loss for the six months ended June 30, 1998 were
approximately $12.5 million and $5.8 million, respectively. For further
information regarding the pro forma combined operating results of the two
companies, see "The Merger and Related Transactions--Unaudited Pro Forma
Combined Condensed Consolidated Financial Statements" on page 71.
The pro forma financial information does not purport to represent what
Legato's financial position or results of operations would actually have been
had the merger occurred at the beginning of the earliest period presented or to
project Legato's financial position or results of operations for any future
date or period. In addition, it does not incorporate any benefits from cost
savings or synergies of operations of the combined company.
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
LEGATO SYSTEMS, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues........................... $18,954 $32,531 $56,774 $ 83,885 $143,178
Gross profit....................... 16,914 28,498 51,209 74,186 125,978
Income from operations............. 1,948 7,576 13,614 21,046 39,996
Net income......................... 2,147 6,033 8,922 14,012 27,708
Net income per share -- basic...... $ 0.27 $ 0.30 $ 0.27 $ 0.40 $ 0.75
Shares used in per share
calculations
-- basic.......................... 7,950 20,174 33,348 35,070 36,894
Net income per share -- diluted.... $ 0.09 $ 0.20 $ 0.24 $ 0.37 $ 0.69
Shares used in per share
calculations
-- diluted........................ 23,922 30,469 37,793 37,976 40,005
<CAPTION>
December 31,
------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
investments....................... $ 4,598 $50,218 $57,787 $ 71,991 118,623
Working capital.................... 3,755 39,090 52,228 70,817 115,556
Total assets....................... 9,529 60,390 84,569 114,791 186,865
Retained earnings (accumulated
deficit).......................... (1,895) 4,138 12,971 26,982 54,690
Total stockholders' equity......... 4,899 51,346 69,398 93,309 144,465
</TABLE>
28
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
FULLTIME SOFTWARE, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
-------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ 6,053 $ 9,403 $16,535 $32,146 $ 30,015 $17,517 $ 12,231
Gross profit............ 1,891 3,842 8,093 19,248 21,178 12,697 8,655
Income (loss) from
operations............. (2,546) (1,117) (288) 2,223 (7,247) (1,080) (6,014)
Net income (loss)....... (2,562) (1,180) 558 2,707 (6,444) (620) (5,819)
Net income (loss) per
share
-- basic............... $ (2.06) $ (0.57) $ 0.21 $ 0.41 $ (0.62) $ (0.06) $ (0.55)
Shares used in per share
calculations -- basic
....................... 1,242 2,054 2,665 6,620 10,336 10,242 10,640
Net income (loss) per
share
-- diluted............. $ (2.06) $ (0.57) $ 0.07 $ 0.29 $ (0.62) $ (0.06) $ (0.55)
Shares used in per share
calculations --
diluted................ 1,242 2,054 8,177 9,312 10,336 10,242 10,640
<CAPTION>
June 30, December 31,
-------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and investments........ $ 331 $ 2,629 $ 3,587 $19,158 $ 11,874 $15,442 $ 7,349
Working capital......... (82) 2,483 2,793 18,735 10,454 17,628 5,097
Total assets............ 1,851 4,455 6,903 26,334 20,934 26,348 15,058
Long-term obligations,
less current portion... 10 153 290 191 87 202 --
Accumulated deficit..... (6,626) (7,806) (7,248) (4,541) (10,985) (5,161) (16,804)
Total stockholders'
equity................. 100 2,479 2,846 20,103 14,139 19,754 8,586
</TABLE>
29
<PAGE>
LEGATO AND FULLTIME
UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
------- -------- ------------
<S> <C> <C> <C>
Pro Forma Combined Condensed Statements of
Operations Data:
Revenues........................................ $88,920 $113,900 $167,907
Gross profit.................................... 70,457 95,364 143,114
Income from operations.......................... 15,837 13,799 27,815
Net income...................................... 10,790 10,146 20,746
Net income per share -- basic................... $ 0.31 $ 0.28 $ 0.54
Shares used in per share calculations -- basic.. 34,288 36,538 38,390
Net income per shares -- diluted................ $ 0.28 $ 0.26 $ 0.50
Shares used in per share calculations --
diluted........................................ 39,115 39,472 41,546
<CAPTION>
December 31,
1998
------------
<S> <C> <C> <C>
Pro Forma Combined Condensed Balance Sheet Data:
Cash, cash equivalents and investments.......... $125,972
Working capital(1).............................. 125,131
Total assets.................................... 208,901
Retained earnings............................... 42,364
Total stockholders' equity(1)................... 157,529
</TABLE>
- --------
(1) Net of estimated expenses of $2.5 million expected to be incurred by the
combined company in connection with direct costs associated with the
Merger.
30
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Legato
and FullTime and combined per share data on an unaudited pro forma and
equivalent pro forma basis, based on the assumption that the merger occurred at
the beginning of the earliest period presented and was accounted for as a
pooling of interests. The pro forma combined per share data gives effect to the
merger at the assumed exchange ratio and is based on the number of shares of
FullTime common stock and options to purchase shares of FullTime common stock
outstanding as of December 31, 1998. The pro forma combined per share data does
not purport to represent what Legato's financial position or results of
operations would actually have been had the merger occurred at the beginning of
the earliest period presented or to project Legato's financial position or
results of operations for any future date or period. This data should be read
in conjunction with the pro forma combined condensed financial statements
included elsewhere herein and the separate historical financial statements and
notes thereto of Legato incorporated herein by reference and FullTime included
elsewhere herein. Neither Legato nor FullTime declared any cash dividends
during the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
HISTORICAL -- LEGATO
Net income per share -- basic.......................... $ 0.27 $ 0.40 $ 0.75
Net income per share -- diluted........................ $ 0.24 $ 0.37 $ 0.69
Book value per share(1)................................ $ 2.03 $ 2.61 $ 3.84
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30, December 31,
--------------------- --------------
1996 1997 1998 1997 1998
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
HISTORICAL -- FULLTIME
Net income (loss) per share -- basic... $ 0.21 $ 0.41 $ (0.62) $(0.06) $(0.55)
Net income (loss) per share --
diluted.............................. $ 0.07 $ 0.29 $ (0.62) $(0.06) $(0.55)
Book value per share(1)................ $ 0.97 $ 1.95 $ 1.33 $ 1.91 $ 0.79
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
PRO FORMA COMBINED PER LEGATO SHARE
Net income per share -- basic(2)....................... $ 0.31 $ 0.28 $ 0.54
Net income per share -- diluted(2)..................... $ 0.28 $ 0.26 $ 0.50
Book value per share(1)................................ $ 2.51 $ 3.03 $ 3.91
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
EQUIVALENT PRO FORMA COMBINED PER FULLTIME SHARE(3)
Net income per share -- basic.......................... $ 0.04 $ 0.04 $ 0.08
Net income per share -- diluted........................ $ 0.04 $ 0.04 $ 0.07
Book value per share................................... $ 0.36 $ 0.43 $ 0.55
</TABLE>
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
the period.
(2) The pro forma combined information per Legato common share for the years
ended December 31, 1996 and 1997 combines Legato net income per share
information for the years ended December 31, 1996 and 1997 with that of
FullTime for the years ended June 30, 1997 and 1998. The pro forma combined
31
<PAGE>
information per Legato share for the year ended December 31, 1998 combines
Legato net income per share information with that of FullTime for the four
quarters ended December 31, 1998. FullTime's results of operations for the
six months ended June 30, 1998 are included in the pro forma combined
results of operations for both the years ended December 31, 1998 and 1997.
FullTime's revenues and net loss for the six months ended June 30, 1998 were
approximately $12.5 million and $5.8 million, respectively.
(3) The FullTime equivalent pro forma combined per share amounts are calculated
by multiplying the combined pro forma per share amounts by the assumed
exchange ratio of 0.1420 shares of Legato common stock for each share of
FullTime common stock. The exchange ratio is equal to a fraction, the
numerator of which is equal to 1,721,000 shares and the denominator of
which will be equal to the sum of (a) the aggregate number of shares of
FullTime common stock issued and outstanding and (b) the aggregate number
of shares of FullTime common stock issuable upon exercise of all
outstanding options. The assumed exchange ratio of 0.1420 shares is
calculated based on the number of shares of FullTime common stock and
options to purchase FullTime common stock outstanding as of December 31,
1998.
32
<PAGE>
THE FULLTIME STOCKHOLDER MEETING
Date, Time and Place of the FullTime Stockholder Meeting
The meeting of FullTime stockholders to approve the reorganization agreement
and the merger will be held on April 19, 1999 at 10:00 a.m., local time, at the
offices of Wilson Sonsini Goodrich & Rosati located at 650 Page Mill Road, Palo
Alto, California.
Record Date and Shares Entitled to Vote
Only holders of record of FullTime common stock at the close of business on
the record date of the merger are entitled to notice of and to vote at the
FullTime stockholder meeting. The record date has been set at March 5, 1999. As
of the close of business on the record date, there were 10,868,835 shares of
FullTime common stock outstanding and entitled to vote, held of record by 123
stockholders. FullTime has been informed, however, that there are in excess of
1,324 beneficial owners of FullTime common stock. A majority, or 5,434,418 of
these shares, present in person or represented by proxy, will constitute a
quorum for the transaction of business. You and each other FullTime stockholder
is entitled to one vote for each share of FullTime common stock held as of the
record date.
Voting of Proxies
The FullTime proxy accompanying this proxy statement/prospectus is solicited
on behalf of the FullTime board of directors for use at the FullTime
stockholder meeting. You are requested to complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to FullTime. All properly executed proxies received by
FullTime prior to the vote at the FullTime stockholder meeting, and that are
not revoked, will be voted at the FullTime stockholder meeting in accordance
with the instructions indicated on the proxies or, if no direction is
indicated, to approve the reorganization agreement and the merger. FullTime's
board of directors does not presently intend to bring any other business before
the FullTime stockholder meeting and, so far as is known to the FullTime board
of directors, no other matters are to be brought before the FullTime
stockholder meeting. As to any business that may properly come before the
FullTime stockholder meeting, however, it is intended that proxies, in the form
enclosed, will be voted in respect thereof in accordance with the judgment of
the persons voting such proxies. Unless you have given an irrevocable proxy
pursuant to a voting and proxy agreement, you may revoke your proxy at any time
before it is exercised at the FullTime stockholder meeting by:
. Delivering to the secretary of FullTime a written notice, bearing a date
later than the date of the previous proxy, stating that the proxy is
revoked,
. Signing and so delivering a proxy relating to the same shares and
bearing a later date than the date of the previous proxy prior to the
vote at the FullTime stockholder meeting, or
. Attending the FullTime stockholder meeting and voting in person.
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Vote Required
Approval of the reorganization agreement and the consummation of the merger
by FullTime's stockholders is required under Delaware corporation law. Such
approval requires the affirmative vote of the holders of a majority of the
shares of FullTime common stock outstanding and entitled to vote. All executive
officers and directors of FullTime and their affiliates as a group, who
beneficially owned on the record date for the merger:
. Shares of FullTime common stock and
. Shares of FullTime common stock issuable upon the exercise of options
exercisable within 60 days of the record date
have entered into agreements and have delivered irrevocable proxies obligating
them to vote in favor of the reorganization agreement and the merger. These
agreements and proxies cover approximately 20.8% of the outstanding shares of
FullTime common stock as of the record date. As of the record date for the
merger and the date of this proxy statement/prospectus, Legato owns no shares
of FullTime common stock. See "The Merger and Related Transactions--Related
Agreements--Voting and Proxy Agreements" on page 62.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the FullTime
stockholder meeting is a majority of the shares of FullTime common stock issued
and outstanding on the record date. Abstentions and broker non-votes each will
be included in determining the number of shares present and voting at the
meeting for the purpose of determining the presence of a quorum. Because
approval of the reorganization agreement and the consummation of the merger
requires the affirmative vote of a majority of the outstanding shares of
FullTime common stock entitled to vote on the merger, abstentions and broker
non-votes will have the same effect as votes against the reorganization
agreement and the consummation of the merger. The actions proposed in this
proxy statement/prospectus are not matters that can be voted on by brokers
holding shares for beneficial owners without the owners' specific instructions.
Accordingly, you are urged to return the enclosed proxy card marked to indicate
your vote.
Procedure for Casting Your Vote if Your Shares are Held by Your Broker in
Street Name
Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker. If you do not
provide your broker with voting instructions, your shares will not be voted at
the FullTime special meeting and it will have the same effect as voting against
adoption of the reorganization agreement.
Solicitation of Proxies and Expenses
FullTime will bear the cost of soliciting of proxies from its stockholders,
which is estimated to be $15,000. In addition to solicitation by mail, the
directors, officers and employees of FullTime may solicit proxies from you and
other FullTime stockholders by telephone, facsimile or in person. Following the
original mailing of the proxies and other soliciting materials, FullTime will
request brokers, custodians, nominees and other record holders to forward
copies of the proxy and other
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soliciting materials to persons for whom they hold shares of FullTime common
stock and to request authority for the exercise of proxies. In such cases,
FullTime, upon the request of the record holders, will reimburse such holders
for their reasonable expenses.
FullTime Board Recommendation
The FullTime board of directors believes that the terms and conditions of the
reorganization agreement and the merger are fair to, and in the best interests
of, FullTime and its stockholders. The FullTime board of directors, other than
Mr. Cole, has unanimously approved the terms and conditions of the
reorganization agreement and the merger and recommends that you and the other
FullTime stockholders vote for approval of the reorganization agreement and the
consummation of the merger. Mr. Cole did not participate in the FullTime vote
or deliberations with respect to the merger. In considering such
recommendation, you should be aware that Legato has agreed to provide certain
employment, severance and indemnification arrangements to certain FullTime
directors and officers. See "The Merger and Related Transactions--Interests of
Certain Persons in the Merger" and "--Indemnification and Insurance."
Representatives of Deloitte & Touche LLP, FullTime's independent auditors,
are expected to be present at the FullTime stockholder meeting.
For information regarding instructions for the exchange of FullTime common
stock share certificates, you should read the section entitled "Exchange of
Certificates" on page 37.
The matters to be considered at the FullTime stockholder meeting are of great
importance to you. Accordingly, you are urged to read and carefully consider
the information presented in this proxy statement/prospectus, and to complete,
date, sign and promptly return the enclosed proxy in the enclosed postage-paid
envelope.
You should NOT send any stock certificates with their proxy cards.
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THE MERGER AND RELATED TRANSACTIONS
General
The reorganization agreement provides for the merger of a newly formed,
wholly-owned subsidiary of Legato with and into FullTime. After the merger,
FullTime will be the surviving corporation and will be a wholly-owned
subsidiary of Legato. The descriptions in this proxy statement/prospectus of
the merger and the reorganization agreement are only summaries. The
reorganization agreement, a copy of which is attached to this document as
Appendix A and is incorporated herein by reference, governs all of the terms
and conditions of the merger. You are urged to read the reorganization
agreement in its entirety.
Conversion of Shares
At the time the merger is completed, each then outstanding share of FullTime
common stock will automatically be converted into the right to receive a
fraction of a share of Legato common stock equal to the share exchange ratio.
<TABLE>
<S> <C>
The "share exchange ratio"
equals: X
-----
(Y+Z)
</TABLE>
where,
X= 1,721,000 shares of Legato common stock
Y= the number of shares of FullTime common stock outstanding at the time of
the merger
Z= the number of options to acquire shares of FullTime common stock
outstanding at the time of the merger
Legato will assume all options to purchase FullTime common stock outstanding
at the time the merger is completed. No fractional shares of Legato common
stock will be issued in the merger. Instead, FullTime stockholders entitled to
receive a fraction of a share of Legato common stock will receive from Legato
an amount of cash, rounded to the nearest whole cent, equal to the per share
market value of Legato common stock multiplied by the fraction of a share of
Legato common stock to which the stockholder would otherwise be entitled. For
the purposes of that calculation, the per share market value of Legato common
stock will be based on the average closing price of a share of Legato common
stock as reported on the Nasdaq National Market for the ten most recent days
that Legato common stock was traded ending on the trading day immediately prior
to the effective date of the merger. Based upon the capitalization of FullTime
and Legato as of December 31, 1998, the stockholders and optionholders of
FullTime will own, or have rights to own, approximately 4.37% of the Legato
common stock outstanding immediately after the merger is completed, assuming
the exercise of all outstanding Legato stock options.
Conversion of Options
At the time the merger is completed, Legato will assume each then outstanding
option granted under FullTime's three stock option plans. In addition,
FullTime's repurchase right with respect to any unvested shares acquired
pursuant to the exercise of a FullTime option will be assigned to Legato. Each
FullTime option so assumed by Legato will continue to have, and be subject to,
the
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<PAGE>
same terms and conditions set forth in the FullTime stock option plans
immediately prior to completion of the merger, except that:
. such FullTime option will be exercisable for that number of whole shares
of Legato common stock equal to the product of (a) the number of shares
of FullTime common stock that were issuable upon exercise of such option
immediately prior to completion of the merger multiplied by (b) the
share exchange ratio, and rounded down to the nearest whole number of
shares of Legato common stock, and multiplied by (b) the share exchange
ratio, and rounded down to the nearest whole number of shares of Legato
common stock, and
. the per share exercise price for the shares of Legato common stock
issuable upon exercise of such assumed option will be equal to the
quotient determined by dividing (a) the exercise price per share of
FullTime common stock at which such option was exercisable immediately
prior to completion of the merger, by (b) the share exchange ratio,
rounded up to the nearest whole cent. Within five business days of
completion of the merger, Legato will file a registration statement on
Form S-8 with the Commission with respect to the shares of Legato common
stock issuable upon exercise of the assumed FullTime options.
As of March 5, 1999, the record date, 1,272,133 shares of FullTime common
stock were subject to outstanding FullTime options.
Under the FullTime 1997 stock option plan, options to purchase FullTime
common stock that were granted to non-employee members of the FullTime board of
directors after FullTime's initial public offering of its common stock will
become fully exercisable and vested at the time the merger is completed.
Under the 1997 stock option plan, in the event that the employment of an
optionee, including a FullTime officer, is involuntarily terminated within
twelve (12) months following the merger, then the exercisability or vesting of
each outstanding option held by the optionee will automatically accelerate and
each option will become fully vested. In addition, the accelerated option will
remain exercisable until the earlier of the expiration of the option term or
the expiration of the one-year period measured from the date of the involuntary
termination. Involuntary termination is defined in the 1997 stock option plan
to include:
. A termination by FullTime without misconduct or
. Voluntary resignation by the optionee following:
(1) a change in the optionee's position that materially reduces the
optionee's level of responsibility,
(2) a reduction by more than 15% in the optionee's level of
compensation, including base salary, fringe benefits and
participation in bonus or incentive programs, or
(3) a change in the optionee's place of employment that is more than 50
miles from the optionee's place of employment prior to the change,
provided such change or reduction is effected without the
optionee's consent.
Exchange of Certificates
Promptly after completion of the merger, a letter of transmittal and
instructions will be mailed to you for use in exchanging your FullTime common
stock certificate(s) for Legato common stock
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<PAGE>
certificate(s). Once you surrender to the exchange agent, Harris Trust &
Savings Bank, or another agent or agents as may be appointed by Legato:
1) your FullTime common stock certificate(s) for cancellation, and
2) a letter of transmittal duly completed and validly executed in
accordance with its instructions,
you will be entitled to receive in exchange therefor a certificate representing
the number of whole shares of Legato common stock and payment in lieu of
fractional shares that you have the right to receive pursuant to the
reorganization agreement. The certificate so surrendered will then be canceled.
Immediately after completion of the merger, each outstanding FullTime common
stock certificate will be deemed for all corporate purposes, other than the
payment of dividends, to evidence:
. the ownership of the number of full shares of Legato common stock into
which the shares of FullTime common stock shall have been so converted
as a result of the merger; and
. the right to receive an amount in cash in lieu of the issuance of any
fractional shares.
No dividends or other distributions paid to holders of Legato common stock
with a record date after the date the merger is completed will be paid to you
as a result of any unsurrendered FullTime common stock certificate until you
surrender the FullTime certificate. Subject to applicable law, following your
surrender of any FullTime common stock certificate, you will be paid without
interest, at the time of the surrender, the amount of any such dividends or
other distributions, with a record date after the merger is completed payable
up to that point with respect to the shares of Legato common stock.
If you want any certificate for shares of Legato common stock to be issued in
a name other than that in which the FullTime common stock certificate
surrendered in exchange therefor is registered, the certificate must be
properly endorsed and otherwise in proper form for transfer. In addition, you
must:
. pay Legato or any agent designated by it any transfer or other taxes
required because of the issuance of a certificate for shares of Legato
common stock in any name other than that of the registered holder of the
FullTime common stock certificate surrendered, or
. establish to the satisfaction of Legato or any agent designated by it
that such tax has been paid or is not payable.
You should not submit your FullTime common stock certificate(s) for exchange
until you have received the letter of transmittal and instructions referred to
above.
Notification Regarding FullTime Options
Following completion of the merger, Legato will issue to each person who
immediately prior to completion of the merger was a holder of an outstanding
FullTime option a document evidencing the assumption of such option by Legato.
Such assumption will be automatic and no action will be required on the part of
the option holder to convert such holder's FullTime option into an option to
purchase shares of Legato common stock.
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Background of the Merger
Over the last several years, Legato and FullTime generally have been familiar
with each other's products, as both companies sell products to many of the same
customers. In addition to sharing common goals and philosophy, Mr. Louis C.
Cole, Chairman, President and Chief Executive of Legato, has been a member of
FullTime's board of directors since October 1997. Because of these positions,
Mr. Cole did not participate in the deliberations or vote of the FullTime board
of directors or in the vote of the Legato board of directors, in each case with
respect to the reorganization agreement or the merger. In addition, while
frequently acting as an intermediary between Legato and FullTime, Mr. Cole did
not negotiate the transaction on Legato's behalf and he did not recommend the
reorganization agreement or the merger to the Legato or FullTime board of
directors. Mr. David N. Strohm and Mr. Phillip E. White, both Legato directors,
and Mr. Stephen Wise, Legato's Chief Financial Officer, acted as Legato's
principal negotiators.
Until recently, FullTime primarily produced high availability software
designed to minimize the impact of unplanned computer hardware, software and
network malfunctions. Sales of these products are targeted at the department
and workgroup level of FullTime's corporate customers. In July 1998, FullTime
expanded its strategic focus and introduced its family of FullTime software
products and solutions which are designed to protect computer systems from
interruptions due to planned as well as unplanned computing events. This
broader family of software solutions incorporates the baseline high
availability solutions which FullTime continues to sell separately. In addition
to broadening its product offering, FullTime also began in July 1988 to target
its marketing efforts at the broader enterprise-level. In conjunction with its
new marketing plan, FullTime commenced doing business under the name "FullTime
Software, Inc." FullTime's software and data protection products complement
Legato's data protection and software accessibility products, with both sets of
products compatible with a wide range of Unix and Windows NT operating system
platforms.
Beginning in April 1998, Mr. Richard G. Thau, Chairman, President and Chief
Executive Officer of FullTime, and Mr. Cole had preliminary discussions from
time to time regarding the similarities between FullTime and Legato, the
complementary nature of their respective products and potential synergies that
might be realized by a business combination of the two entities. These
discussions led to several meetings in early July 1998, during which certain
management representatives of the two companies discussed in preliminary terms
personnel and operating issues and potential business opportunities that might
result from a combination.
On July 10, 1998, Mr. Thau and Mr. William Hart, a FullTime director, met
with Mr. Strohm, a Legato director, and Mr. Wise, Legato's Chief Financial
Officer. At this meeting Legato expressed its continued interest in a business
combination. However, these discussions were terminated due to the parties'
inability to come to agreement on the material terms of a business combination.
At its regularly scheduled meeting on July 20, 1998, the FullTime board of
directors, excluding Mr. Cole, discussed various business challenges and
opportunities facing FullTime. Among other things, the FullTime board of
directors reviewed the earlier discussions about a potential business
combination with Legato and considered FullTime's recently adopted strategic
plan, FullTime's ability to execute the strategic plan and FullTime's other
opportunities. At the conclusion of discussions, the FullTime board of
directors determined to proceed with the FullTime strategic plan
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<PAGE>
and instructed Mr. Thau to promptly terminate further discussions between the
companies regarding a potential business combination. On July 21, Mr. Thau
telephoned Mr. Cole to notify him of the FullTime board of directors' decision.
On August 31, 1998, without any authorization from FullTime and without
FullTime's knowledge, Mr. David Crockett, a major stockholder of FullTime,
contacted Mr. Cole. Mr. Crockett had become aware that Legato had expressed an
interest in acquiring FullTime and asked whether Legato would still be
interested in such a business combination. Mr. Cole indicated that Legato might
still be interested under the right circumstances and on the right terms.
On September 15, 1998, Mr. Thau and Mr. Crockett had a breakfast meeting.
During this meeting Mr. Crockett and Mr. Thau discussed whether FullTime, in
light of the then-recent stock market volatility and significant strategic
benefits that might result from such a business combination, should consider
discussions with Legato to explore a business combination on mutually
acceptable terms.
Over the next few days, Mr. Thau discussed with Mr. Peter L. Wolken and Mr.
Kenneth A. Goldman, both FullTime directors, and Mr. Cole, the possibility of
Mr. Crockett acting as an intermediary between FullTime and Legato. Mr.
Crockett would assist in communicating each party's respective position and in
maintaining an ongoing dialogue between the parties.
On October 2, 1998, Mr. Thau met with Mr. Crockett and briefed him on the
status of FullTime and the progress it was making under the FullTime strategic
plan.
After multiple phone conversations with members of Legato's board of
directors, on October 4, 1998, Mr. Crockett contacted Mr. Thau to discuss the
results of these conversations and suggested that he arrange a meeting between
representatives of FullTime, Legato, and Mr. Crockett.
On October 6, 1998, the FullTime board of directors, other than Mr. Cole, met
telephonically to discuss the status of events and get feedback from Mr.
Crockett. During this meeting it was agreed that representatives of FullTime,
including Messrs. Wolken, Thau, and Mr. Bruce C. Felt, FullTime's Chief
Financial Officer, should meet with representatives of Legato and Mr. Crockett.
On October 7, 1998, representatives of FullTime met with representatives of
Legato and Mr. Crockett. The FullTime representatives included Messrs. Thau,
Wolken and Felt. The Legato representatives included Messrs. Strohm, White,
Wise and Cole. The meeting covered issues of strategic fit, financial leverage,
and pricing for a business combination between Legato and FullTime. It was
determined that the parties should proceed, review the issue with the FullTime
board of directors, and attempt to complete due diligence and a definitive
agreement between the parties in an expedient fashion.
On October 7, 1998, the FullTime board of directors, other than Mr. Cole, met
telephonically and determined to proceed with discussions with Legato and
retain a financial advisor to assist in conducting financial due diligence and
assessing the fairness of the consideration to be received by FullTime's
stockholders in a potential transaction.
On October 15, 1998, Mr. Thau met with Mr. Cole. During this meeting, Messrs.
Cole and Thau discussed structural terms by which a merger of the companies
might be accomplished, subject to completion of a comprehensive investigation
by Legato of FullTime's business, the negotiation and
40
<PAGE>
preparation of a definitive reorganization agreement and approval of each
company's board of directors of such reorganization agreement following
presentations concerning each party's due diligence investigation of the other
party.
On October 15, 1998, FullTime retained Hambrecht & Quist as its financial
advisor.
On October 15, 1998, Legato's outside law firm, Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, delivered drafts of the reorganization
agreement and stock option agreement to FullTime and its outside legal counsel,
Wilson Sonsini Goodrich & Rosati, Professional Corporation.
On October 16, 1998, representatives of FullTime met with representatives of
Legato. The FullTime representatives included Messrs. Thau and Felt and Mr.
David R. Malmstedt, FullTime's Senior Vice President of Field Operations. The
Legato representatives included Messrs. Wise and Cole and Mr. Andrew Hill,
Legato's General Counsel and Mr. James Chappell, Legato's Vice President,
Business Development. Also present were representatives of FullTime's legal
counsel, Wilson Sonsini Goodrich & Rosati, and financial advisors, Hambrecht &
Quist, and representatives of Bear, Stearns & Co. Inc., Legato's financial
advisors, and Gunderson Dettmer, Legato's legal counsel. At this meeting,
members of FullTime's management made a presentation concerning, among other
things, FullTime's strategic plan, organizational structure and product
roadmap.
On October 19, 1998, the FullTime board of directors, other than Mr. Cole,
met at the offices of Wilson Sonsini Goodrich & Rosati. During this meeting,
counsel reviewed with the FullTime board of directors the terms and conditions
of the proposed documentation and the status of negotiations and the status of
its legal due diligence investigation on Legato's business.
From October 19 to October 25, 1998, representatives of the two companies and
their respective legal and financial advisors met to conduct due diligence and
negotiate the definitive documentation providing for the merger.
On October 23, 1998, the FullTime board of directors met to review the status
of negotiations, receive reports as to the status of the due diligence
investigation on Legato's business and receive a preliminary presentation by
Hambrecht & Quist. The FullTime board of directors also discussed the strategic
rationale for the proposed merger. Following this discussion, Mr. Cole, as
Chairman, President and Chief Executive Officer of Legato, joined the meeting
and made a presentation on, among other things, the business and strategic
focus of Legato.
On October 25, 1998, the FullTime board of directors, other than Mr. Cole,
met telephonically, together with representatives of Wilson Sonsini Goodrich &
Rosati and Hambrecht & Quist, to review the proposed transaction terms and
documentation, which had been delivered to each of them, and to discuss the
strategic rationale and other considerations related to the proposed merger.
Hambrecht & Quist delivered its verbal opinion that the share exchange ratio
proposed for the merger is fair to the holders of FullTime common stock from a
financial point of view. Hambrecht & Quist's oral opinion was later confirmed
in writing. Following these events, the FullTime board of directors unanimously
approved the reorganization agreement and the merger, except that Louis Cole, a
director of both FullTime and Legato, did not participate in the meeting and
abstained from voting on such matters.
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<PAGE>
On October 25, 1998, the Legato board of directors held a special meeting to
approve the proposed reorganization agreement and the merger. The Legato board
of directors discussed the terms of the reorganization agreement with Legato's
management. Following that discussion, the Legato board of directors, other
than Mr. Cole, determined that the proposed merger was in the best interests of
Legato and its stockholders, approved the reorganization agreement and the
merger and authorized the officers of Legato to enter into the reorganization
agreement and related transactions. Mr. Cole did not participate in the
discussions and abstained from voting on such matters.
At various times during the negotiations, the management of FullTime
consulted with its legal counsel and Hambrecht & Quist. Although Hambrecht &
Quist was not directly involved in the negotiations of the consideration to be
received by FullTime stockholders, its advice as to the financial aspects of
the transaction and its input on financial due diligence and related matters
provided guidance to the FullTime board of directors and management in their
direct negotiations with the management of Legato.
As of October 25, 1998, representatives of Legato and FullTime executed the
reorganization agreement and the stock option agreement and the appropriate
stockholders executed the voting and proxy agreements, the affiliate
agreements, the employment agreements and the separation agreement.
Prior to the opening of the market on October 26, 1998, Legato issued a news
release announcing the merger.
Reasons for the Merger
Certain statements made in the following paragraphs regarding the potential
benefits that could result from the merger are forward-looking statements based
on current expectations and entail various risks and uncertainties that could
cause actual results to differ materially from those expressed in such forward-
looking statements. The anticipated potential benefits of the merger may not be
realized. Such risks and uncertainties are set forth under "Risk Factors" on
page 9 and elsewhere in this proxy statement/prospectus.
Joint Reasons for the Merger
In reaching their decisions to approve the reorganization agreement, the
merger, and the transactions contemplated by the reorganization agreement, each
of the Legato board of directors and the FullTime board of directors consulted
with their respective management teams and advisors and independently
considered the proposed reorganization agreement and the related transactions.
Based on their respective reviews of the proposed transaction and the business
and operations of the other party, the Legato board of directors and the
FullTime board of directors each approved the reorganization agreement and the
merger. Each board concluded that:
. The goals and philosophies of the companies are compatible and
consistent;
. The products of the companies are complementary;
. Legato and FullTime have the potential to offer customers a more
comprehensive data protection solution than either could offer
independently;
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. The merger would be positively received by customers of each company,
because the combined company's software products could potentially
address a broader range of customer needs;
. The companies' respective stockholders would benefit by the enhanced
ability of the combined company to compete in the rapidly evolving and
consolidating software industry; and
. The companies' respective stockholders could participate in the
potential for growth of the combined company following the merger.
Legato Board of Directors Recommendation; Legato's Reasons for the Merger
The Legato board of directors has unanimously approved the reorganization
agreement and the merger and has identified several potential benefits of the
merger to Legato, except that Louis Cole, a director of both FullTime and
Legato, has abstained from voting on such matters. In addition to the
anticipated joint benefits described above, the Legato board of directors
believes that additional benefits of the merger to Legato include:
. The expanded ability to deliver storage management solutions through the
addition of FullTime consulting and research and development expertise;
. The extension of important elements of Legato's storage management
architecture by enhancing the accessibility of client/server data and
the availability of server resources;
. The potential results from combining the complementary key distribution
channel partnerships into one company; and
. The ability to offer the FullTime installed customer base the increased
benefits of the Legato global support services, integrated technology
strength and a single vendor solution for storage management.
FullTime Board of Directors Recommendation; FullTime's Reasons for the Merger
The FullTime board of directors has unanimously approved the reorganization
agreement, has determined that the merger is fair to, and in the best interests
of, FullTime and its stockholders, and recommends that holders of shares of
FullTime common stock vote FOR approval and adoption of the reorganization
agreement and the merger, except that Mr. Cole did not participate in the
FullTime vote on the merger or the deliberations with respect to the merger.
The FullTime board of director's decision to approve the reorganization
agreement and the merger was based in significant part upon its assessment of
the strategic benefits of the merger and the potentially significant premium to
be received by FullTime's stockholders in the transaction. The FullTime board
of directors viewed Legato as a well-managed company with very high quality
products. The FullTime board of directors also viewed Legato and FullTime as
having similar corporate cultures, customers, competitors and sales focuses.
Strategic benefits of the merger that FullTime believes will contribute to the
success of the combined entity include:
. The ability to offer a broader integrated solution for high-end computer
system requirements, combining FullTime's application and information
protection products and Legato's data protection and accessibility
products;
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. The opportunity to benefit from Legato's greater size and financial
strength;
. The opportunity to more rapidly increase FullTime's enterprise-level
sales force, support and engineering development efforts and maintain
its market leadership position in high availability solutions for UNIX
and Windows NT computing environments;
. The opportunity for improved revenue prospects with the addition of new
customers and the ability to obtain greater revenue from existing
customers; and
. The opportunity to maintain and enhance strategic relations with systems
management software vendors and with hardware and software original
equipment manufacturers.
FullTime further evaluated the merits of Legato common stock and concluded
that shares of Legato common stock:
. Have appreciation potential in the long term;
. Represent a more liquid investment than FullTime common stock; and
. Are followed by a much greater number of stock analysts.
In the course of its deliberations, the FullTime board of directors reviewed
with FullTime's management a number of other factors relevant to the merger
including:
. The likelihood of realizing superior benefits through alternative
business strategies, including remaining an independent company and
continuing to execute on the recently announced FullTime strategic plan;
. Historical information concerning Legato's business, prospects,
financial performance and condition, operations, technology, management
and competitive position, including public reports concerning results of
operations during the most recent fiscal year and fiscal quarter filed
with the Securities and Exchange Commission;
. FullTime management's view of the financial condition, results of
operations and business of Legato before and after giving effect to the
merger;
. Current financial market conditions and historical market prices,
volatility and trading information with respect to the FullTime common
stock and Legato common stock;
. The share exchange ratio of Legato common stock for FullTime common
stock and the relationship between the market value of Legato common
stock to be issued in exchange for each share of FullTime common stock
and a comparison of comparable merger transactions;
. The belief that the terms of the reorganization agreement, including the
parties' representations, warranties and covenants, and the conditions
to their respective obligations, are reasonable;
. The terms of the stock option agreement and the voting and proxy
agreements;
. Detailed financial analysis and pro forma and other information with
respect to the companies presented by Hambrecht & Quist in presentations
to the FullTime board of directors, including Hambrecht & Quist's
opinion that the share exchange ratio of Legato common stock for
FullTime common stock in the merger is fair to the holders of FullTime
common stock from a financial point of view;
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. The impact of the merger on FullTime's customers and employees; and
. Reports from management, legal, financial and accounting advisors as to
the results of the due diligence investigation of Legato's business.
FullTime's board of directors believed that these factors, including the
FullTime board's review of the terms of the reorganization agreement, supported
the board's recommendation of the merger when viewed with the risks and
potential benefits of the merger.
The FullTime board of directors also considered risks arising in connection
with the merger, including:
. The potential disruption of FullTime's business that might result from
employee and customer uncertainty and lack of focus following
announcement of the merger in connection with integrating the operations
of FullTime and Legato;
. The possibility that the merger might not be consummated;
. The effects of the public announcement of the merger on FullTime's sales
and operating results, FullTime's ability to attract and retain key
management, marketing and technical personnel and the progress of
certain of its development projects;
. The risk that the announcement of the merger could result in decisions
by customers to cancel or delay purchases of products of FullTime or
Legato;
. The risk that Legato might fail to meet projected growth rates and
analyst expectations and that Legato's stock price might decline
substantially prior to the closing, thus reducing the value per share to
be received by FullTime's stockholders in the merger;
. The risk associated with attempting to integrate Legato's products with
FullTime's products;
. The risk that the other benefits sought to be achieved by the merger
will not be achieved;
. The risk associated with granting Legato an option to purchase 19.9% of
FullTime common stock and its potential effects on the ability to
consider and negotiate other acquisition proposals;
. The risks associated with entering into a non-solicitation agreement
with Legato regarding potential alternative transactions;
. The risks associated with agreeing to a break-up fee of $2,000,000
payable to Legato if the merger is terminated by Legato following, among
other possible events, the withdrawal or modification by the FullTime
board of directors of its recommendation of the reorganization
agreement;
. The risks associated with FullTime's affiliates entering into the voting
and proxy agreements and the potential effects on the ability to enter
into and consummate other acquisition proposals; and
. Other risks described under the caption "Risk Factors" on page 9.
In the view of the FullTime board of directors, these considerations were not
sufficient, either individually or in the aggregate, to outweigh the advantages
of the proposed merger in the manner in
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which it was proposed. In addition, in the view of the FullTime board of
directors, the inclusion of the non-solicitation agreement, stock option,
break-up fee and the voting and proxy agreements, together with the limited
circumstances under which Fulltime could consider and negotiate other
acquisition proposals, was consistent with the exercise of their fiduciary
obligations under applicable law. These provisions were a condition to Legato's
agreeing to enter into the proposed transaction.
The foregoing discussion of the information and factors considered by the
FullTime board of directors is not intended to be exhaustive, but is believed
to include all material factors considered by the FullTime board of directors.
In view of the wide variety of factors, both positive and negative, considered
by the FullTime board of directors, the FullTime board of directors did not
find it practical to, and did not, quantify or otherwise assign relative
weights to the specific factors considered or necessarily reach a conclusion as
to these factors. Based on the totality of the information and factors
considered, the FullTime board of directors believed and continues to believe
that the merger is in the best interests of FullTime and its stockholders and
continues to recommend approval and adoption of the reorganization agreement
and the merger.
Operations Following the Merger
Following the merger, FullTime will continue its operations as a wholly-owned
subsidiary of Legato. Upon consummation of the merger, the members of
FullTime's board of directors will be Stephen C. Wise and Louis C. Cole. The
membership of the board of directors of Legato will remain unchanged as a
result of the merger. See "Comparison of Rights of Stockholders of Legato and
FullTime" on page 121.
Opinion of Financial Advisor
FullTime retained Hambrecht & Quist to render an opinion as to the fairness
from a financial point of view to the holders of the outstanding shares of
common stock of FullTime as to the exchange ratio to be received by such
holders in the merger. Hambrecht & Quist was selected by the FullTime board of
directors based on Hambrecht & Quist's qualifications, expertise and
reputation, as well as Hambrecht & Quist's historic investment banking
relationship and familiarity with FullTime.
Hambrecht & Quist rendered its oral opinion, which was subsequently confirmed
in writing, on October 25, 1998 to the FullTime board of directors that, as of
that date, the exchange ratio to be received by the holders of FullTime common
stock in the merger was fair from a financial point of view.
No limitations were placed on Hambrecht & Quist by the FullTime board of
directors with respect to the investigation made or the procedures followed in
preparing and rendering its opinion. The Hambrecht & Quist opinion was directed
to, and prepared at the request and for the information of, the FullTime board
of directors and does not constitute a recommendation to any holder of FullTime
common stock as to how any such stockholder should vote with respect to the
merger. The methodology used by Hambrecht & Quist to reach the fairness opinion
formed the basis for the Hambrecht & Quist presentation to the FullTime board
of directors on October 25, 1998.
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The full text of the opinion delivered by Hambrecht & Quist to the FullTime
board of directors, dated October 25, 1998, which sets forth the assumptions
made, general procedures followed, matters considered and limitations on the
scope of review undertaken by Hambrecht & Quist in rendering its opinion, is
attached as Appendix B to this document.
Hambrecht & Quist's opinion is directed only to the fairness, from a
financial point of view, of the consideration to be received by the holders of
FullTime common stock and does not constitute a recommendation to any FullTime
stockholder as to how such stockholder should vote with respect to the merger
agreement. The summary of Hambrecht & Quist's fairness opinion set forth below
is qualified in its entirety by reference to the full text of such fairness
opinion attached hereto as Appendix B. You should read the Hambrecht & Quist
opinion carefully and in its entirety.
In its review of the merger, and in arriving at its opinion, Hambrecht &
Quist, among other things:
. Reviewed some publicly available financial statements and other
information of Legato made available to it from published sources;
. Reviewed certain publicly available financial and operating information,
including certain projections, relating to Legato;
. Discussed the business, financial condition and prospects of Legato with
certain of its officers;
. Reviewed some publicly available financial statements and other
information of FullTime made available to it from published sources and
from the internal records of FullTime;
. Discussed the business, financial condition and prospects of FullTime
with certain of its officers;
. Reviewed the recent reported prices and trading activity for the
FullTime common stock and Legato common stock;
. Compared the financial performance and the price and trading activity of
FullTime common stock and Legato common stock with that of some other
publicly traded companies;
. Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
. Reviewed a draft of the reorganization agreement; and
. Performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and
financial, economic and market data as deemed relevant.
Hambrecht & Quist did not independently verify any of the information
concerning FullTime or Legato considered in connection with its review of the
merger and, for purposes of its opinion, Hambrecht & Quist assumed and relied
upon the accuracy and completeness of all such information. In connection with
its opinion, Hambrecht & Quist did not prepare any independent valuation or
appraisal of any of the assets or liabilities of FullTime or Legato, nor did it
conduct a physical inspection of the properties and facilities of either
company.
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With respect to the financial forecasts and projections used by Hambrecht &
Quist in its analysis, Hambrecht & Quist assumed that these forecasts and
projections reflected the best currently available estimates and judgments of
prospects of FullTime and Legato, respectively. For purposes of its opinion,
Hambrecht & Quist assumed that neither FullTime nor Legato was a party to any
pending transactions, including external financings, recapitalizations or
material merger discussions, other than the merger and those activities
undertaken in the ordinary course of conducting their respective businesses.
Hambrecht & Quist's opinion was necessarily based upon market, economic,
financial and other conditions as they existed and can be evaluated only as of
the date of the opinion and any change in such conditions would require a
reevaluation of its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analyses set forth below does not constitute to be a
complete description of the presentation by Hambrecht & Quist to FullTime's
board of directors. In arriving at its opinion, Hambrecht & Quist did not
attribute any particular weight to any analyses or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, in order to fully understand the financial
analysis used by Hambrecht & Quist, the analysis (tables) must be read together
with the text of each summary. The analyses alone do not constitute a complete
description of the financial analysis. Selecting portions of the analysis could
create an incomplete view of the processes underlying the analyses set forth in
the Hambrecht & Quist presentation to the FullTime board of directors and its
opinion.
In performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of FullTime and Legato. The
analyses performed by Hambrecht & Quist (and summarized below) are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to
be appraisals or to reflect the prices at which businesses actually may be
acquired.
In performing its analyses, Hambrecht & Quist used published Wall Street
projections for both FullTime and Legato for calendar years 1998 and 1999 (the
Base Case).
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to
FullTime's board of directors on October 25, 1998. Certain of the financial
analyses summarized below include information presented in tabular format. In
order to fully understand Hambrecht & Quist's financial analysis, the tables
must be read together with the text of each summary. Considering the data set
forth in the tables below without considering the full narrative description of
the financial analysis, including the methodologies and assumptions underlying
the analyses, could create a misleading or incomplete view of Hambrecht &
Quist's financial analysis.
Contribution Analysis: Hambrecht & Quist analyzed the pro forma contribution
of each of FullTime and Legato to certain calendar 1999 financial statement
categories of the pro forma combined company with no revenue or expense
adjustments. The financial statement categories
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included revenue, operating income and net income. This contribution analysis
was then compared to the pro forma ownership percentage of FullTime and Legato
stockholders in the pro forma post-merger combined company. Hambrecht & Quist
observed that, calculated on a fully-diluted basis, FullTime stockholders are
expected to own approximately 4% of the combined company equity at the close of
the merger and Legato stockholders are expected to own approximately 96% of the
combined company equity at the close of the merger.
Hambrecht & Quist examined the expected contribution to the combined
company's revenues by FullTime using the Base Case for calendar 1999. The
following table summarizes the estimated contribution of FullTime and Legato to
the combined company's projected results:
<TABLE>
<CAPTION>
Calendar Year Calendar Year
1998 1999
(estimated) (estimated)
------------- -------------
<S> <C> <C>
Revenues
Legato......................................... 83.6% 86.4%
FullTime....................................... 16.4 13.6
----- -----
Combined....................................... 100.0 100.0
Operating Income
Legato......................................... NM 97.9
FullTime....................................... NM 2.1
----- -----
Combined....................................... NM 100.0
Net Income
Legato......................................... NM 97.7
FullTime....................................... NM 2.3
----- -----
Combined....................................... NM 100.0
</TABLE>
Hambrecht & Quist determined that the contribution analysis provided
meaningful information in the context of analyzing the fairness of the merger
from a financial view.
Pro Forma Merger Analysis: Hambrecht & Quist analyzed the pro forma impact of
the merger on the combined company's calendar 1999 earnings per share.
Hambrecht & Quist observed that the Base Case resulted in unchanged earnings
per share for the combined company than for Legato as a stand-alone company.
The foregoing analysis did not assume any adjustments in revenues or costs
resulting from the operating synergies potentially realized from the merger.
The actual results and savings achieved by the combined company resulting from
the merger may vary from the projected results and variations may be material.
Hambrecht & Quist determined that the pro forma merger analysis provided
meaningful information in the context of analyzing the fairness of the merger
from a financial view.
Premium Analysis: Hambrecht & Quist compared the implied price per share of
the offer as of October 23, 1998 to similar premiums for certain software and
certain technology transactions under $100 million announced since 1994.
Hambrecht & Quist observed that the average (excluding high and low) one
trading-day premium paid in the selected public company software and selected
technology transactions was approximately 28% and 21%, respectively. This
compared with the proposed acquisition in which, as of October 23, 1998, the
one day premium offered over the closing price for FullTime common stock was
approximately 287%. Hambrecht & Quist also analyzed the
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implied premiums to average historical closing prices for the 5-day, 10-day,
15-day, 20-day, and 30-day trading day periods using the implied offer price
and found that the implied premiums were approximately 339%, 405%, 404%, 434%,
and 457%, respectively, as set forth in the following table:
<TABLE>
<CAPTION>
Average Stock Price Implied
--------------------- Price Premium/
Time Period Legato FullTime Per Share (Discount)
----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
October 23, 1998.................. $ 40.31 $ 2.00 $5.73 286.5%
5 Day Average..................... 40.06 1.68 5.69 338.7
10 Day Average.................... 40.21 1.41 5.71 405.0
15 Day Average.................... 38.38 1.35 5.45 403.7
20 Day Average.................... 40.99 1.34 5.82 434.3
30 Day Average.................... 44.69 1.39 6.35 456.8
</TABLE>
Hambrecht & Quist determined that the premium analysis provided meaningful
information in the context of analyzing the fairness of the merger from a
financial view.
Discounted Cash Flow Analysis: Hambrecht & Quist analyzed the theoretical
valuation of FullTime based on discounted anticipated future cash flows using
projected financial performance estimates of FullTime. Based on this discounted
cash flow analysis, FullTime's implied equity value per share ranged from
approximately $2.71 per share to approximately $4.17 per share. This compared
with an offer in the proposed acquisition of approximately $5.73 per share for
FullTime common stock, based on the closing price of Legato common stock on
October 23, 1998. However, because of the nature of FullTime's business, the
absence of meaningful future cash flow projections, and the disproportionate
value of the business attributable to periods for which there were no cash flow
projections available, Hambrecht & Quist determined that this analysis did not
provide meaningful information in the context of analyzing the fairness from a
financial point of view of the merger.
Analysis of Publicly Traded Comparable Companies: To provide contextual data
and comparative market information, Hambrecht & Quist compared selected
historical and projected financial information of FullTime to publicly traded
companies Hambrecht & Quist deemed to be comparable to FullTime. Using publicly
available information, Hambrecht & Quist compared selected historical and
projected financial, operating and stock market performance data of FullTime
and Legato to the corresponding data of the numerous comparable companies.
Companies deemed comparable included selected public systems management
software companies. The most relevant comparable companies consisted of:
BMC Software, Inc. (BMCS) Boole & Babbage, Inc. (BOOL)
Computer Associates International (CA) Compuware Corporation (CPWR)
New Dimension Software (DDDDF) Novadigm, Inc. (NVDM)
Platinum Technology International (PLAT)Sterling Software, Inc. (SSW)
Veritas Software Corp.(VRTS) Wall Data, Inc. (WALL)
Such information considered by Hambrecht & Quist included the ratio of:
. market value to latest-twelve-month revenues;
. market value to projected calendar 1999 net income;
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. market value to projected calendar 1998 and 1999 revenue; and
. market value to book value.
Hambrecht & Quist also examined the ratio of the enterprise value (market
value plus debt less cash) to:
. latest-twelve-month revenues;
. projected calendar 1999 net income;
. projected calendar 1998 and 1999 revenue; and
. book value.
The foregoing multiples were applied to historical financial results of
FullTime for the latest-twelve-month period ended September 30, 1998 and
projected Base Case financial results of FullTime. Hambrecht & Quist determined
average (excluding high and low) multiples for the system management software
comparables of 2.4 times latest-twelve-month revenue, 19.1 times projected
calendar 1999 net income, 2.3 times projected calendar 1998 revenue, 1.9 times
projected calendar 1999 revenue, and 4.4 times book value. Hambrecht & Quist
examined a second group of comparable companies. These companies consisted of
software companies with market capitalization of between $15 and $50 million.
Hambrecht & Quist determined average (excluding high and low) multiples for the
second group of comparables of .5 times latest-twelve-month revenue, 13.7 times
projected calendar 1999 net income, .5 times projected calendar 1998 revenue,
.4 times projected calendar 1999 revenue, and 1.6 times book value.
Based on the analysis of publicly traded comparable companies, FullTime's
implied equity value per share applying the two groups of comparables'
multiples to historical results and the Base Case ranged from approximately
$1.13 per share to approximately $6.53 per share. This compared with an offer
in the proposed acquisition of approximately $5.73 per share for FullTime
common stock, based on the closing price of Legato common stock on October 23,
1998. Hambrecht & Quist determined that the analysis of publicly traded
comparable companies provided meaningful information in the context of
analyzing the fairness of the merger from a financial view.
Analysis of Selected Merger and Acquisition Transactions: Hambrecht & Quist
compared the proposed acquisition with selected merger and acquisition
transactions. Hambrecht & Quist reviewed publicly available financial
information for selected mergers and acquisitions involving companies that are
affiliated with the software sector. This analysis included 67 transactions
with an aggregate consideration less than $100 million involving companies in
the software industry and 111 transactions with an aggregate consideration less
than $100 million involving selected technology transactions. Hambrecht & Quist
also analyzed premiums of 77 selected technology transactions. In examining
these transactions, Hambrecht & Quist analyzed certain income statement and
balance sheet parameters of the acquired company relative to the consideration
offered in the merger. The foregoing multiples were applied to historical
financial results of FullTime for the twelve-month period ended September 30,
1998. Multiples analyzed included consideration offered to latest-twelve-month
revenue and book value. The consideration offered in the software transactions
under $100 million was an average multiple of 2.0 times latest-twelve-month
revenue, and 4.5 times book value. The consideration offered in the technology
transactions under $100 million was an average
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multiple of 2.2 times latest-twelve-month revenue, and 5.2 times book value.
Based on the analysis of selected merger and acquisition transactions,
FullTime's implied equity value per share applying selected transaction
multiples to historical results ranged from values between approximately
$1.76 per share to approximately $5.86 per share. This result compared with an
implied value in the proposed acquisition of approximately $5.73 per share for
FullTime common stock, based on the closing price of Legato common stock on
October 23, 1998.
No company or transaction used in the "Analysis of Publicly Traded Comparable
Companies" and "Analysis of Selected Merger and Acquisition Transactions" is
identical to FullTime or the merger. Accordingly, an analysis of the results of
the foregoing is not mathematical; rather it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading values
of the companies or company to which they are compared. However, Hambrecht &
Quist determined that the analysis of selected merger and acquisition
transactions provided meaningful information in the context of analyzing the
fairness of the merger from a financial view.
The foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of its opinion, which is attached as
Appendix B to this proxy statement/prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, strategic transactions, corporate restructurings,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Hambrecht & Quist has acted as a financial advisor to the FullTime Board of
Directors and will receive a fee for rendering of the fairness opinion.
Pursuant to an engagement letter dated October 15, 1998, FullTime has agreed
to pay Hambrecht & Quist $100,000 in connection with the delivery of a fairness
opinion. This fee is not contingent upon the closing of the proposed merger.
FullTime also has agreed to reimburse Hambrecht & Quist for reasonable out-of-
pocket expenses and to indemnify Hambrecht & Quist against certain liabilities,
including liabilities under the federal securities laws or relating to or
arising out of Hambrecht & Quist's engagement as financial advisor.
In the past, Hambrecht & Quist has provided investment banking and other
financial advisory services to both FullTime and Legato and Hambrecht & Quist
has received fees for rendering these services. In particular, Hambrecht &
Quist acted as lead managing underwriter in FullTime's initial public offering
on February 12, 1997 and received $751,077 in connection therewith.
Additionally, Hambrecht & Quist and its affiliates beneficially own a total of
approximately 686,929 shares of FullTime common stock. Hambrecht & Quist also
acted as a managing underwriter in connection with Legato's initial public
offering in 1995. In the ordinary course of business, Hambrecht & Quist acts as
a market maker and broker in the publicly traded securities of FullTime and
Legato. Hambrecht & Quist also provides research coverage for FullTime and
Legato. In the ordinary course of business, Hambrecht & Quist actively trades
in the equity and derivative securities of FullTime and Legato for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities. Hambrecht & Quist may in the
future provide additional investment banking or other financial advisory
services to FullTime and Legato.
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The Agreement and Plan of Reorganization
Representations, Warranties and Covenants
The reorganization agreement contains various representations and warranties,
including representations by both Legato and FullTime as to:
. Their organization and capitalization;
. Their authority to enter into the reorganization agreement and to
consummate the merger;
. The existence of liabilities; and
. The absence of material undisclosed liabilities and changes in their
businesses.
FullTime and Legato have agreed to conduct their business and their
subsidiaries' businesses in the ordinary course and in substantially the same
manner as conducted before signing the reorganization agreement. FullTime also
agreed to:
. Pay its debts and taxes when due;
. Preserve intact its present business organization;
. Keep available the services of its present officers and key employees;
and
. Preserve its relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it.
The reorganization agreement restricts FullTime's and its subsidiaries'
ability, without Legato's prior written consent, to among other things:
. Amend its certificate of incorporation or bylaws;
. Declare or pay any dividends or other distributions on its capital
stock;
. Split, combine or reclassify its capital stock;
. Repurchase directly or indirectly its capital stock;
. Enter into, violate or amend the terms of any material contract,
agreement, license or commitment;
. Accelerate, amend or change the terms, including vesting, of its
outstanding stock options;
. Issue, purchase or sell or authorize the issuance, purchase or sale of
capital stock, convertible securities, warrants and options;
. Transfer or license or extend, amend or modify in any material respect
its intellectual property;
. Sell, dispose of, or encumber its material assets;
. Incur or commit to indebtedness for borrowed money;
. Enter into operating leases;
. Pay, discharge or satisfy claims, liabilities and obligations;
. Incur or commit to capital expenditures;
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. Reduce insurance coverage levels;
. Increase or modify compensation or severance arrangements;
. Commence lawsuits and arbitration proceedings;
. Make material tax elections or amend tax returns;
. Take any action likely to interfere with Legato's ability to account for
the merger as a pooling;
. Materially revalue its assets; or
. Take or agree to take in writing any of the actions described above.
The reorganization agreement restricts Legato and its subsidiaries' ability,
without FullTime's prior written consent, to among other things:
. Declare or pay any dividends or other distributions on its capital
stock;
. Split, combine or reclassify its capital stock; or
. Take any action likely to interfere with Legato's ability to account for
the merger as a pooling.
No Solicitation of Transactions
FullTime has agreed not to directly or indirectly:
. Solicit, initiate or encourage any inquiries or proposals that
constitute or could reasonably lead to an acquisition proposal; or
. Engage in negotiations or discussions for, or provide any non-public
information to any third party relating to, an acquisition.
For purposes of the reorganization agreement, an "acquisition proposal" is a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock, including by way of a
tender offer, or similar transaction.
However, FullTime may furnish non-public information to, or enter into
discussions or negotiations with respect to a written unsolicited acquisition
proposal, so long as:
. The FullTime board of directors has determined that their fiduciary
duties under applicable law require them to take those actions;
. The discussions or negotiations are reasonably likely to result in a
deal more favorable from a financial point of view than the proposed
merger with Legato; and
. The other person or entity signs a confidentiality agreement similar to
the confidentiality agreement Legato and FullTime signed.
FullTime must advise Legato in writing of such disclosure or discussions,
including the party to whom the disclosure was made or with whom the
discussions or negotiations occur.
No Change of Recommendation
The FullTime board of directors may not agree to or recommend any acquisition
proposal or withdraw or modify its recommendation of the reorganization
agreement or the merger in any
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manner adverse to Legato. However, the FullTime board of directors may
recommend an unsolicited, bona fide, written acquisition proposal to the
FullTime stockholders, or withdraw or modify its recommendation of the
reorganization agreement and the merger, in connection with an unsolicited,
bona fide, written acquisition proposal, so long as:
. The FullTime board of directors believes that the acquisition proposal
is reasonably capable of being completed on the terms proposed and,
would, if consummated, result in a transaction more favorable from a
financial point of view than the proposed Legato merger; and
. The FullTime board of directors determines that its fiduciary duties
under applicable law require it to take this action.
FullTime must notify Legato immediately after receipt of:
. Any acquisition proposal;
. Any request for non-public information in connection with an acquisition
proposal; or
. Any request for access to its properties, books or records by any person
or entity indicating that it is considering making, or has made, an
acquisition proposal.
FullTime must keep Legato informed of the status of any acquisition related
discussions or negotiations and the terms being discussed or negotiated.
Limitations on Ability to Amend FullTime Rights Plan
FullTime enacted its rights plan by entering into a rights agreement dated
July 31, 1997, with ChaseMellon Shareholder Services, L.L.C., as rights agent.
FullTime has agreed not to amend or modify the FullTime rights plan in the
specified manner. However, at any time after the earlier of January 15, 1999 or
ten days after the effective date of Legato's registration statement on Form S-
4, FullTime may take any action under the FullTime rights plan necessary to
permit a qualified tender offer. A "qualified tender offer" is an all cash
tender offer for all outstanding shares of FullTime common stock, which:
. Is more favorable from a financial point of view than the proposed
Legato merger;
. Is capable of being financed;
. Is not subject to non-customary, material conditions; and
. Would not close prior to the earlier of a negative FullTime
stockholders' vote on the reorganization agreement or the termination of
the reorganization agreement.
For a description of the FullTime rights plan, see "Comparison of Capital
Stock--Description of FullTime Capital Stock--FullTime Rights Agreement" on
page 120.
Conditions to the Merger
FullTime's and Legato's respective obligations to consummate the merger are
subject to the satisfaction or waiver by them of the following conditions
before completion of the merger:
. The reorganization agreement must be adopted by holders of at least a
majority of the outstanding FullTime common stock;
. No temporary restraining order, preliminary or permanent injunction or
other court order preventing the consummation of the merger can be in
effect;
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. No proceeding brought by an administrative agency or commission or other
governmental authority seeking a restraint or prohibition of the merger
can be pending;
. No action can be taken or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the merger, which
makes the consummation of the merger illegal;
. Legato's registration statement on Form S-4 must be effective and no
stop order suspending the effectiveness of the registration statement or
any part thereof can be issued and no proceeding for that purpose, and
no similar proceeding in respect of this proxy statement/prospectus, can
be initiated or threatened in writing by the Commission;
. All necessary governmental approvals, waivers and consents in connection
with the merger and the transactions contemplated by the reorganization
agreement must be timely obtained and all waiting periods under
applicable antitrust laws must be expired or terminated;
. Each of FullTime and Legato must receive a written opinion from their
respective counsel to the effect that the merger will constitute a
reorganization within the meaning of Section 368 of the Internal Revenue
Code;
. Legato and FullTime must file with the Nasdaq National Market a
Notification Form for Listing of Additional Shares with respect to the
shares of Legato common stock issuable in exchange for FullTime common
stock in the merger and upon exercise of the options under the FullTime
stock option plans assumed by Legato;
. Legato must receive a letter from Deloitte & Touche LLP, dated as of the
closing date and addressed to Legato, FullTime and
PricewaterhouseCoopers LLP, reasonably satisfactory in form and
substance to Legato and PricewaterhouseCoopers LLP, to the effect that,
after reasonable investigation, Deloitte & Touche LLP is not aware of
any fact concerning FullTime or any of FullTime's stockholders or
affiliates that could preclude Legato from accounting for the merger as
a "pooling of interests" in accordance with generally accepted
accounting principles, Accounting Principles Board Opinion No. 16 and
all published rules, regulations and policies of the Commission; and
. Legato must receive a letter from PricewaterhouseCoopers LLP, reasonably
satisfactory in form and substance to Legato, to the effect that Legato
may account for the merger as a "pooling of interests" in accordance
with generally accepted accounting principles, Accounting Principles
Board Opinion No. 16 and all published rules, regulations and policies
of the Commission.
FullTime's obligations to consummate the merger are subject to the
satisfaction or waiver by it of the following conditions before completion of
the merger:
. Each representation and warranty of Legato and Merger Sub contained in
the reorganization agreement:
(1) must have been true and correct as of the date of the
reorganization agreement; and
(2) must be true and correct on and as of the completion of the merger
except,
(a) in each case, or in the aggregate, as does not constitute a
material adverse effect on Legato and Merger Sub, taken as a
whole,
(b) for changes contemplated by the reorganization agreement and
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(c) for those representations and warranties that address matters
only as of a particular date, which representations and
warranties must be true and correct as of that particular date;
. Legato and Merger Sub must have performed or complied in all material
respects with all agreements and covenants required by the
reorganization agreement to be performed or complied with by them on or
prior to the completion of the merger;
. No material adverse effect on Legato has occurred since the date of the
reorganization agreement; and
. FullTime must receive from each of Legato's affiliates an executed
affiliate agreement.
For purposes of the reorganization agreement and this proxy
statement/prospectus, any reference to a "material adverse effect" with respect
to any entity or group of entities means any event, change, condition or effect
that is materially adverse to the condition, financial or otherwise,
properties, assets, liabilities, business, operations or results of operations
of the relevant entity and its subsidiaries, taken as a whole. However, none of
the following is a "material adverse effect":
. Changes, events, violations, inaccuracies, circumstances and effects
that are caused by conditions affecting the United States economy as a
whole or affecting the industry in which the entity completes as a
whole, which conditions do not affect the entity in a disproportionate
manner;
. A shortfall in revenues of the entity as a result of delays or
cancellations in customer orders, which delays or cancellations result
from the announcement and pendency of the merger; or
. The loss of employees resulting from the announcement and pendency of
the merger.
Legato's and Merger Sub's respective obligations to consummate the merger are
subject to the satisfaction or waiver by them of the following conditions
before completion of the merger:
.Each representation and warranty of FullTime contained in the
reorganization agreement
(1) must have been true and correct as of the date of the
reorganization agreement and
(2) must be true and correct on and as of the completion of the merger
except:
(a) in each case, or in the aggregate, as does not constitute a
material adverse effect on FullTime,
(b) for changes contemplated by the reorganization agreement and
(c) for those representations and warranties that address matters
only as of a particular date, which representations and
warranties must be true and correct as of that particular date;
. FullTime must have performed or complied in all material respects with
all agreements and covenants required by the reorganization agreement to
be performed or complied with by it at or prior to the completion of the
merger;
. No material adverse effect on FullTime has occurred since the date of
the reorganization agreement;
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. Legato must receive from each of FullTime's affiliates an executed
FullTime affiliate agreement;
. Mr. Malmstedt and Mr. Symons must have entered into an employment
agreement with FullTime;
. Mr. Thau must have entered into a separation agreement with Legato;
. If requested by Legato, FullTime must have terminated its 401(k) plan;
and
. All actions necessary to extinguish and cancel all outstanding rights
under the FullTime rights plan or render the FullTime rights
inapplicable to the merger must have been taken.
Closing
As soon as practicable after the satisfaction or waiver of each of the
conditions set forth in the reorganization agreement, or at another time as
FullTime and Legato agree, FullTime and Legato will cause the merger to be
consummated by filing the certificate of merger, together with the required
officers' certificates, with the Secretary of State of the State of Delaware.
It is anticipated that, assuming all conditions are met, the merger will be
effective on approximately April 19, 1999.
Amendments, Termination and Waiver
Amendment. The reorganization agreement may be amended at any time; provided
that an amendment made subsequent to adoption of the reorganization agreement
by FullTime stockholders may not:
. Alter the amount or kind of consideration to be received in exchange for
the FullTime common stock;
. Alter any term of the certificate of incorporation of the surviving
corporation to be effected by the merger; or
. Alter any of the terms and conditions of the reorganization agreement if
the alteration or change would adversely affect the holders of FullTime
common stock.
Termination. The reorganization agreement may be terminated at any time prior
to the completion of the merger, whether before or after approval of the merger
by the FullTime stockholders,
. By the written mutual consent of Legato and FullTime;
. By either FullTime or Legato if the merger has not been consummated by
May 31, 1999;
. By either FullTime or Legato if a court of competent jurisdiction or
other governmental entity issues a nonappealable final order, decree or
ruling or taken any other nonappealable final action, in each case,
having the effect of permanently restraining, enjoining or otherwise
prohibiting the merger;
. By either Legato or FullTime, if at the FullTime stockholder meeting,
the requisite vote of the stockholders of FullTime in favor of the
adoption of the reorganization agreement has not been obtained;
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. By Legato, if
(1) the FullTime board of directors has withdrawn or modified its
recommendation of the reorganization agreement or the merger;
(2) the FullTime board of directors fails to reaffirm its unanimous
recommendation of the reorganization agreement or the merger within
ten (10) business days after Legato requests in writing that the
FullTime board recommendation be reaffirmed at any time following
the public announcement of another acquisition proposal. Louis
Cole, a director of both FullTime and Legato, may abstain from
voting on any reaffirmation, recommendation or request;
(3) the FullTime board of directors has recommended to the FullTime
stockholders any transaction which could result in a party other
than Legato acquiring 15% or more of the equity or assets of
FullTime;
(4) an entity or person other than Legato or its affiliates commences a
tender offer or exchange offer for 15% or more of the outstanding
shares of FullTime common stock and the FullTime board of directors
has not sent to its security holders pursuant to Rule 14e-2 of the
Securities Exchange Act, within ten (10) business days after that
tender or exchange offer is first published, sent or given, a
statement disclosing that FullTime recommends rejection of that
tender or exchange offer; or
(5) FullTime fails to call and hold the meeting of its stockholders to
approve the merger by the date immediately preceding May 31, 1999
and that failure constitutes a material breach of FullTime's
obligations regarding the preparation and content of the proxy
statement or the timely calling of the FullTime stockholders
meeting; or
. By FullTime or Legato, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth
in the reorganization agreement, which breach
(1) causes the conditions in the reorganization agreement not to be
satisfied, and
(2) is not cured within twenty business days following notice of the
breach.
Waiver. At any time prior to the completion of the merger any party to the
reorganization agreement may, to the extent legally allowed,
. Extend the time for the performance of any of the obligations or other
acts of the other parties to the reorganization agreement;
. Waive any inaccuracies in the representations and warranties made to
such party contained in the reorganization agreement or in any document
delivered pursuant hereto; and
. Waive compliance with any of the agreements or conditions for its
benefit contained in the reorganization agreement.
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Fees and Expenses; Break-up Fee
Except as described below, whether or not the merger is consummated, all
fees and expenses incurred in connection with the reorganization agreement and
the related transactions will be paid by the party incurring that expense.
However, Legato and FullTime will share equally all fees and expenses, other
than attorneys' fees, incurred in relation to the printing and filing of this
proxy statement/prospectus, any related preliminary materials, Legato's
registration statement on Form S-4, financial statements exhibits and any
amendments or supplements to Legato's registration statement.
FullTime will pay Legato a termination fee of $2,000,000 within one business
day after termination of the reorganization agreement by Legato as a result of
one of the following events:
. The FullTime board of directors withdraws or modifies its recommendation
of the reorganization agreement or the merger;
. The FullTime board of directors fails to reaffirm its recommendation of
the reorganization agreement or the merger within ten (10) business days
after Legato requests in writing that
the FullTime board recommendation be reaffirmed at any time following
the public announcement of an acquisition proposal;
. The FullTime board of directors recommends to the FullTime stockholders
any transaction which could result in a party other than Legato
acquiring 15% or more of the equity or assets of FullTime;
. An entity or person other than Legato or one of its affiliates commences
a tender offer or exchange offer for 15% or more of the outstanding
shares of FullTime common stock and the FullTime board of directors
shall not have sent to its security holders pursuant to Rule 14e-2 of
the Securities Exchange Act within ten (10) business days after that
tender or exchange offer is first published, sent or given, a statement
disclosing that the FullTime board of directors recommends rejection of
that tender or exchange offer; or
. FullTime fails to call and hold the meeting of its stockholders to
approve the merger by the date immediately preceding May 31, 1999 and
this failure constitutes a material breach of obligations of FullTime.
Indemnification and Insurance
The reorganization agreement provides that Legato will, from and after the
completion of the merger, defend and hold harmless each person who is an
officer, director or employee of FullTime or any of its subsidiaries in
respect of acts or omissions occurring on or prior to the completion of the
merger to the extent provided under FullTime's certificate of incorporation,
its bylaws in effect on the date of the reorganization agreement and
indemnification agreements in effect as of the completion of the merger. This
indemnification is subject to any limitation imposed from time to time under
the applicable law.
The reorganization agreement also provides that for a period of six (6)
years after the completion of the merger, Legato will use its commercially
reasonable efforts to maintain in effect, if available, directors' and
officers' liability insurance covering those persons who were covered by
FullTime's directors' and officers' liability insurance policy as of the date
of execution of the
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reorganization agreement on terms substantially similar to those applicable to
the current directors and officers of FullTime. In no event, however, will
Legato or the surviving corporation be required to spend more than $180,000 in
the aggregate for this coverage or the coverage that may be available for
$180,000.
Interests of Certain Persons in the Merger
In considering the recommendation of the merger by FullTime's board of
directors, you should be aware that certain FullTime officers and directors
have interests in the merger, including those referred to below, that presented
them with potential conflicts of interests. The FullTime board of directors was
aware of these potential conflicts and considered them along with the other
matters described in "The FullTime Stockholder Meeting--FullTime Board
Recommendation" on page 35 and "The Merger and Related Transactions--Reasons
for the Merger" on page 42.
Louis C. Cole, a director of FullTime, is also the President, Chief Executive
Officer and Chairman of Legato.
As of December 31, 1998, directors and executive officers of FullTime and
their affiliates beneficially owned an aggregate of 2,254,306 shares of
FullTime common stock, including shares of FullTime common stock subject to
outstanding stock options exercisable within 60 days of December 31, 1998.
Based on the last reported sales price for Legato common stock on March 12,
1999 of $56.625 per share, the aggregate dollar value of the shares of Legato
common stock to be received in the merger by FullTime's executive officers and
directors and their affiliates is approximately $18.1 million.
Certain FullTime directors and executive officers have agreed to vote all
shares of FullTime common stock under their control in favor of the merger and,
in connection with agreements to vote, have executed voting agreements and
granted irrevocable proxies to Legato. See "Related Agreements--Voting and
Proxy Agreements" on page 62.
David Malmstedt, the Senior Vice President, Field Sales Operations of
FullTime, and George J. Symons, the Vice President, Engineering/Technical
Services of FullTime, have entered into employment agreements with FullTime.
See "Related Agreements--Employment and Separation Agreements" on page 63.
Richard G. Thau, the President, Chief Executive Officer and Chairman of the
FullTime board of directors, has entered into a separation agreement with
Legato. See "Related Agreements--Employment and Separation Agreements" on page
63.
Under the FullTime 1997 stock option plan, options to purchase FullTime
common stock that were granted to non-employee members of the FullTime board of
directors after FullTime's initial public offering will become fully
exercisable and vested in connection with the merger.
Under FullTime's 1997 stock option plan, in the event that the employment of
an optionee, including a FullTime officer, is involuntarily terminated within
twelve (12) months following the completion of the merger, then the
exercisability or vesting of each outstanding option held by such
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optionee will automatically accelerate and each option will become fully
vested. The accelerated option will remain exercisable until the earlier of:
. The expiration of the option term or
. The expiration of the one-year period measured from the date of the
involuntary termination.
Involuntary termination is defined in FullTime's 1997 stock option plan to
include a termination by FullTime without misconduct or a voluntary resignation
by the optionee following:
. A change in the optionee's position that materially reduces the
optionee's level of responsibility,
. A reduction by more than 15% in the optionee's level of compensation,
including base salary, fringe benefits and participation in bonus or
incentive programs, or
. A change in the optionee's place of employment that is more than 50
miles from the optionee's place of employment prior to the change,
provided such change or reduction is effected without the optionee's
consent.
The reorganization agreement provides for indemnification and insurance
benefits. See "The Agreement and Plan of Reorganization-Indemnification and
Insurance" on page 60.
Related Agreements
Voting and Proxy Agreements
In connection with the merger, certain FullTime stockholders have entered
into voting and proxy agreements. The terms of the voting and proxy agreements
provide that:
. These stockholders may not transfer, sell, exchange, pledge or otherwise
dispose of or encumber their shares of FullTime common stock
beneficially owned by them, or any new shares of such stock they may
acquire, at any time prior to the termination of such agreement unless
the transferee of such shares agrees to be bound by the voting and proxy
agreement; and
. These stockholders will vote all shares of FullTime common stock
beneficially owned by them in favor of the approval of the
reorganization agreement and approval of the merger.
These voting and proxy agreements include irrevocable proxies whereby the
relevant FullTime stockholders provide to Legato the right to vote their shares
on the proposals relating to the reorganization agreement and the merger at the
meeting of FullTime stockholders to approve the merger. As of December 31,
1998, holders of approximately 20.9% of the shares, including shares that can
be acquired upon stock option exercises within 60 days of December 31, 1998, of
FullTime common stock entitled to vote at the stockholder meeting have entered
into voting and proxy agreements. The voting and proxy agreements terminate on
the earlier of (1) the completion of the merger or (2) the termination of the
reorganization agreement in accordance with its terms.
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Affiliate Agreements
In connection with the merger, each member of the FullTime board of directors
and the officers and stockholders who are affiliates of FullTime within the
meaning of Rule 145 promulgated under the Securities Act, have executed the
FullTime affiliate agreement. Accordingly, Legato will be entitled to place
appropriate legends on the certificates evidencing any Legato common stock to
be received by a FullTime affiliate pursuant to the terms of the reorganization
agreement, and to issue appropriate stop transfer instructions to the transfer
agent for the Legato common stock, consistent with the terms of the FullTime
affiliate agreement. Pursuant to these agreements, these directors, officers
and stockholders have also acknowledged the resale restrictions imposed by Rule
145 under the Securities Act on shares of Legato common stock to be received by
them in the merger. Before FullTime and Legato can effect the merger as a
pooling-of-interests transactions, each affiliate of FullTime and Legato, as
defined in Rule 145 of the Securities Act, must execute and deliver an
agreement that the affiliate will not sell or otherwise dispose of Legato
common stock or FullTime common stock during:
. The thirty (30) day period prior to the completion of the merger; or
. After the completion of the merger until financial results covering at
least thirty (30) days of the combined operations of Legato and FullTime
have been published.
Thereafter, it is expected that affiliates of FullTime and Legato will be
able to sell shares of Legato common stock without registration, subject to the
limitations of the Securities Act and the rules and regulations of the
Commission. These sales restrictions are set forth in the FullTime affiliate
agreement and a separate affiliate agreement executed by Legato's affiliates.
Employment and Separation Agreements
Employment Agreements. FullTime has entered into employment agreements with
each of Messrs. David R. Malmstedt and George J. Symons. The employment
agreements are contingent upon the consummation of the merger and will become
effective upon completion of the merger. The employment agreements provide that
if either employee is terminated for any reason other than cause during the
initial one-year term of employment, then Legato will pay the terminated
employee his base compensation for a period of 12 months following the
termination. During this 12-month period, the terminated employee will also be
eligible to participate in the FullTime employee benefit plans to the extent
permitted under such plans. If either employee voluntarily terminates his
employment or Legato terminates either employee for cause, then that employee
will be paid all salary and benefits through the date of termination of
employment, but nothing else.
The employment agreements also provide that if either employee's employment
terminates for any reason within one year after the completion of the merger,
then for a one-year period following termination, that employee will not,
subject to certain exceptions:
. Participate or engage in the design, development, manufacture,
production, marketing, sale or servicing of any product, or the
provision of any service, that directly relates to FullTime's or
Legato's existing business; or
. Permit the employee's name to be used in connection with a business
competitive with FullTime's or Legato's business.
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Additionally, during either employee's employment with FullTime and for one
year after termination of such employment, neither employee will, directly or
indirectly, solicit or attempt to solicit the employment of any employee of
FullTime, Legato or its affiliates or the business of any customer of FullTime,
Legato or any of its affiliates in a line of business that is competitive with
the FullTime's or Legato's business.
During their employment with FullTime, Messrs. Malmstedt and Symons will
continue to vest in outstanding options to purchase FullTime common stock that
will be assumed by Legato in the merger.
Separation Agreement. Legato has entered into a separation agreement with Mr.
Richard G. Thau under which he will receive a specified fee consistent with his
compensation in the past year for services during a 12-month period starting at
the completion of the merger. The separation agreement is contingent upon the
consummation of the merger and will become effective at the completion of the
merger. Mr. Thau will also receive an option for 25,000 shares of Legato common
stock that vests over the twelve month period starting at the completion of the
merger. During this period, Mr. Thau will continue to vest in outstanding
options to purchase FullTime common stock that will be assumed by Legato in the
merger.
In the separation agreement, Mr. Thau released Legato and FullTime from
claims relating to wrongful termination. In addition, during the twelve month
period starting at the completion of the merger, Mr. Thau will not, directly or
indirectly;
. Subject to certain exceptions, participate or engage in the design,
development, manufacture, production, marketing, sale or servicing of
any product, or the provision of any service, that now or in the future
competes with FullTime's or Legato's business in the United States or in
any country specifically identified;
. Divert or attempt to divert from Legato or FullTime any business that
Legato or FullTime enjoyed or solicited from its customers during the
twelve month period starting at the completion of the merger; or
. Encourage or solicit any service provider of Legato or its subsidiaries,
including but not limited to employees, consultants or temporary
employees or other service providers, to leave the employment of, or
terminate their service relationship with, Legato or its subsidiaries
for any reason.
California law may make it difficult to enforce any of the non-competition or
non-solicitation provisions contained in Mr. Thau's separation agreement or the
employment agreements with Messrs. Malmstedt and Symons.
Stock Option Agreement
At the same time they entered into the reorganization agreement, FullTime and
Legato entered into a stock option agreement, a copy of which is attached as
Appendix C to this proxy statement/prospectus and is incorporated herein by
reference. Pursuant to the stock option agreement, FullTime agrees to grant to
Legato an irrevocable option to acquire up to a number of shares of the
FullTime common stock equal to 19.9% of the issued and outstanding shares of
capital stock of
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FullTime as of the first date, if any, upon which an "exercise event" occurs,
in exchange for $5.73 per share. An "exercise event" occurs when Legato has
terminated the reorganization agreement after:
. The FullTime board of directors has withdrawn or modified its
recommendation of the reorganization agreement or the merger;
. The FullTime board of directors fails to reaffirm its unanimous
recommendation of the reorganization agreement or the merger within ten
(10) business days after Legato requests in writing that this
recommendation be reaffirmed at any time following the public
announcement of an acquisition proposal. Louis Cole, a director of both
FullTime and Legato, may abstain from voting on all these matters;
. The FullTime board of directors has recommended to the FullTime
stockholders any transaction which could result in a party other than
Legato acquiring 15% or more of the equity or assets of FullTime;
. A person or entity other than Legato or one of its affiliates commences
a tender offer or exchange offer for 15% or more of the outstanding
shares of FullTime common stock and the FullTime board of directors has
not sent to its security holders pursuant to Rule 14e-2 within ten (10)
business days after the tender or exchange offer is first published,
sent or given, a statement disclosing that the FullTime board of
directors recommends rejection of the tender or exchange offer; or
. FullTime fails to call and hold the meeting of it stockholders to
approve the merger by the date immediately preceding May 31, 1999 and
this failure constitutes a material breach of FullTime's obligations
regarding the preparation and content of the proxy statement or the
timely calling of the FullTime stockholders meeting.
In no event will Legato receive more than $1,500,000 in profit as a result of
exercise of the option provided for in the stock option agreement.
The stock option agreement will terminate upon the earliest of:
. The completion of the merger;
. Twelve (12) months following the termination of the reorganization
agreement for the reasons which result in an exercise event; or
. Upon termination of the reorganization agreement for any reason other
than those which result in an exercise event.
Regulatory Matters
Under the Hart-Scott Rodino Act, and the rules promulgated thereunder by the
Federal Trade Commission, the merger may not be consummated until:
. Notifications have been given and certain information has been furnished
to the Federal Trade Commission and the Antitrust Division of the
Department of Justice; and
. Specified waiting period requirements have been satisfied.
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Each of Legato and FullTime filed their respective notification and report
forms required under the Hart-Scott Rodino Act with the Federal Trade
Commission and the Antitrust Division on November 19, 1998. The applicable
waiting period under the Hart-Scott Rodino Act was terminated on December 7,
1998. At any time before or after consummation of the merger, the Federal Trade
Commission, the Antitrust Division, the state attorneys general or others could
take action under the antitrust laws with respect to the merger, including
seeking to enjoin the consummation of the merger or seeking divestiture of
substantial assets of Legato or FullTime.
Based on information available to them, Legato and FullTime believe that the
merger will not violate federal or state antitrust laws. However, there can be
no assurance that a challenge to the consummation of the merger on antitrust
grounds will not be made or that, if such a challenge were made, Legato and
FullTime would prevail or would not be required to accept additional
conditions, possibly including certain divestitures or hold-separate
arrangements, in order to consummate the merger.
Certain Federal Income Tax Considerations
In the opinions of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, and Wilson Sonsini Goodrich & Rosati, Professional Corporation, the
following discussion addresses the material federal income tax considerations
relevant to the merger that may be applicable to you. These opinions and the
following discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended ("IRS code"), existing treasury regulations
and current administrative rulings and court decisions, all of which are
subject to change. Any such change, which may or may not be retroactive, could
alter the tax consequences to Legato, FullTime or you and the other FullTime
stockholders.
You should be aware that this discussion does not deal with all federal
income tax considerations that may be relevant to particular FullTime
stockholders that are subject to special rules or that may be important in
light of such stockholders' individual circumstances, such as stockholders who:
. Are dealers in securities;
. Are subject to the alternative minimum tax provisions of the IRS code;
. Are foreign persons or entities;
. Are financial institutions or insurance companies;
. Do not hold their FullTime shares as capital assets;
. Acquired their shares in connection with the stock option or stock
purchase plans or in other compensatory transactions;
. Hold FullTime common stock as part of an integrated investment
(including a "straddle" or "conversion" transaction) comprised of shares
of FullTime common stock and one or more other positions; or
. May hold FullTime common stock subject to the constructive sale
provisions of Section 1259 of the IRS code.
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In addition, the following discussion does not address:
. Tax consequences of the merger under foreign, state or local tax laws;
. Tax consequences of transactions effectuated before, after or
concurrently with the merger (whether or not any such transactions are
undertaken in connection with the merger) including any transaction in
which FullTime shares are acquired or Legato shares are disposed of; or
. Tax consequences to holders of options, warrants or similar rights to
acquire FullTime common stock, including the assumption by Legato of
outstanding options and subscriptions to acquire FullTime common stock.
Accordingly, you are urged to consult your own tax advisor as to the specific
tax consequences of the merger, including the applicable federal, state, local
and foreign tax consequences of the merger to you.
Legato and FullTime have received tax opinions (the "Exhibit Tax Opinions")
from their respective counsel, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP and Wilson Sonsini Goodrich & Rosati, Professional Corporation,
to the effect that the merger will be treated as a "reorganization" within the
meaning of the IRS code. These opinions have been filed as an exhibit to the
Registration Statement of which this Joint Proxy Statement/Prospectus is a
part. As explained more fully below, these opinions are subject to certain
assumptions, limitations and qualifications. In addition, completion of the
merger is conditioned on, subject to waiver by Legato or FullTime, receipt by
Legato and FullTime of tax opinions (the "Final Tax Opinions") substantially
similar to the Exhibit Tax Opinions but based on representations of Legato,
FullTime and Merger Sub as of the date of the closing of the Merger. In the
event that this opinion requirement is waived as a result of a material change
in the tax consequences of the merger from those expressed in this tax
consequences section, a revised tax consequences section will be prepared and
distributed to FullTime stockholders as part of a revised Joint Proxy
Statement/Prospectus for the merger.
The following material federal income tax consequences will result from the
merger constituting a reorganization within the meaning of the IRS code:
. You should not recognize any gain or loss solely upon your receipt in
the merger of Legato common stock in exchange for your FullTime common
stock, except to the extent of cash received in lieu of fractional
shares of Legato common stock.
. The aggregate tax basis of the Legato common stock you receive in the
merger, including any fractional shares of Legato common stock not
actually received, should be the same as the aggregate tax basis of the
surrendered FullTime common stock.
. The holding period of the Legato common stock you receive in the merger
should include the period for which the surrendered FullTime common
stock was considered to be held, provided that the FullTime common stock
so surrendered is held as a capital asset at the time of the merger.
. Cash payments you receive in lieu of fractional shares of Legato common
stock should be treated as if fractional shares of Legato common stock
had been issued in the merger and
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then redeemed by Legato. If you receive cash for fractional shares, you
should recognize gain or loss with respect to such payment measured by
the difference (if any) between the amount of cash received and the
basis in the fractional share.
. Neither Legato, Merger Sub nor FullTime should recognize gain or loss
solely as a result of the merger.
Although Legato and FullTime have received the Exhibit Tax Opinions and will
receive the Final Tax Opinions that the Merger will constitute a
reorganization, a recipient of shares of Legato common stock could recognize
gain to the extent that those shares were considered to be received in
exchange for services or property other than solely FullTime common stock. All
or a portion of such a gain may be taxable as ordinary income. You could also
have to recognize gain to the extent you were treated as receiving (directly
or indirectly) consideration other than Legato common stock in exchange for
your FullTime common stock.
Legato and FullTime will not request a ruling from the Internal Revenue
Service ("IRS") in connection with the merger. You should be aware that
neither the Exhibit Tax Opinions nor the Final Tax Opinions bind the IRS. The
IRS is therefore not precluded from successfully asserting a contrary opinion.
In addition, the Exhibit Tax Opinions and Final Tax Opinions are subject to
certain assumptions, limitations and qualifications, including the assumptions
that:
. Original documents (including signatures) are authentic, documents
submitted to counsel as copies conform to the original documents, and
there has been (or will be by the effective time of the Merger) due
execution and delivery of all documents where due execution and delivery
are prerequisites to the effectiveness of such documents;
. All statements, covenants, representations and warranties in the merger
agreement, in the representations received from Legato, Merger Sub and
FullTime to support the opinions, and in other documents related to
Legato, Merger Sub and FullTime and relied upon by counsel to support
the opinions are, in each case, true and accurate. Any such
representation or statement made "to the knowledge of" or otherwise
similarly qualified is correct without such qualification and all such
statements and representations, whether or not qualified, will remain
true through the effective time of the merger. In addition, as to all
matters in which a person or entity making such a representation has
represented that such person or entity either is not a party to, does
not have, or is not aware of any plan, intention, understanding or
agreement to take an action, there is in fact no plan, intention,
understanding or agreement and such action will not be taken;
. The Merger will be consummated pursuant to the merger agreement and will
be effective under the laws of the state of Delaware;
. No FullTime stockholder has guaranteed or will guarantee any Fulltime
indebtedness outstanding during the period immediately prior to the
merger, and at all relevant times, including as of the effective time of
the merger, (i) no outstanding indebtedness of FullTime, Legato or
Merger Sub has or will represent equity for tax purposes, (ii) no
outstanding equity of Legato, FullTime or Merger Sub has or will
represent indebtedness for tax purposes, and (iii) no outstanding
security, instrument, agreement or arrangement that provides for,
contains, or represents either a right to acquire FullTime stock or to
share in
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the appreciation thereof constitutes or will constitute "stock" for
purposes of Section 368(c) of the IRS code;
. After the Merger, FullTime will hold "substantially all" of its and
Merger Sub's properties within the meaning of Section 368(a)(2)(E)(i) of
the IRS code and the regulations promulgated thereunder and will
continue its historic business or use a significant portion of its
historic assets in a business; and
. Legato, FullTime and Merger Sub will report the merger on their
respective U.S. federal income tax returns in a manner consistent with
the qualification of the merger as a reorganization.
The truth and accuracy of certain representations made by Legato, its
subsidiary and FullTime in certain certificates to be delivered to counsel by
the respective management of Legato, its subsidiary and FullTime.
A successful IRS challenge to the reorganization status of the merger as a
result of a failure to meet any of the requirements of a reorganization would
result in you recognizing taxable gain or loss with respect to each share of
FullTime common stock surrendered equal to the difference between your basis
in such share and the fair market value, as of the date the merger is
completed, of the Legato common stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the Legato common stock so received
would equal its fair market value as of the date the merger is completed and
the stockholder's holding period for such stock would begin the day after the
merger.
Accounting Treatment
The merger is intended to qualify as a pooling-of-interests for accounting
purposes. The merger is conditional on such qualification and on Legato's
receipt of a letter from its independent accountant and FullTime's independent
accountant related to the treatment of the merger as a pooling-of-interests.
Under this accounting treatment, the recorded assets and liabilities and the
operating results of both Legato and FullTime are carried forward to the
combined operations of the combined company at their recorded amounts. No
recognition of goodwill in the combination is required of either party to the
merger. To support the treatment of the merger as a pooling-of-interests, the
affiliates of Legato and FullTime have entered into agreements imposing
certain resale limitations on their stock. See "The Merger and Related
Transactions--The Agreement and Plan of Reorganization--Conditions to the
Merger" on page 55 and "--Related Agreements--Affiliate Agreements" on page
63.
No Appraisal Rights
Section 262 of the Delaware General Corporate Law provides appraisal rights
to stockholders of Delaware corporations. These rights are sometimes referred
to as "dissenters rights." However, Section 262 appraisal rights are not
available to stockholders of a corporation, such as FullTime, whose:
. Securities are listed on a national securities exchange or are
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc.; and
69
<PAGE>
. Stockholders are not required to accept in exchange for their stock
anything other than stock of another corporation listed on a national
securities exchange or on an interdealer quotation system by the NASD
and cash in lieu of fractional shares.
Because FullTime's common stock is traded on such a system, the Nasdaq
National Market, and because you are being offered stock of Legato, which is
also traded on the Nasdaq National Market, and cash in lieu of fraction shares,
you will not have appraisal rights with respect to the merger. Delaware
corporate law does not provide appraisal rights to stockholders of a
corporation, such as Legato, which issues shares in connection with a merger
but is not itself a constituent corporation in the merger.
70
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed consolidated financial
statements give effect to the proposed merger between Legato and FullTime
accounted for on a pooling-of-interests basis and are based on each company's
respective historical consolidated financial statements and notes thereto. The
pro forma combined condensed statements of operations assume the merger
occurred at the beginning of the earliest year presented.
The financial position and results of operations of Legato for the years
ended December 31, 1996, 1997 and 1998 have been derived from Legato's
historical financial statements. FullTime has historically reported its
operating results on the basis of a fiscal year ended June 30. The financial
position and results of operations of FullTime for the twelve months ended
December 31, 1998 are unaudited. The results of operations of FullTime for the
years ended June 30, 1997 and 1998 have been derived from FullTime's historical
audited consolidated financial statements. The pro forma financial statements
should be read in conjunction with the accompanying notes thereto and with the
historical financial statements and related notes thereto.
Legato and FullTime estimate that they will incur direct transaction costs of
approximately $2,500,000 associated with the merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the merger. It is expected that following the
merger, Legato and FullTime will incur an additional significant charge to
operations, which is not currently reasonably estimable, to reflect costs
associated with integrating the two companies. This additional significant
charge has not been reflected in the pro forma combined condensed balance sheet
or the pro forma combined condensed statements of operations. There can be no
assurance that Legato and FullTime will not incur additional charges to reflect
costs associated with the merger or that management will be successful in its
efforts to integrate the operations of the two companies.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the merger had been consummated at the beginning of the
earliest period presented, nor is it necessarily indicative of future operating
results or financial position.
71
<PAGE>
LEGATO SYSTEMS, INC.
AND FULLTIME SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Legato FullTime Pro Forma Pro Forma
Systems, Inc. Software, Inc. Adjustments Combined
------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $ 81,128 $ 2,049 $ 83,177
Short-term investments..... 28,472 5,300 33,772
Accounts receivable, net... 36,787 3,195 39,982
Other current assets....... 5,034 1,025 6,059
Deferred tax asset......... 6,012 -- $6,978(5) 12,990
-------- -------- ------ --------
Total current assets...... 157,433 11,569 6,978 175,980
Long-term investments....... 9,023 -- 9,023
Property and equipment,
net........................ 17,630 3,489 21,119
Intangible assets, net...... 2,243 -- 2,243
Other assets................ 536 -- 536
-------- -------- ------ --------
Total assets.............. $186,865 $ 15,058 $6,978 $208,901
======== ======== ====== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued
liabilities and current
portion of long-term
obligations............... $ 22,226 $ 4,244 $2,500(4) $ 28,970
Deferred revenues.......... 19,651 2,228 21,879
-------- -------- ------ --------
Total current
liabilities.............. 41,877 6,472 2,500 50,849
Deferred tax liability...... 523 -- 523
Stockholders' equity:
Capital stock.............. 89,775 25,390 -- 115,165
Retained earnings
(accumulated deficit)..... 54,690 (16,804) 4,478 42,364
-------- -------- ------ --------
Total stockholders'
equity................... 144,465 8,586 4,478 157,529
-------- -------- ------ --------
Total liabilities and
stockholders' equity.... $186,865 $ 15,058 $6,978 $208,901
======== ======== ====== ========
</TABLE>
See notes to unaudited proforma combined condensed financial statements.
72
<PAGE>
LEGATO SYSTEMS, INC.
AND FULLTIME SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Legato Systems, Inc. FullTime Software, Inc. Pro Forma Adjustments
------------------------ ----------------------------- -------------------------------
Twelve
Year Ended Year Ended Months Ended Year Ended
December 31, June 30, December 31, December 31,
------------------------ --------------- ------------ -------------------------------
1996 1997 1998 1997 1998 1998 1996 1997 1998
------- ------- -------- ------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product.......... $46,500 $66,356 $110,477 $27,204 $24,061 $ 18,656
Service and
support......... 10,274 17,529 32,701 4,942 5,954 6,073
------- ------- -------- ------- ------- -------- ------- ------- -------
Total revenues.. 56,774 83,885 143,178 32,146 30,015 24,729 0 0 0
Cost of revenues:
Product ......... 2,087 2,888 4,299 11,027 6,734 5,397
Service and
support......... 3,478 6,811 12,901 1,871 2,103 2,196
------- ------- -------- ------- ------- -------- ------- ------- -------
Total cost of
revenues....... 5,565 9,699 17,200 12,898 8,837 7,593 0 0 0
------- ------- -------- ------- ------- -------- ------- ------- -------
Gross profit..... 51,209 74,186 125,978 19,248 21,178 17,136 0 0 0
Operating
expenses:
Research and
development..... 9,517 14,753 21,784 2,272 3,823 3,861
Sales and
marketing....... 18,130 29,289 51,664 11,280 19,878 20,353
General and
administrative.. 7,002 7,981 10,771 2,878 4,724 5,103
Amortization of
intangibles..... 1,097 1,117 1,118 0 0 0
In-process
research and
development..... 1,849 0 0 0 0 0
Merger expenses.. 0 0 645 595 0 0
------- ------- -------- ------- ------- -------- ------- ------- -------
Total operating
expenses....... 37,595 53,140 85,982 17,025 28,425 29,317 0 0 0
------- ------- -------- ------- ------- -------- ------- ------- -------
Income (loss)
from
operations...... 13,614 21,046 39,996 2,223 (7,247) (12,181) 0 0 0
Other income,
net............. 1,812 2,162 4,221 890 803 578 0
------- ------- -------- ------- ------- -------- ------- ------- -------
Income before
provision for
income taxes.... 15.426 23,208 44,217 3,113 (6,444) (11,603) 0 0 0
Provision for
income taxes.... 6,504 9,196 16,509 406 0 40 $ 839 (5) (2,578)(5) $(4,681)(5)
------- ------- -------- ------- ------- -------- ------- ------- -------
Net income....... $ 8,922 $14,012 $ 27,708 $ 2,707 $(6,444) $(11,643) $ (839) $ 2,578 $ 4,681
======= ======= ======== ======= ======= ======== ======= ======= =======
Net income per
share--basic.... $ 0.27 $ 0.40 $ 0.75 $ 0.41 $ (0.62) $ (1.11)
======= ======= ======== ======= ======= ========
Net income per
share--diluted.. $ 0.24 $ 0.37 $ 0.69 $ 0.29 $ (0.62) $ (1.11)
======= ======= ======== ======= ======= ========
Shares used in
per share
calculations--
basic........... 33,348 35,070 36,894 6,620 10,336 10,534 (5,680)(2) (8,868)(2) (9,038)(2)
======= ======= ======== ======= ======= ======== ======= ======= =======
Shares used in
per share
calculations--
diluted......... 37,793 37,976 40,005 9,312 10,336 10,534 (7,990)(2) (8,840)(2) (8,993)(2)
======= ======= ======== ======= ======= ======== ======= ======= =======
<CAPTION>
Pro Forma Combined
------------------------
Year Ended
December 31,
------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenues:
Product.......... $73,704 $90,417 $129,133
Service and
support......... 15,216 23,483 38,774
------- ------- --------
Total revenues.. 88,920 113,900 167,907
Cost of revenues:
Product ......... 13,114 9,622 9,696
Service and
support......... 5,349 8,914 15,097
------- ------- --------
Total cost of
revenues....... 18,463 18,536 24,793
------- ------- --------
Gross profit..... 70,457 95,364 143,114
Operating
expenses:
Research and
development..... 11,789 18,576 25,645
Sales and
marketing....... 29,410 49,167 72,017
General and
administrative.. 9,880 12,705 15,874
Amortization of
intangibles..... 1,097 1,117 1,118
In-process
research and
development..... 1,849 0 0
Merger expenses.. 595 0 645
------- ------- --------
Total operating
expenses....... 54,620 81,565 115,299
------- ------- --------
Income (loss)
from
operations...... 15,837 13,799 27,815
Other income,
net............. 2,702 2,965 4,799
------- ------- --------
Income before
provision for
income taxes.... 18,539 16,764 32,614
Provision for
income taxes.... 7,749 6,618 11,868
------- ------- --------
Net income....... $10,790 $10,146 $ 20,746
======= ======= ========
Net income per
share--basic.... $ 0.31 $ 0.28 $ 0.54
======= ======= ========
Net income per
share--diluted.. $ 0.28 $ 0.26 $ 0.50
======= ======= ========
Shares used in
per share
calculations--
basic........... 34,288 36,538 38,390
======= ======= ========
Shares used in
per share
calculations--
diluted......... 39,115 39,472 41,546
======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
73
<PAGE>
LEGATO SYSTEMS, INC. AND
FULLTIME SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma combined condensed financial statements combine the financial
position of Legato and FullTime at December 31, 1998 and the results of
Legato's and FullTime's operations for the year ended December 31, 1998 and the
twelve months ended December 31, 1998, respectively, the year ended December
31, 1997 and the year ended June 30, 1998, respectively, and the year ended
December 31, 1996 and the year ended June 30, 1997. FullTime's results of
operations for the six months ended June 30, 1998 are included in the pro forma
combined results of operations for both the years ended December 31, 1998 and
1997. FullTime's revenues and net loss for the six months ended June 30, 1998
were approximately $12.5 million and $5.8 million, respectively. Upon
consummation of the Merger, actual periods combined may differ from those
included in the pro forma combined condensed financial statements.
2. UNAUDITED PRO FORMA COMBINED NET INCOME PER SHARE
The unaudited pro forma combined net income per share is based on the
combined weighted average number of common and common equivalent shares of
Legato and FullTime common stock for each period. FullTime's weighted average
common equivalent shares are based upon the share exchange ratio of 0.1420
shares of Legato common stock. The assumed share exchange ratio of 0.1420
shares is calculated based on the number of shares of FullTime common stock and
options to purchase FullTime common stock outstanding as of December 31, 1998.
(See Note 3). In computing pro forma diluted earnings per share for 1998 and
1997, however, dilutive common stock equivalent shares, which were excluded
from the calculation of FullTime's net loss per share, were included in the pro
forma combined net income per share as their impact would have been dilutive.
3. PRO FORMA UNAUDITED COMBINED SHARES OUTSTANDING
These unaudited pro forma combined condensed financial statements reflect the
issuance of 1,721,000 shares of Legato common stock in exchange for an
aggregate of 12,119,609 shares of FullTime common stock, based on the
outstanding FullTime common stock and potential common shares as of December
31, 1998.
The following table details the pro forma share issuance in connection with
the Merger:
<TABLE>
<S> <C>
FullTime common stock outstanding and potential common shares
as of December 31, 1998....................................... 12,119,609
Assumed Exchange Rate.......................................... 0.1420
----------
Number of shares of Legato common stock exchanged for FullTime
common stock.................................................. 1,721,000
Total number of shares of Legato common stock as of December
31, 1998...................................................... 37,627,121
----------
Number of Legato common shares outstanding after completion of
the Merger.................................................... 39,348,121
==========
</TABLE>
74
<PAGE>
LEGATO SYSTEMS, INC. AND
FULLTIME SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (Continued)
4. TRANSACTION COSTS AND MERGER RELATED EXPENSES
Legato and FullTime estimate they will incur direct transaction costs of
approximately $2,500,000 associated with the merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the merger.
Legato and FullTime also expect that following the merger, FullTime and
Legato will incur an additional significant charge to operations, which is not
currently reasonably estimable, to reflect costs associated with integrating
the two companies. This additional significant charge has not been reflected in
the pro forma combined condensed balance sheet or the pro forma combined
condensed statements of operations. There can be no assurance that Legato and
FullTime will not incur additional charges to reflect costs associated with the
merger or that management will be successful in its efforts to integrate the
operations of the two companies.
The unaudited pro forma combined condensed balance sheet gives effect to
estimated direct transaction costs as if such costs and expenses had been
incurred as of December 31, 1998. These costs and expenses are assumed to be
nondeductible for income tax purposes. These costs and expenses are not
reflected in the unaudited pro forma combined condensed statements of
operations.
5. PRO FORMA ADJUSTMENTS
FullTime has previously provided a valuation allowance for its net deferred
tax assets related primarily to loss carryforwards generated in periods since
inception until 1995 and in its fiscal 1999. Legato has determined that
estimated combined taxable income is sufficient to conclude that such net
deferred tax assets would be realized. The extent to which the loss
carryforwards can be used to offset future taxable income may be limited,
depending on the extent of ownership changes resulting from this business
combination. Accordingly, a pro forma adjustment has been made to eliminate the
valuation allowance during FullTime's year ended June 30, 1995. As this period
is not included in the pro forma combined condensed statement of operations, it
only impacts the combined condensed balance sheet as of June 30, 1998.
In addition, pro forma adjustments have been made to eliminate the benefit of
recognition of the net operating loss carryforward in the pro forma combined
condensed financial statements by increasing (decreasing) income tax expense by
$839,000, $(2,578,000) and $(4,681,000) for the years ended June 30, 1997, June
30, 1998 and the twelve-month period ended December 31, 1998, respectively,
using the statutory tax rate.
75
<PAGE>
BUSINESS OF FULLTIME
Overview
In July 1998, Qualix Group, Inc. commenced doing business as FullTime
Software, Inc. FullTime is a leading provider of software which protects the
availability of software applications and information running on UNIX and
Windows NT-based computer systems in a distributed computing environment.
FullTime's products are designed to ensure that software applications and data
are available whenever computer users need them, eliminating disruptions of
computer service due to computer hardware or software malfunctions. FullTime's
availability solutions are designed to minimize the impact of computing events
on the efficiency and availability of critical applications such as financial
systems, order entry, manufacturing and web-based sales applications. The
efficiency and overall availability of a software application can be impacted
by both unplanned and planned computing events:
. Unplanned events include a wide range of software, hardware or computer
network malfunctions. These events include having a machine fail, having
a power outage or having a software failure. Unplanned events result in
costly disruptions to computer services and happen unexpectedly with
little warning.
. Planned events are events where a company's computer administrators
intentionally shut down the company's computer systems or software
applications during computer system maintenance. These events include
activities such as upgrading software or maintaining computer hardware.
Planned events have traditionally resulted in a company having to stop
the computer system, temporarily impacting the ability to continue
business operations.
FullTime's software provides the capabilities to avoid the computer downtime
associated with both unplanned and planned events, making computers and their
software applications more dependable. FullTime's availability software
products work with both packaged software applications, such as SAP, Lotus
Notes and Microsoft Exchange, and proprietary software applications that have
been developed internally by companies. FullTime also protects the availability
of the data associated with these software applications.
Until recently, FullTime sold software solutions designed to protect computer
systems only from unplanned events. Sales of these software solutions were
targeted at an individual corporate department customer level. In July 1998,
FullTime expanded its strategic focus and introduced its family of FullTime
software products and solutions which are designed to protect computer systems
from interuptions due to both unplanned and planned computing events. This
broader family of service level availability software solutions incorporates
the baseline high availability software solutions for unplanned events which
FullTime continues to sell separately. In connection with this product
expansion, in July 1998, Qualix commenced doing business as FullTime Software,
Inc.
FullTime believes that its FullTime family of software products solve a much
broader market problem than traditional high availability products which
focused solely on unplanned events. This offers a potential opportunity for
FullTime to dramatically expand the size of its market and to target entire
corporate enterprises, as well as individual departmental customers. A key
element of FullTime's strategy is to sell FullTime products and solutions to
strategic buyers such as chief
76
<PAGE>
information officers, heads of information technology and others responsible
for maintaining service level agreements between information technology and
line-of-business organizations. Service level agreements are contracts for
information technology services between information technology executives and
the managers of divisions or groups within a corporation. These service level
agreements stipulate the level of availability and service that business
managers expect from their software applications, which are often managed by
centralized information technology organizations. Increasingly, service level
agreements are becoming the basis on which companies measure their information
technology performance, and form the yardstick by which information technology
executives are rewarded. FullTime's service level availabilty software products
and solutions and FullTime's baseline products for high availability are
described in greater detail below. To date, FullTime's broader service level
availability products and solutions have not generated significant revenues.
This result is due primarily to two sets of factors. First is the significant
amount of time and effort spent by FullTime's sales force in familiarizing
itself with the new products and introducting these products to the market and
the longer sales cycle for products marketed at the enterprise-level. Second is
the loss of sales and marketing momentum and customer delay or lost sales due
to the announcement and pendency of the proposed merger with Legato.
FullTime's service level availability products and services, which protect
against both unplanned and planned computing events are based on internally-
developed technology including:
. Data and software application monitoring, which tells a company when
something is wrong with a software application or its data;
. System hardware and software monitoring, which tells a company when the
computer itself has a problem; and
. Support for managing and monitoring the disks on which data is stored,
which tells a company if there is a problem with electronically stored
information.
In April 1998 FullTime exclusively licensed technology which further enhanced
its capabilities by providing:
. A reliable messaging system, which ensures that every message a computer
sends to another computer is received correctly and timely;
. A distributed database, which enables information to be constantly
synchronized across different computers. This is important when there
are multiple computer systems, in different locations, and each computer
system must constantly know what is happening on each other computer
system. The new database, in conjunction with the reliable messaging
system, enables these dispersed computers to be continuously aware of
the actions of other computers, and to respond appropriately; and
. An event management and rules engine, which acts as a "watchdog" over
software applications, computer systems or computer networks. This
engine watches for things to happen in systems, such as a slowdown in
performance, and informs a company when that event occurs. The event
management and ruler engine then tells the other systems in the network
how to adapt their workload so that the slow-down in processing on one
machine does not impact users' abilities to get information.
77
<PAGE>
The variety of computing events, both unplanned and planned, that can impact
service levels and availability are illustrated below.
[GRAPHIC APPEARS HERE]
Table Depicting FullTime's Service Level Availability
Industry Background
Historically, large organizations have depended upon centralized computing
environments, where large computers processed business software applications
and stored computer data in a single place. Given the importance of these
software applications, systems management software evolved to ensure the
availability, performance and integrity of these centralized computing systems.
Functions addressed by systems management software included reducing downtime
on these computers in the event of system failure, ensuring that the system was
secure and protected against data loss.
In recent years, distributed computing, also known as client/server
computing, has been increasingly adopted by many businesses for their
enterprise computing needs. In a distributed computing environment, multiple
computers are linked together via a network, and are able to share their
processing power to run software applications and databases, as well as to
share computer data. These environments run computers using the UNIX operating
system, and increasingly the Windows NT operating system. Distributed computing
is being used for a growing number of business-critical software applications,
or software applications which have to stay up for a business to continue
operations. Examples of these applications include electronic funds transfer
and teller systems for a bank, order entry for consumer product companies and
billing and payroll for virtually any business.
In today's global business world, there are no "off-hours," so it is
important that computers and their software applications are always available.
The Internet has increased this need for constantly available systems, since
users access the Internet 24 hours a day, 7 days-a-week. Consequently, around-
the-clock computer system availability has become imperative for global
businesses. But managing availability across multiple computer systems that are
geographically distributed is much
78
<PAGE>
more difficult than in the days of centralized computing. Yet these systems are
critical for employees to do their work or for customers to do business with a
company. Consequently, the availability of software applications and data has
become the focus of service level agreements between a company's users and its
information technology departments. These service level agreements stipulate
the service efficiency and percent of time they expect computer systems and
their software applications to be available. Information technology executives
are actively seeking tools which can help them to automatically and proactively
enforce the metrics specified in these service level agreements. These tools
would help to ensure that critical software applications and information are
available when and where users require it.
In an around-the-clock business world, the practice of taking systems down
for maintenance, tuning, upgrades and changes is no longer acceptable.
Addressing the requirements of maintaining availability during planned downtime
is a more challenging technical problem than recovery from unplanned system
failure due to a much greater number of variables that must be managed. The
FullTime products are designed to ensure consistent availability during planned
maintenance and other day-to-day operational activity, as well as in the case
of computer malfunction. As a result, FullTime products provide an expanded
level of availability to meet the needs of global organizations. This requires
an innovative approach to managing availability of systems, and FullTime
believes the FullTime Adaptive Architecture, based on the technology FullTime
exclusively licensed in April 1998, represents the class of solution required
to successfully deliver this new level of availability. The FullTime Adaptive
Architecture is believed to be the first software solution that lets networked
computers work together cooperatively. When something happens, unplanned or
planned, to one of the computers which might impact its ability to continue to
process effectively, FullTime's Adaptive Architecture changes, or adapts, the
work of the other computers so that they can take over the processing work of
the computer having problems. Companies can tell FullTime's software how they
want the processing to adapt, based on the priority of different applications
to their business. For example, a company might tell FullTime's software that
its order entry application and billing application always have the highest
priority, while email has lower priority. If Computer A, responsible for order
entry, has performance problems, FullTime's software would find another healthy
computer, Computer B. Fulltime's software would then move email off of Computer
B and move order entry to this healthy computer, so that order entry remained
optimally available. When Computer A's problems are solved, FullTime's software
would move order entry back to Computer A and move email back to Computer B.
FullTime divides systems management software for distributed computing
systems into three categories, with FullTime's products focused on the last
category, reliability:
. operations management software automates the day-to-day computing
operating tasks that were previously performed by system administrators
in the days of centralized computing;
. resource and applications management software addresses the management
of the way computers process software applications and data, and manages
the profiles and resources allocated to specific users, such as a user's
password, which systems they can access and which systems they cannot
access; and
. reliability management software addresses a computer system's need to
ensure that computer servers, data and software applications are
constantly available and secure.
79
<PAGE>
These categories are illustrated below:
Systems Management Software
<TABLE>
<CAPTION>
Resource/Applications Reliability Management
Operations Management Management (Becoming service level availability)
- --------------------- --------------------- -------------------------------------
<S> <C> <C>
Monitor Manage critical resources . Enforce service level agreements
system
components
.Event .Database administration . Eliminate requirements for planned
management .User administration downtime events
. Proactive protection from unplanned
downtime events
. Traditional reactive high availability for
unplanned downtime events
</TABLE>
Traditional reliability software solutions focused specifically on reactively
managing unplanned downtime events or failures. However, in today's global
market the requirements for reliability of services are rapidly expanding.
Today, data and software applications must remain available during the variety
of planned as well as unplanned computing events.
FullTime believes that companies are increasingly focused on the need for
software to protect the service efficiency and availability of the software
applications critical to their business operations. By ensuring that systems
are meeting or exceeding the required levels for service and availability,
FullTime software provides users with access to the computer power, data and
software applications they need, when and where they need them. FullTime
software solutions also enable information technology organizations to tune,
maintain and upgrade applications and systems in a non-interruptive and
continuous fashion. In this way, companies can ensure that their computer
resources are optimized at all times to meet the needs of their businesses,
without the disruptions caused by traditional planned computer downtime.
Service Level Availability. As organizations migrate or consider migrating
critical applications to distributed computing environments, they need the
tools to make sure that these applications are fully operational around-the-
clock. However, traditional tools which offer protection from computer system
failures do not address planned downtime for maintenance that consumes more
customer time, effort and expense than unplanned downtime. Examples of planned
downtime are systems maintenance, hardware and software upgrades, changes to
network or computer configurations, tuning computer systems to optimize their
processing power and changing software applications to process the way the
business runs.
Traditional High Availability. Computer system failures can result in lost
revenues or damaged customer relations when computer applications are not
available. Although large-scale, fault-tolerant hardware systems can be used to
ensure systems operate continuously, such solutions are expensive and are not
designed to work with different hardware and software components. As a result,
there is a significant need for high availability software that works with
existing systems to prevent computer systems and software applications from
going down due to malfunction, human error, sabotage or natural disasters.
Given these trends, FullTime believes that the need for availability software
will grow as more critical software applications are deployed on distributed
systems and as applications typically found
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on UNIX and Windows NT-based servers, such as e-mail, intranet applications and
Internet access, are increasingly considered critical to business operations.
In particular, FullTime believes the need for administering and protecting
service level agreements and their contractual requirements will be an
important stimulus to market growth.
FullTime Technologies and Products
FullTime's software solutions have a number of key attributes:
. They are based on advanced technologies that are designed to be used
either independently or can be integrated with other computer system
management products. This allows companies to easily deploy solutions
containing FullTime's software products and products from other vendors
that work together and can be managed as a single entity;
. They are designed to work with popular hardware and software platforms,
including computers from Sun Microsystems, Hewlett Packard, IBM and
Digital Equipment, as well as Intel-based systems. Operating system
software from these vendors, as well as Microsoft, are also supported.
Computers from different vendors can be managed by the FullTime
solutions, eliminating the need for different management systems for
these different computers;
. They are scaleable, meaning the same software works on small or large
machines, so as a company needs larger or more systems, FullTime's
software can easily provide the same functionality across a broad range
of computers; and
. They are designed to be installed quickly and easily without impacting
the availability or operation of critical software applications or
computer systems.
FullTime Adaptive Architecture
The FullTime Adaptive Architecture provides a variety of advanced
technologies, integrated together to manage availability of dispersed computers
and their software applications. These technology components include:
. An event engine that functions as a "watchdog" over the computer and its
processing. The event engine watches for things to happen to the
computer or its software that can impact the performance and
availability of the computer system. An event in a software application,
database, computer or computer network that is potentially detrimental
is immediately reported to FullTime's event engine, and then passed on
to the rules engine for action;
. A rules engine that contains a number of event/action scenarios that
tell FullTime's software how to respond to reported events in a
company's computers. For example, in the case of a computer malfunction,
an event would be reported to FullTime's event engine. This would result
in the rule associated with this specific event being initiated.
FullTime's rules engine then manages the computer network in the most
appropriate fashion based on this rule. FullTime's rules engine can be
easily programmed by an information technology staff, so that the rules
accurately reflect the way a business wants its computers to respond in
the event of malfunctions;
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. A reliable messaging infrastructure which makes sure that any
communication within the network is received and heard by all computers.
This is important for companies as it changes the way the computers are
working in case of a computer or software problem. All computers on a
company's computer network need to be aware of any action being taken by
FullTime's software, and how these actions change the processing of the
other computer systems in their network, so that all of the company's
computers continue to process in a cooperative fashion. If one computer
system misses a change in the overall processing configuration, it can
result in disruption of service across the company's computer network;
. Published instructions on how other computer programs can interact with
FullTime's software, allowing FullTime's software to work with other
popular systems management applications, sharing information and working
as part of a complete corporate-wide management solution; and
. An intuitive user interface that lets information technology staff
quickly and easily define how they want FullTime's software to watch
over their computers, and the responses they want in case of problems.
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[GRAPHIC APPEARS HERE]
Table Illustrating FullTime's Adaptive Architecture
Service Level Availability Software Products and Solutions
In July 1998, FullTime introduced a comprehensive set of products and
solutions, based on the FullTime Adaptive Architecture, focused on optimizing
computer availability and management of service level agreements for
information technology staff. FullTime's services, including support,
consulting and training, are generally priced separately. FullTime generally
charges its customers according to the number and types of computers on a
company's computer network, as well as other factors, and typically charges
extra for support and consulting services. FullTime's current or planned
availability products and solutions are categorized as follows:
<TABLE>
<CAPTION>
Operating System Date of First or
Product Description Platform Planned Release
------- ----------- ---------------- ----------------
<C> <S> <C> <C>
FullTime Products
-----------------
FullTime Cluster Service level Windows NT, Sun July 1998 through
availability software Solaris HP-UX and December 1998
for Windows NT and UNIX IBM AIX
Environments. Clustering
technology provides
scalability for up to
one hundred servers.
FullTime Data Efficient real-time data Windows NT, Sun July 1998 through
replication Solaris HP-UX and December 1998
IBM AIX
FullTime Solutions
------------------
FullTime Enterprise FullTime Cluster and Windows NT, Sun July 1998 through
FullTime Data and Solaris HP-UX and December 1998
software developers kit IBM AIX
for customization of
rules and events
FullTime Department FullTime Cluster and Windows NT, Sun July 1998 through
FullTime Data pre- Solaris HP-UX and December 1998
packaged to work with IBM AIX
popular workgroup
applications
</TABLE>
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FullTime Cluster. FullTime Cluster lets computers work together in a
cooperative fashion, leveraging each other's resources in the case of a problem
to make sure that critical software applications are always available. It
supports up to one hundred separate computers in a cluster, uniting computers
into cooperative groups. By creating these cooperative groups from currently
in-use systems, FullTime Cluster eliminates the need for expensive extra
computers or dedicated alternate computers to ensure computer and software
application availability. FullTime Cluster enables clusters to include systems
from different vendors, grouping and managing computers running on Windows NT
and UNIX operating systems from a single management interface. FullTime Cluster
supports dynamic load balancing, or movement of workloads from one computer to
another, to proactively maintain performance at optimum levels while directing
computing resources to their best use.
FullTime Data. FullTime Data replicates, or copies, information in real time,
as it is created, to make sure data is not lost. FullTime Data can be used for
exchanging data between different software applications, or to synchronize data
across different computer systems, as well as for disaster recovery. It can
replicate data between two systems, between one system and multiple systems, or
between multiple systems in a networked computer environment.
FullTime Enterprise. FullTime Enterprise is a packaged solution that can be
customized to fit individual information technology requirements. It is
designed to offer the flexibility to meet the needs of departmental or
enterprise-wide software applications. FullTime Enterprise includes FullTime
Cluster, FullTime Data and a software developer's kit which makes it easy to
customize it to meet individual needs.
Baseline Products for High Availability
FullTime plans to continue to market and sell its baseline high availability
line of products that focus on traditional unplanned system failures.
FullTime's services for these products, including customer support, consulting
and training, are generally priced separately. Prices vary according to number
and type of computers as well as other factors and exclude support and
consulting services. FullTime's baseline products and solutions can be
categorized as follows:
<TABLE>
<CAPTION>
Operating System
Product Description Platform Date of First Release
------- ----------- ---------------- ---------------------
<C> <S> <C> <C>
HA+ High availability software Sun Solaris October 1996
for UNIX environments. HP-UX 10.0
Clustering Technology IBM AIX
provides scalability for up
to sixteen servers.
Octopus Data replication and Windows NT October 1995
automatic switch-over for
Windows NT Servers.
</TABLE>
HA+. HA+ is an availability software product that enables computer to
failover, or pass all of their workload to another dedicated computer system,
in the event of a computer malfunction. HA+ also manages the recovery, or
movement back to the original processor, of workloads after a failover has
occurred. HA+ works on computers using the UNIX operating system. HA+ is
designed to monitor and support a variety of UNIX-based operating systems,
hardware platforms, disk configurations, networks, software applications and
databases. HA+ includes FullTime's proprietary clustering technology.
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The clustering technology that HA+ uses allows multiple computers to work
together to provide failover and recovery of applications in the event of a
system failure. If a computer goes down, or for any reason stops providing
service to an application, HA+ uses an intelligent decision-making process to
promptly "elect" another computer to carry on service. Using this election
process, HA+ can determine which computer has the highest priority and should
begin providing the service in place of the primary computer. In addition, HA+
can provide load balancing to ensure that all computers in the clustered
network share workloads in the most efficient manner.
HA+ can be set up to provide the degree of computer system availability that
best suits a company's unique needs. The software is easily installed and does
not change the existing core operating system, which has been an issue with
other competitive solutions. System administrators simply describe possible
failure scenarios and establish the desired failover procedures for individual
applications as part of the initial set up.
HA+ consists of three components:
. HA+ Cluster Management Software provides the functions needed to
maintain communications between computers as well as monitor computer
resources and applications. This technology is scalable, providing the
enterprise the ability to start small and add on components or computers
as needs increase, without changing the original product.
. HA+ Environment is designed to facilitate easy installation, as well as
to monitor critical system-level resources to assure "end-to-end"
availability of all critical components in a computer network cluster.
. HA+ modules allow HA+ to provide monitoring and failover/recovery
management for individual computer software applications in addition to
protecting the computer itself. HA+ modules allow FullTime to tailor its
solutions for specific computer software applications and allow FullTime
to engage in co-marketing programs with strategic partners. FullTime
currently ships HA+ modules for databases from Oracle, Sybase, Informix
and CA-Ingres. FullTime also ships HA+ modules that support Tivoli's and
Netscape's system management solutions. FullTime is currently working
with other companies and products to create additional modules that
allow HA+ to be tailored to specific market needs.
Octopus. The Octopus software solution is a data protection and a computer
system availability package for Windows NT-based computers and software
applications. This product was awarded Byte Magazine's Best Utility award at
Comdex 1996. If a malfunction occurs in a company's primary system, the
company's alternate system can automatically assume the role of the failed
systems so users can continue to access their data and applications. Similar to
HA+ for UNIX, the goal of Octopus is to provide continuous up-time for Windows
NT-based computers and data.
FullTime's Organization in Support of Revenue
Customer Support
FullTime believes that a high level of customer service is required to
successfully sell reliability products for distributed computing systems.
Accordingly, an essential part of FullTime's business is
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providing comprehensive maintenance, technical support, consulting and training
services for its customers. Most of FullTime's customers have support and
maintenance agreements with FullTime that are typically for 12 month
increments.
As of December 31, 1998, FullTime's Technical Services Group consisted of 16
people, which FullTime supplements with outside consultants for some support
requirements. These consultants are on-site and provide service at comparable
levels to a FullTime employee. The Technical Services Group provides the
following services:
Maintenance and Technical Support. FullTime offers two levels of support
packages:
. Support during normal business hours; and
. Twenty-four hour, seven day support.
Both levels of support include e-mail and fax support and provide new software
releases. Prices for maintenance and technical support, which is mandatory for
the first year for most of FullTime's products, typically range from 12% to 30%
of the price of the product.
Consulting. FullTime's Professional Services Group is responsible for on-site
consulting as well as development work done for specific customers. Consulting
services include implementation planning, project management, project
customization and upgrade management. Consulting services are generally
performed on a daily fee-basis or by project. These consulting services are
used to leverage FullTime's products so they can be better implemented at
customers' sites. A majority of FullTime's new high availability customers
purchase FullTime's consulting services. FullTime believes that market
acceptance of its FullTime products and solutions will increase consulting
activity.
Training. FullTime offers comprehensive training classes to its customers,
distributors, systems integrators and value-added resellers both on-site and at
FullTime's headquarters. The training program includes instruction in the
installation, customization and optimization of FullTime's products on their
specific environment.
Sales and Marketing
FullTime is targeting customers within both public and private sector
organizations that have deployed or are deploying distributed computing
systems. Typical target customers are large and medium-sized companies that
have their critical applications running on UNIX or Windows NT-based computers.
FullTime's customers are in a variety of industries, including
telecommunications, finance, manufacturing and energy. FullTime markets its
software and services to Fortune 2000 accounts primarily through its field
sales organization complemented by other sales channels, including systems
integrators, original equipment manufacturers, value added resellers and
international distributors.
Field Sales. As of December 31, 1998, FullTime's field sales force consisted
of 65 personnel, including 41 sales representatives and 24 sales engineers that
provide technical sales assistance. At December 31, 1997, FullTime's field
sales force was comprised of 86 personnel, including 57 sales representatives
and 29 sales engineers. FullTime currently has 21 sales offices, most of which
are
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staffed with both sales and technical pre-sales personnel. FullTime uses a
consultative sales approach for selling to major accounts. This model entails
the collaboration of technical and sales personnel to formulate proposals that
address the specific requirements of the customer. FullTime focuses its initial
sales efforts on chief information officer level and information technology
executive level management, working with system and network administrators for
evaluation and deployment purposes.
Inside Sales. FullTime's telesales organization is located in San Mateo,
California and is aligned with the field sales force, providing support for
field sales representatives and their resellers. Inside sales is also focused
on sales to middle-tier account targets.
Indirect Distribution Channels. As of December 31, 1998, FullTime had more
than 200 value added resellers, resellers and systems integrators of its
reliability products. During August 1998, FullTime entered into a comprehensive
master distribution agreement with GE Information Technology Distribution, a
major global distributor. The GE relationship is expected to enhance the
support of current resellers, while also extending the reach of FullTime
products into a broader reseller base. These resellers are generally
responsible for managing the sales and installation process in each customer
situation. In selected opportunities, FullTime's support personnel often work
with the reseller to provide technical support. This approach enables FullTime
to cost effectively achieve broader market coverage, while maintaining close
contact with customers in order to gauge product direction and to monitor
customer satisfaction.
International. As of December 31, 1998, FullTime had approximately 70
distributors in Europe, Asia, Africa and South America. Revenue from sales
outside the United States accounted for 33% of total revenue in the quarter
ended December 31, 1998, 22% of total revenue in fiscal 1998 and 17% in fiscal
years 1997 and 1996.
Strategic Alliances and Original Equipment Manufacturers. A key objective of
FullTime is to expand its joint development and marketing relationships with
systems management software vendors to provide complementary solutions and to
establish relationships with hardware and software original equipment
manufacturers to incorporate reliability solutions in their products. FullTime
works with hardware providers such as Hewlett-Packard, IBM and Sun Microsystems
and software vendors such as Oracle, Sybase, Informix, Legato, Microsoft and
Tivoli. In addition, FullTime is currently in active discussions with several
systems management software vendors and software original equipment
manufacturers to form additional strategic relationships in which FullTime's
reliability products would be marketed and sold as an added feature to these
client/server packages. There can be no assurance that FullTime will
successfully consummate any of these arrangements.
Marketing Programs. In support of its domestic sales force and international
distributors, FullTime conducts comprehensive marketing programs intended to
position, promote and market its family of computer availability products.
Marketing personnel engage in a variety of activities in support of the sales
force and resellers, including public relations and product seminars, trade
shows, direct mailings, preparing marketing materials and coordinating
FullTime's participation in industry programs and forums. In addition to
setting up and managing distribution channels, recently introduced programs
have positioned the marketing staff to provide better support for key vertical
markets, such as financial and telecommunications.
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Product Development
FullTime has historically derived a substantial majority of its revenues from
the sale of products that are licensed or incorporate technology that is
licensed from third parties. FullTime has increased its commitment to product
development. In the quarter ended December 31, 1998 and in fiscal years 1998,
1997 and 1996, FullTime's product development expenses were $998,000,
$3,823,000, $2,272,000 and $620,000, respectively.
FullTime believes that small, focused product development teams are the most
efficient method of developing new products, enhancing existing products and
supporting them. These teams are able to provide more focus on customer
requirements and work together with outside industry experts when necessary to
release timely, quality products and enhancements. As of December 31, 1998,
FullTime had 24 employees and consultants working on product development and
engineering.
FullTime currently has four internal development teams:
FullTime products. The FullTime development teams are located in
Northborough, Massachusetts and Boulder, Colorado. These teams have been
responsible for FullTime Cluster and FullTime Data. These teams rely primarily
on FullTime's employees, supplemented with consultants for specific application
or operating system expertise. Their emphasis has been on developing the
initial release of the FullTime products and making those products available
across the key UNIX and Windows NT platforms.
HA+. The HA+ development team is based in San Mateo, California and focuses
on developing and enhancing UNIX-based high availability products. They are
currently focused on enhancing FullTime's proprietary HA+ clustering technology
and developing additional modules to support application-specific failover and
recovery management.
Octopus. The Octopus development team is based in Langhorne, Pennsylvania and
is responsible for the Octopus family of NT reliability products. They have
significant expertise in remote data mirroring and failover in the Windows NT
operating environment. They are currently focused on adding features to Octopus
and key usability issues. These features include support for Microsoft Cluster
Server.
Qualix Direct
Through its Qualix Direct indirect sales organization, FullTime provides an
incremental product line of add-on hardware, software and accessories for
distributed computing systems. Qualix Direct uses direct mailings, catalogs and
Web promotions to market its products. As of December 31, 1998, Qualix Direct
had 4 sales and marketing personnel focused on selling third-party products.
Qualix Direct has historically sold third party products that require a less
consultative sales approach and are sold in smaller transactions that typically
generate lower gross margins.
Competition
The market for reliability software for distributed computing environments is
intensely competitive, fragmented and characterized by rapid technological
developments, evolving standards
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and rapid changes in customer requirements. However, today there are few direct
competitors to FullTime within the service level availability management arena.
Today's competitors continue to focus on traditional unplanned failure
recovery, and do not address the problems associated with planned maintenance
and upgrades. Although FullTime believes that the service level availability
management segment of the market is in the early stages of development as the
market matures FullTime expects competition from four types of vendors:
Independent Vendors that Provide Reliability Products. These companies offer
standalone products that provide specific availability solutions. FullTime
believes that the majority of vendors currently in this arena are focused on
traditional high availability solutions which react to unplanned failures, and
do not currently have the technology required to address the proactive
requirements planned maintenance segment of the service level management
marketplace.
Centralized Systems Management Software Companies Migrating Their Products to
the Distributed Computing Market. These vendors, such as BMC and Computer
Associates, have built large businesses based upon selling systems management
tools primarily into the mainframe, or centralized computing market, and are
currently expanding into the distributed computing arena. These vendors today
provide event monitoring technology which can be complementary to FullTime's
software, and may license or create alternative solutions in the future.
Distributed Computing Systems Management Software Companies That Incorporate
Reliability Products as a Part of Integrated System Management Solutions. A
number of companies have introduced products addressing various segments of the
distributed computing systems management market.
Hardware and Operating Systems Vendors That Incorporate Reliability Solutions
Into Their Products. Companies such as Sun Microsystems and Microsoft continue
to add features to their operating systems and thereby reduce the need for
their customers to purchase products providing these features from independent
vendors for homogeneous environments. For example, Sun Microsystems has
introduced a version of its database clustering product that includes high
availability features and Microsoft introduced Microsoft Cluster Server as a
built-in feature of Microsoft Windows NT Server, Enterprise Edition. A key
element of FullTime's strategy is to provide enterprise-level solutions for
heterogeneous networked computing environments, where these alternatives fail.
FullTime believes that the principal competitive factors affecting its market
include brand name recognition, product performance and functionality, such as
service level availability features, heterogeneity, scalability, performance
and ease of installation and use, quality, price, customer service and support
and the effectiveness of its sales and marketing efforts. Although FullTime
believes that its products currently compete favorably with respect to all of
these factors, there is no assurance that FullTime can maintain its competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources than FullTime. FullTime's future success will depend
significantly on its ability to continue to enhance its existing products and
introduce new products more rapidly and less expensively than its existing and
potential competitors and to persuade hardware and software vendors to license
FullTime's products rather than to develop their own reliability products.
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Many of FullTime's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
FullTime. FullTime's current and future competitors could introduce products
with more features, higher scalability, greater functionality and lower prices
than FullTime's products. These competitors could also bundle existing or new
products with other, more established products in order to compete with
FullTime. FullTime's focus on reliability software may be a disadvantage in
competing with vendors that offer a broader range of products. Moreover, as the
distributed systems management software market develops, a number of companies
with significantly greater resources than those of FullTime could attempt to
increase their presence in this market by acquiring or forming strategic
alliances with competitors or business partners of FullTime. Because there are
relatively low barriers to entry for the software market, FullTime expects
additional competition from other established and emerging companies. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could materially and adversely affect
FullTime's business, operating results and financial condition. Any material
reduction in the price of FullTime's products would negatively affect gross
margins and would require FullTime to increase software unit sales in order to
maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render FullTime's
existing or planned products obsolete or unmarketable, particularly because the
market for reliability products is at an early stage of development. There is
no assurance that FullTime will be able to compete successfully against current
and future competitors, and the failure to do so would seriously harm
FullTime's business, financial condition and results of operations.
Proprietary Rights
FullTime's success depends in part upon its proprietary technology. Although
FullTime has recently been issued a United States patent covering certain
aspects of the technology included in its Octopus data mirroring product, there
is no assurance that any issued patent will provide meaningful protection for
FullTime's technology or that any issued patent will provide FullTime with any
competitive advantages or will not be challenged by third parties. Moreover,
there is no assurance that FullTime will develop additional proprietary
products or technologies that are patentable or that the patents of others will
not seriously harm FullTime's ability to do business. Furthermore, there is no
assurance that others will not independently develop similar products,
duplicate FullTime's products or design around the patents issued to FullTime.
As part of its confidentiality procedures, FullTime generally enters into non-
disclosure agreements with its employees, consultants, distributors and
corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use
FullTime's products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of FullTime's products is
difficult and, although FullTime is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In selling its products, FullTime relies on "shrink wrap"
licenses for sales of certain products that are not signed by licensees and,
therefore,
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may be unenforceable under the laws of certain jurisdictions. In addition,
effective protection of intellectual property rights is unavailable or limited
in certain foreign countries.
Additionally, FullTime relies on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect its proprietary rights relating to its licensed and
internally developed products. There is no assurance that FullTime's protection
of its proprietary rights will be adequate or that FullTime's competitors will
not independently develop similar technology, duplicate FullTime's products or
design around any patents issued to FullTime or other intellectual property
rights. See "Risk Factors--Risks Related to Legato and FullTime--Protection of
Legato's and FullTime's Intellectual Property is Limited" on page 18.
Employees
As of December 31, 1998, FullTime had 147 employees. Of the total, 81 were
engaged in sales and marketing, including the Qualix Direct telesales
organization, 24 in product development and engineering, 16 in customer service
and support and 26 in administration and finance. FullTime's future success
depends in significant part upon the continued seirvice of its key technical
and senior management personnel and its continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for
such personnel is intense and there is no assurance that FullTime can retain
its key managerial and technical employees or that it can attract, assimilate
or retain other highly qualified technical and managerial personnel in the
future. None of FullTime's employees are represented by a labor union. FullTime
has not experienced any work stoppages and considers its relations with its
employees to be good. See "Risk Factors--Risks Related to the Combined Company
and the Merger" on page 9.
Legal Proceedings
From time to time FullTime has been, or may become, involved in litigation
proceedings incidental to the conduct of its business. FullTime does not
believe these proceedings presently pending will seriously harm FullTime's
financial position or its results of operations.
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FULLTIME MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In July 1998, Qualix Group, Inc. commenced doing business as FullTime
Software, Inc. FullTime was incorporated under the laws of Delaware on
September 21, 1990. FullTime began operating primarily as a distributor, value
added reseller and publisher of licensed third party client/server software
products. In 1993, FullTime focused on the reliability market by introducing
QualixHA, its first high availability product for the UNIX operating
environment. QualixHA was based on a licensed core software engine. In May
1996, FullTime acquired substantially all of the assets and assumed certain
liabilities of Anthill, including technology relating to a hierarchical storage
management product under development. In August 1996, FullTime merged with
Octopus Technologies, which had developed high availability and remote data
mirroring products for the Windows NT operating environment.
In October 1996, FullTime introduced QualixHA+, currently known as HA+, which
is based on an internally developed core software engine. A key element of
FullTime's strategy is to increase substantially the percentage of revenues
derived from internally developed or acquired products that typically have
higher gross margins than licensed products. Pursuant to this strategy,
FullTime ceased marketing QualixHA in February 1997. FullTime completed its
initial public offering in February 1997, receiving net proceeds of
$14,950,000.
In July 1998, FullTime expanded its strategic focus and introduced its family
of FullTime software products and solutions, which are designed to protect
computer systems from interruptions due to unplanned and planned computing
events. This broader family of service level availability software solutions
incorporates the HA+ baseline high availability solutions, which FullTime
continues to sell separately. In connection with this product expansion, in
July 1998, FullTime commenced doing business as FullTime Software, Inc. The
Company believes that its broader service level availability products solve a
much broader market problem than traditional high availability products, which
only address unplanned computing events. This offers a potential opportunity
for FullTime to dramatically expand the size of its market and to target
enterprise-wide customers, as well as individual departmental customers. A key
element of FullTime's strategy is to sell FullTime products and solutions to
strategic buyers such as chief information officers, heads of information
technology and others responsible for maintaining service level agreements
between information technology and line-of-business organizations. Service
level agreements are contracts for information technology services between
information technology executives and the managers of divisions or groups
within a corporation. These service level agreements stipulate the level of
availability and service that business managers expect from their software
applications, which are often managed by centralized information technology
organizations.
To date, FullTime's broader products and solutions have not generated
significant revenues. This result is due primarily to two sets of factors.
First is the significant amount of time and effort spent by FullTime's sales
force in familiarizing itself with the new products and introducing these
products to the market, and the longer sales cycle for products marketed at the
enterprise-level. Second is the loss of sales and marketing momentum and
customer delay and potential lost sales due to the
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announcement and pendancy of the proposed merger with Legato. For these same
reasons, FullTime expects its revenues for the quarter ended March 31, 1999 to
be significantly lower than both the previous quarter ended December 31, 1998
and the comparable quarter ended March 31, 1998.
Prior to the Octopus Technologies merger, and prior to developing QualixHA+,
FullTime had minimal research and development expenditures and a
correspondingly high cost of reliability software revenue.
FullTime markets and sells reliability software through a combination of its
field sales organization and indirect distribution channels. In addition,
FullTime sells other third party software and hardware products through its
Qualix Direct telesales organization, which has recently transitioned into
selling FullTime's reliability products for Windows NT, the Octopus product
line.
FullTime generally recognizes revenue from software license agreements upon
shipment of the software if no significant future contractual obligations
remain and collection of the resulting receivable is probable. Maintenance and
technical support revenue is recognized over the term of the agreement,
typically 12 months. Consulting and training revenue is recognized as services
are provided.
In August 1996, FullTime merged with Octopus Technologies in a transaction
accounted for as a pooling-of-interests. All financial statements contained
herein have been restated to reflect the transaction. Approximately $595,000 of
costs directly attributable to the business combination were incurred in the
first quarter of fiscal 1997.
Prior to FullTime's development and introduction of QualixHA+ in October 1996
and the merger with Octopus, FullTime was a reseller of products and,
consequently, had minimal research and development expenditures and higher cost
of revenues. The remote data mirroring and high availability product lines for
WindowsNT which were developed from Octopus' technology represented 11.6%,
13.0% and 13.0% of total revenue in 1996, 1997 and 1998, respectively. These
same product lines represented 22.9%, 39.1% and 17.3% of gross profit in the
corresponding periods.
In May 1996, FullTime acquired substantially all of the assets and assumed
certain of the liabilities of Anthill Incorporated, including certain data
access management development which resulted in the introduction of QualixSD
remote mirroring software in March, 1997. The purchase price for Anthill was
$675,000 payable in annual installments of $125,000 plus $175,000 at the
closing. The acquisition resulted in a $740,000 charge for in-process
technology in the fourth quarter of fiscal 1996. Revenues from Anthill
represented less than 1% of fiscal 1997 total revenues and were insignificant
in fiscal 1998.
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Results of Operations
The following table set forth certain items in FullTime's Consolidated
Statements of Operations expressed as a percentage of total revenue for the
period indicated:
<TABLE>
<CAPTION>
Percentage of Revenue
-------------------------------------------------------
Three Months Six Months
Year Ended Ended Ended
June 30, December 31, December 31,
------------------- --------------- ---------------
1996 1997 1998 1997 1998 1997 1998
----- ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Reliability software.. 54.2% 52.5% 53.4% 59.6% 49.0% 57.4 53.3
Other products........ 32.4 32.2 26.7 24.0 24.5 26.3 22.4
Support, maintenance
and consulting....... 13.4 15.3 19.9 16.4 26.5 16.3 24.3
----- ----- ----- ------ ------ ------ ------
Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of reliability
software............. 22.0 11.6 3.2 4.7 3.5 2.9 4.3
Cost of other
products............. 22.9 22.7 19.2 17.3 18.5 18.9 16.0
Cost support,
maintenance and
consulting........... 6.2 5.8 7.0 5.6 9.5 5.7 8.9
----- ----- ----- ------ ------ ------ ------
Total cost of
revenue............ 51.1 40.1 29.4 27.6 31.5 27.5 29.2
----- ----- ----- ------ ------ ------ ------
Gross profit............ 48.9 59.9 70.6 72.4 68.5 72.5 70.8
Operating expenses:
Sales and marketing... 30.8 35.1 66.2 59.2 96.2 56.1 84.2
General and
administrative....... 11.6 9.0 15.7 12.5 25.2 12 .4 20.8
Research and
development.......... 3.7 7.1 12.8 10.0 19.1 10.1 14.9
Purchased in-process
technology........... 4.5 -- -- -- -- --
Merger expenses....... -- 1.8 -- -- -- --
----- ----- ----- ------ ------ ------ ------
Total operating
expenses........... 50.6 53.0 94.7 81.7 140.5 78.6 119.9
----- ----- ----- ------ ------ ------ ------
Income (loss) from
operations............. (1.7) 6.9 (24.1) (9.3) (72.0) (6.1) (49.1)
Gain on sale of
investments.......... 4.6 1.7 -- -- -- -- --
Other income
(expense), net....... 0.5 1.1 2.7 2.3 2.0 2.6 1.9
----- ----- ----- ------ ------ ------ ------
Income (loss) before
income taxes........... 3.4 9.7 (21.4) (7.0) (70.0) (3.5) (47.2)
Provision for income
taxes.................. -- 1.3 -- -- 0.7 -- 0.3
----- ----- ----- ------ ------ ------ ------
Net income (loss)....... 3.4% 8.4% (21.4)% (7.0)% (70.7)% (3.5)% (47.5)%
===== ===== ===== ====== ====== ====== ======
</TABLE>
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The following table sets forth unaudited consolidated results of operations
data for FullTime for each of the ten quarters in the period ended December 31,
1998. This information has been derived from unaudited consolidated financial
statements of FullTime that, in the opinion of management, reflect all
recurring adjustments necessary to fairly present this information when read in
conjunction with FullTime's Consolidated Financial Statements and notes thereto
appearing elsewhere in this proxy statement/prospectus. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.
FULLTIME SOFTWARE, INC.
QUARTERLY FINANCIAL DATA
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1996 1996 1997 1997 1997 1997 1998 1998 1998
------------- ------------ --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... $6,949 $8,100 $8,637 $8,460 $8,225 $9,292 $ 5,971 $ 6,527 $ 7,001
Gross profit.... 3,481 4,838 5,427 5,502 5,970 6,727 4,074 4,407 5,070
Income (loss)
from
operations..... (159) 840 984 558 (211) (869) (3,232) (2,935) (2,252)
Net income
(loss)......... (139) 850 917 1,079 37 (657) (3,090) (2,734) (2,120)
Earning (loss)
per share, ba-
sic............ $(0.04) $ 0.17 $ 0.12 $ 0.11 -- $(0.06) $ (0.30) $ (0.26) $ (0.20)
Earnings (loss)
per share, di-
luted.......... $(0.04) $ 0.10 $ 0.10 $ 0.10 -- $(0.06) $ (0.30) $ (0.26) $ (0.20)
<CAPTION>
December 31,
1998
------------
<S> <C>
Total revenue... $ 5,230
Gross profit.... 3,585
Income (loss)
from
operations..... (3,762)
Net income
(loss)......... (3,699)
Earning (loss)
per share, ba-
sic............ $ (0.35)
Earnings (loss)
per share, di-
luted.......... $ (0.35)
</TABLE>
Comparison of Six Months Ended December 31, 1997 and 1998
Revenue
Total Revenues. Total revenues decreased to $5,230,000 in the second quarter
of fiscal 1999 from $9,292,000 for the same period of fiscal 1998, a decrease
of $4,062,000, or 44%. For the six months ended December 31, 1998, total
revenues decreased $5,286,000 from the six months ended December 31, 1997, a
decrease of 30%.
Reliability Software. Reliability software revenues decreased to $2,563,000
in the second quarter of fiscal 1999 from $5,541,000 for the comparable period
in the prior year, a decrease of $2,978,000, or 54%; reliability software
revenues for the six months ended December 31, 1998 decreased to $6,519,000
from $10,047,000 for the six months ended December 31, 1997, a decrease of 35%.
The decrease from the comparable quarter in the prior year is primarily
attributable to a loss of sales and marketing momentum and customer delay or
lost sales due to the announcement and pendancy of the proposed merger with
Legato. The decline for the six month period was also influenced by the
transition of the sales force to a new enterprise-level sales approach and the
shift in focus from selling its high availability products to selling its
FullTime service level availability products and services. The sales force
spent a significant amount of time in the first and second quarters of fiscal
1999 familiarizing itself with the new products and introducing these new
products to the marketplace.
Other Products. Revenue from the sale of other products, which consist
primarily of ancillary hardware and software products that are resold by Qualix
Direct, decreased to $1,281,000 in the
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second quarter and $2,736,000 for the six months ended December 31, 1998 from
$2,227,000 and $4,613,000, respectively for the same period of 1998, decreases
of $946,000 or 42% and $1,877,000 or 41%, respectively. The decrease from the
comparable quarter of fiscal 1998 is primarily attributable to a loss of sales
and marketing momentum due to the announcement and pendancy of the proposed
merger with Legato. The decrease for the comparable six-month periods was also
impacted by FullTime's continued focus on the sales of its internally developed
higher margin reliability products as compared to third party products.
Approximately $226,000 of the comparable six month period decrease was
attributable to lower selling prices of other products initiated in July 1998
due to increased competition.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue, primarily derived from annual maintenance agreements and training,
decreased to $1,386,000 in the second quarter of fiscal 1999 from $1,524,000
for the same period of fiscal 1998, a decrease of $138,000, or 9%. Support,
maintenance and consulting revenue increased to $2,976,000 in the first six
months of fiscal 1999 from $2,857,000 for the same period in fiscal 1998, an
increase of 4%. The decrease from the comparable quarter of the prior year is
attributable primarily to the adverse impact of the proposed merger on the
sales staff and related loss of marketing momentum. The increase for the six
month period is primarily attributable to increasing renewals of support
contracts as FullTime's installed base of licenses has increased.
International Revenue. Revenue generated from sales to FullTime's customers
outside the United States decreased 12% to $1,777,000 in the second quarter of
fiscal 1999 from $2,039,000 in the second quarter of fiscal 1998 and decreased
1% to $3,239,000 in the first six months of fiscal 1999 from $3,267,000 in the
first six months of fiscal 1998. These decreases are primarily attributable to
the loss of sales and marketing momentum associated with the proposed merger
with Legato. International revenue increased to 33% of total revenue for the
quarter ended December 31, 1998 from 21% of total revenue for the quarter ended
December 31, 1997. International revenue increased to 26% of total revenue for
the six months ended December 31, 1998 from 19% of total revenue for the six
months ended December 31, 1997. The increase in international revenue as a
percentage of total revenue has been attributable primarily to the increase in
field sales offices and increases in the number of international employees. At
December 31, 1998, FullTime had 20 foreign employees in 7 offices compared to
13 foreign employees in 6 offices at December 31, 1997.
Cost of Revenues
Total cost of revenues decreased to $1,645,000 in the second quarter of
fiscal 1999 from $2,565,000 for the same period of 1998, a decrease of
$920,000, or 36%. Cost of revenues decreased to $3,576,000 in the first six
months of fiscal 1999 from $4,820,000 for the same period of fiscal 1998, a
decrease of 26%.
Cost of Reliability Software. Cost of reliability software as a percentage of
reliability software revenues decreased to 7% in the second quarter of fiscal
1999 from 8% in the second quarter of 1998 and increased to 8% from 5% for the
first six months of the respective fiscal years. The decrease from the
comparable quarter of the prior year is attributable to high sales volume of a
lower margin resold reliability product in the prior year period. In the first
six months of fiscal 1998, FullTime was relieved of an obligation to pay
Veritas royalties in the amount of $421,605. The obligation was
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relieved as a direct result of FullTime's customers choosing to convert their
software from Qualix HA, software with a licensed core engine, to Qualix HA+,
software with an internally developed core engine. The financial impact of the
reversal of the obligation was a reduction in the cost of sales for reliability
products. This resulted in a lower cost of sales percentage and, therefore, a
higher gross margin than is typically experienced by FullTime. The 1999 fiscal
year showed lower gross margin than the comparable period in 1998 because 1999
did not have any such benefit.
Cost of Other Products. Cost of other products as a percentage of other
product revenues increased to 75% in the second quarter of fiscal 1999 from 72%
in the second quarter of 1998. Cost of other products as a percentage of other
product revenues decreased to 71% in the first six months of fiscal 1999 from
72% in the first six months of fiscal 1998. The increase from the comparable
quarter of the prior year is attributable to lower selling prices initiated in
July 1998 due to increased competition. The percentage cost of other product
revenues for the first six months of fiscal 1998 and 1999 are virtually the
same.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance and
consulting as a percentage of support, maintenance and consulting revenues
increased to 36% for the second quarter of fiscal 1999 from 34% for the same
period of 1998 and to 37% for the first six months of fiscal 1999 from 35% for
the first six months of fiscal 1998. These slight increases are primarily
attributable to support renewal price reductions for some types of support
contracts while costs have remained stable.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased to $5,032,000 in
the second quarter of fiscal 1999 from $5,507,000 for the same period of 1998,
a decrease of $475,000, or 9%. Sales and marketing expenses increased to
$10,301,000 in the first six months of fiscal 1999 from $9,826,000 for the same
period of 1998, an increase of $475,000 or 5%. These expenses increased as a
percentage of total net revenues to 84% in the second quarter of fiscal 1999
from 56% in the second quarter of 1998. The increase in terms of percentage of
total net revenues was due to significantly reduced revenues. The decrease in
absolute dollars from the comparable quarter in the prior fiscal year is
primarily attributable to reduced staffing levels in the current year. Sales
and marketing staff totaled 81 at December 31, 1998 compared to 100 at December
31, 1997. The increase on an absolute and percentage basis from the comparable
six month period of fiscal 1998 was primarily attributable to costs associated
with the rollout of the FullTime product line in the first quarter of fiscal
1999 approximating $355,000 plus incremental costs associated with operating
foreign offices during the period aggregating approximately $98,000.
General and Administrative. General and administrative expenses increased to
$1,317,000 in the second quarter and to $2,551,000 for the six months ended
December 31, 1998 from $1,158,000 and $2,172,000, respectively, for the
comparable periods of fiscal 1998, increases of $159,000, or 13% and $379,000,
or 17%, respectively. As a percentage of total net revenues, these expenses
increased to 25% in the second quarter of fiscal 1999 from 12% in the
comparable period of 1998. The increase in terms of percentage of total net
revenues was due to significantly reduced revenues. The increase in absolute
dollars is primarily a result of increased staffing and related costs required
to manage and support FullTime's operations. General and administrative staff
increased from 22 at
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December 31, 1997 to 26 at December 31, 1998 and employee related expenses
increased by 32% for the second quarter and 22% for the first six months of
fiscal 1999. In addition, depreciation expense increased by 99% and other
facilities costs associated with business expansion increased by 202% over the
comparable six month period of fiscal 1998.
Research and Development. Research and development expenses increased to
$998,000 in the second quarter of fiscal 1999 from $931,000 for the same period
of 1998, an increase of $67,000, or 7%. Research and development expenses
increased to $1,817,000 in the first six months of fiscal 1999 from $1,779,000
in the first half of fiscal 1998, an increase of $38,000 or 2%. This increase
was primarily attributable to increased staffing and related expenses required
to support product development activities, including development of the
FullTime service level availability products introduced in July 1998,
development and enhancement of HA+, FullTime's UNIX-based high availability
products, and adding features to FullTime's Octopus family of reliability
products including application failover and support for Microsoft Cluster
Server. Research and development staff increased from 21 at December 31, 1997
to 24 at December 31, 1998 and employee related expenses increased by 9% for
the three months ended December 31, 1998 and 13% for the first six months of
fiscal 1999 as compared to the comparative periods in fiscal 1998. During the
latter part of the first quarter of fiscal 1999, FullTime opened a New England
development office, resulting in incremental costs of $24,000 and $38,000 for
the three month and six month periods ended December 31, 1998.
Non-Operating Items
Interest Income (Expense), net. Interest income decreased to $103,000 in the
second quarter of fiscal 1999 from $212,000 for the same period of 1998, a
decrease of $109,000, or 51%. Interest income decreased to $235,000 in the
first six months of fiscal 1999 from $460,000 for the same period of 1998, a
decrease of $225,000, or 48%. These decreases reflects lower average investment
balances largely attributable to the net losses incurred in fiscal 1998 and
1999.
Provision For Income Taxes. FullTime recorded no provision for domestic
income taxes for the second quarter and first six months of fiscal 1999 and no
provision for the same periods in the prior fiscal year because FullTime had
taxable losses for which no significant benefit was recognized. FullTime
incurred $40,000 of income tax expense during the period related to its
operations in France and Singapore.
Net Loss. Net loss for the quarter ended December 31, 1998 was $(3,699,000)
or $(0.35) per share, diluted, compared to net loss of $(657,000) or $(0.06)
per share, diluted, for the comparable period in the prior fiscal year. Net
loss for the first six months of fiscal 1999 was $(5,819,000) or $(0.55) per
share, diluted, compared to net loss of $(620,000) or $(0.06) per share,
diluted, for the comparable six month period in the prior year.
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<PAGE>
Comparison of Fiscal Years Ended June 30, 1996, 1997 and 1998
Revenue
Reliability Software. Revenue from the sale of reliability software decreased
5% to $16.0 million in fiscal 1998 from $16.9 million in fiscal 1997 and
increased 88% in fiscal 1997 from $9.0 million in fiscal 1996. The decrease in
fiscal 1998 is primarily attributable to a decline in sales force productivity
during the year. Sales productivity levels declined in fiscal 1998 as a result
of adding 23 or 47% more field sales personnel without a corresponding increase
in revenue. The increase from fiscal 1996 to fiscal 1997 was primarily
attributable to the broad market acceptance of high availability products for
the UNIX and Windows NT operating environments, the increase in field sales
offices from 10 to 21, an increase in field sales personnel of 17 or 54% and
the expansion of the telesales and telemarketing organization from 7 to 12, an
increase of 58%.
Other Products. Revenue from the sale of other products, which consist
primarily of ancillary hardware and software products that are resold by Qualix
Direct, decreased 22% to $8.0 million in fiscal 1998 from $10.3 million in
fiscal 1997 and increased 93% in fiscal 1997 from $5.4 million in fiscal 1996.
The decrease in fiscal 1998 is attributable to FullTime's continued focus on
the sales of its internally developed higher margin reliability products as
compared to third party products. The increase in fiscal 1997 primarily
reflects an emphasis on expansion of the Qualix Direct telesales and
telemarketing operation, including expanded product offerings and an increase
in sales personnel from 7 to 12 from year to year, an increase of 58%.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue increased 20.5% to $6.0 million in fiscal 1998 from $4.9 million in
fiscal 1997 and increased 124% in fiscal 1997 from $2.2 million in fiscal 1996.
The growth in support, maintenance and consulting revenue has been primarily
attributable to increased sales of services and support contracts on new
license sales and, to a lesser extent, on increasing renewals of these
contracts as FullTime's installed base of licenses has increased. Revenue on
new support sales increased by 3818% in fiscal 1997 from $31,000 in fiscal 1996
to $1,204,000 and 87% in fiscal 1998 to $2,247,000 while renewal support sales
increased by 103% to $1,008,000 in fiscal 1997 and 35% to $1,356,000 in fiscal
1998. The percentage increases in support, maintenance and consulting were
higher than the percentage increases in reliability product revenue in fiscal
1997 and 1998 because of support contract renewals from FullTime's installed
base and because the Octopus installed base historically had purchased minimal
amounts of support.
International Revenue. Revenue generated from sales to customers outside the
United States increased 23% to $6.6 million in fiscal 1998 from $5.4 million in
fiscal 1997 and increased 88% from $2.9 million in fiscal 1996. The growth in
international revenue was attributable primarily to the increasing market
acceptance of high availability products for the UNIX and Windows NT operating
environments, the increase in international field sales offices from none at
June 30, 1996 to 2 at June 30, 1997 and to 8 at June 30, 1998 and increases in
the number of international employees from none at June 30, 1996 to 3 at June
30, 1997 and to 21 at June 30, 1998.
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Cost of Revenue
Cost of Reliability Software. Cost of revenue from the sale of reliability
software decreased 74% to $1.0 million in fiscal 1998 from $3.7 million in
fiscal 1997 and increased 3% in fiscal 1997 from $3.6 million in fiscal 1996.
Gross margin was 94% in fiscal 1998, 78% in fiscal 1997 and 59% in fiscal 1996.
The increase in gross margin on reliability software in fiscal 1998 is due to
increased sales volumes of higher margin internally developed reliability
products, primarily QualixHA+ and OctopusHA+, that have little or no royalty or
licensing components. The increase in gross margin in fiscal 1997 primarily
resulted from increasing percentages of revenue from higher margin reliability
software, including both QualixHA and OctopusHA+.
Cost of Other Products. Cost of revenue from the sale of other products
decreased to $5.8 million in fiscal 1998 from $7.3 million in fiscal 1997 and
$3.8 million in fiscal 1996. Gross margin remained constant at 29% in fiscal
1998, 1997 and 1996. In general, margins for resold products are decreasing
because of lower selling prices due to increased competition, however these
decreases were partially offset by the refocused efforts of the Qualix Direct
telesales organization on higher margin products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance and
consulting revenue increased to $2.1 million in fiscal 1998 from $1.9 million
in fiscal 1997 and $1.0 million in fiscal 1996. This is a result of increased
personnel-related costs which increased from $334,000 in fiscal 1996 to
$396,000 in fiscal 1997, an increase of 18%, and increased to $734,000 in
fiscal 1998, an increase of 85%, as FullTime continues to build its customer
support and training organizations. Gross margin on support, maintenance and
consulting revenue was 65% in fiscal 1998, 62% in fiscal 1997 and 54% in fiscal
1996. The increasing margin in both fiscal 1998 and fiscal 1997 was due to the
higher average selling prices, increases in Fulltime's support staff as noted
above and a corresponding reduction in the use of outside consultants resulting
in cost savings of $120,000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $19.9 million
in fiscal 1998 from $11.3 million in fiscal 1997 and $5.1 million in fiscal
1996. Sales and marketing expenses increased as a percentage of revenue to
66.2% in fiscal 1998 from 35.1% in fiscal 1997 and increased in fiscal 1997
from 30.8% in fiscal 1996. The increases on both an absolute and a percentage
basis from fiscal 1997 to fiscal 1998 were primarily a result of the expanded
infrastructure to support FullTime's growing global presence, including the
opening of nine new sales offices worldwide, and an increase in personnel of 23
or 31% to expand FullTime's marketing and distribution capabilities. The
increase in absolute dollars from fiscal 1996 to fiscal 1997 is primarily
related to growth in FullTime's domestic sales and marketing infrastructure
through the increase in the number of employees of 22 or 44% and the opening of
eleven sales offices throughout the United States.
General and Administrative. General and administrative expenses increased to
$4.7 million in fiscal 1998 from $2.9 million in fiscal 1997 and $1.9 million
in fiscal 1996. General and administrative expenses as a percentage of revenue
were 15.7%, 9.0% and 11.6% in fiscal 1998, 1997 and 1996, respectively. These
increases in absolute dollars are attributable to the costs
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associated with increased staffing and the related costs required to manage and
support Fulltime's operations. General and administrative staff increased from
10 at June 30, 1996, to 19 at June 30, 1997, and to 24 at June 30, 1998;
employee related expenses increased by 103% in fiscal 1997 and by 37% in fiscal
1998. In addition, depreciation expense increased by $260,000 in fiscal 1997
and by $615,000 in fiscal 1998 and other facilities costs associated with
business expansion increased by $30,000 in fiscal 1997 and by $245,000 in
fiscal 1998.
Research and Development. Research and development increased to $3.8 million
in fiscal 1998 from $2.3 million in fiscal 1997 and $620,000 in fiscal 1996.
Research and development expenses as a percentage of total revenue increased to
12.7% in fiscal 1998 from 7.1% in fiscal 1997 and 3.7% in fiscal 1996. These
increases were primarily attributable to increased staffing and related
expenses required to support product development activities, including
development of the FullTime Service Level Availability products introduced in
July 1998, development and enhancement of HA+, FullTime's UNIX-based high
availability products, and adding features to FullTime's Octopus family of
reliability products including application failover and support for Microsoft
Cluster Server. These employee related expenses have increased from $83,000 for
fiscal 1996 to $1,281,000 for fiscal 1997 to $2,804,000 for fiscal 1998.
Merger Expenses. Merger expenses of $595,000 were incurred in connection with
the acquisition of Octopus Technologies in the first quarter of fiscal 1997.
Merger expenses consisted primarily of investment banking, legal and accounting
fees.
Purchased In-Process Technology. Approximately $740,000 of the purchase price
of Anthill represented the value of in-process technology which was charged to
FullTime's operations in the fourth quarter of fiscal 1996.
Non-Operating Items
Gain on Sale of Investments. In May 1995, FullTime received shares of Veritas
common stock pursuant to a merger agreement between Veritas and Tidalwave
Technologies, Inc. In September 1995, FullTime sold 75% of the shares and
realized a gain of $763,000. In June, 1997 FullTime sold the remaining 25% of
the shares and realized a gain of $528,000.
Other Income, (Expense), net. Other Income, (Expense), net increased $439,000
or 121% to $801,000 for fiscal 1998 from $362,000 for fiscal 1997 and increased
$279,000 or 336% year over year from $83,000 in fiscal 1996. This increase
reflects higher average investment balances for during the year, largely
attributable to FullTime's IPO in February 1997.
Provision for Income Taxes. FullTime recorded no provision for income taxes
in fiscal 1998 as FullTime incurred losses during the period. FullTime had an
effective tax rate of 13% for fiscal 1997 due primarily to Alternative Minimum
Tax imposed by the Internal Revenue Service and state income taxes. Due to
FullTime's utilization of net operating loss carryforwards, the effective tax
rate for fiscal 1997 was lower than the statutory rate. There was no provision
for income taxes in fiscal 1996 which reflects the reversal of the valuation
reserve against deferred income taxes to the extent of current period earnings.
See Note 6 to the Consolidated Financial Statements.
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Liquidity and Capital Resources
At December 31, 1998, FullTime had $7,349,000 in cash, cash equivalents and
temporary cash investments, as compared to $11,874,000 at June 30, 1998, a
decrease of $4,525,000, or 38%. At December 31, 1998, FullTime had working
capital of $5,097,000 compared to $10,454,000 at June 30, 1998.
Cash Flows From Operating Activities. Cash used in operations was $4,081,000
during the first six months of fiscal 1999 which was a $1,206,000 increase from
the comparable period of the prior year. This increase is attributed
principally to the loss from operations plus a decrease in deferred revenue and
advances offset by a decrease in accounts receivable, other current assets and
an increase in depreciation and amortization and accounts payable and accrued
liabilities. During the comparable period of fiscal 1998, cash used in
operating activities was attributable to loss from operations plus increases in
accounts receivable and other current assets offset by decreases in deferred
revenues, accounts payable and accrued liabilities and increases in
depreciation and amortization. The decreases in deferred revenue and advances
are attributable to payments under support, maintenance and consulting
contracts for which revenue had not yet been recognized.
Cash Flows From Investing Activities and Financing Activities. Net cash used
by investing activities was $740,000 for the first six months of fiscal 1999
primarily consisting of $460,000 in purchases of property and equipment and
$1,180,000 in net purchases of temporary cash investments. Net cash used by
investing activities was $3,717,000 for the first six months of fiscal 1998
consisting of $1,112,000 in purchases of property and equipment and $2,605,000
in net purchases of temporary cash investments.
FullTime believes that cash, cash equivalents and temporary investments and
cash flows from operations will be sufficient to fund operations, purchases of
capital equipment and research and development programs currently planned at
least through the next twelve months; however, should the merger between
FullTime and Legato not be consummated as a result of certain specified events
involving, in general, a change in FullTime board of director support for the
merger and/or an alternative transaction, FullTime has agreed to pay to Legato
a "break-up" fee of $2.0 million. If the merger is not consummated, expenses
incurred in connection with the proposed merger, including the possible "break-
up" fees described above, could have a material adverse effect on FullTime's
results of operations.
Business Environment
FullTime has incurred significant net losses since its inception and had an
accumulated deficit of approximately $13.1 million as of September 30, 1998.
FullTime is subject to the risks inherent in the operation of a new business
enterprise, and there can be no assurance that FullTime will be able to
successfully address these risks.
Year 2000 Compliance Issues
Many currently installed computer systems and software products are coded to
accept only two digit entries in date code fields. These date code fields will
need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, many companies'
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software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements.
FullTime has tested its current products for Year 2000 compliance and
believes that its current products are Year 2000 compliant. However, the
failure of FullTime's current or prior products to operate properly with regard
to the Year 2000 requirements could cause FullTime to incur unanticipated
expenses to remedy any problems, could cause a reduction in sales and could
expose FullTime to related litigation by its customers, each of which could
have a material adverse effect on FullTime's business, operating results and
financial condition.
FullTime utilizes third party equipment and software that may not be Year
2000 compliant. Except for the suppliers of FullTime's proposed new financial
system, FullTime has made inquiries of all its material equipment and software
suppliers as to the Year 2000 compliance of their products. Each supplier has
indicated that its equipment and/or software either is, or will be by December
31, 1999, Year 2000 compliant.
The supplier of FullTime's current financial information system has indicated
that the current version of its software is not, and will not be Year 2000
compliant. FullTime has determined that minor modifications to the current
financial information system would be required to make it Year 2000 compliant.
The estimated cost of such modifications is expected to approximate $50,000.
Nonetheless, while FullTime would be affected by any such failure, FullTime
believes that it could continue to operate despite any such failure of its
financial information system to be Year 2000 compliant. Additionally, FullTime
is investigating migration to alternative financial information systems, each
of which have committed to being Year 2000 compliant.
FullTime also has material relationships with third party suppliers and
service providers who may utilize equipment or software that may not be Year
2000 compliant, such as financial institutions, shipping companies and payroll
services. FullTime has made inquiries of all such material parties as to their
Year 2000 status. Each such supplier that has responded indicates that it has a
Year 2000 program underway and intends to be compliant by December 31, 1999.
Based upon the results of such inquiry, FullTime intends to take appropriate
action. Nonetheless, while FullTime would be affected by any such failure,
FullTime believes that it could continue to operate despite any such failure of
a material party to be Year 2000 compliant. Failure of any third-party's
equipment or software to operate properly with regards to the Year 2000
requirements could cause FullTime to incur unanticipated expenses to remedy any
problems and could cause a reduction in sales, each of which could have a
material adverse effect on FullTime's business, operating results and financial
condition.
The business, operating results and financial condition of FullTime's
customers could also be adversely affected to the extent that they utilize
equipment or software that is not Year 2000 compliant. Furthermore, the
purchasing patterns of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to evaluate and correct
their equipment of software for Year 2000 compliance and as they evaluate the
Year 2000 compliance of like third parties with whom they deal. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by FullTime, which could have a material adverse
effect on FullTime's business, operating results and financial condition.
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FullTime has not established a formal contingency plan for any potential
failure of any of FullTime's or any third party's equipment or software, but
FullTime plans to create such a formal contingency plan prior to June 30, 1999.
FullTime has, and will continue to make, certain investments in its
equipment, software systems and applications to ensure that FullTime is Year
2000 compliant and to evaluate the Year 2000 preparedness of the material third
parties with whom it deals. To date, FullTime has primarily used existing
personnel and spent approximately $2,000 in order to evaluate the Year 2000
exposure, apply software and firmware upgrades to all personal computer
operating systems and expects to spend an additional $25,000 to $35,000 in the
next twelve months. As a result, the financial impact to FullTime for Year 2000
compliance has not been and is not anticipated to be material to its financial
position, results of operation or cash flows in any given year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FullTime is exposed to market risk related to changes in interest rates. The
Company does not use derivative financial instruments for hedging, speculative
or trading purposes.
FullTime maintains a portfolio of cash equivalents and temporary investments
consisting mainly of securities with an average maturity of 3.6 years. These
available for sale securities are subject to interest rate risk and will fall
in value if market interest rates increase. FullTime has the ability to hold
its fixed income investments until maturity and therefore would not expect its
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on its portfolio.
<TABLE>
<CAPTION>
Amounts by Maturity as of June 30, 1998
(dollars in thousands): FY 1999 FY 2000 FY 2008 FY 2030
--------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash Equivalents......................... $4,367 $ -- $ -- $ --
Average interest rate................. 5.69%
Temporary investments.................... $3,264 $ 441 $1,100 $ 200
Average interest rate................. 6.36% 6.69% 5.74% 5.65%
Total Portfolio.......................... $7,631 $ 441 $1,100 $ 200
Average interest rate................. 6.02% 6.69% 5.75% 5.65%
</TABLE>
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FULLTIME MANAGEMENT
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard G. Thau......... 52 Chairman of the Board, President and Chief Executive Officer
Bruce C. Felt........... 40 Vice President of Finance and Chief Financial Officer
David R. Malmstedt...... 42 Senior Vice President of Field Operations
Dan E. Kingman.......... 44 Vice President of Human Resources
George J. Symons........ 38 Vice President of Engineering/Technical Services
Louis C. Cole........... 55 Director
Kenneth A. Goldman(2)... 49 Director
William Hart(1)......... 58 Director
William D. Jobe(1)...... 60 Director
Peter L. Wolken(2)...... 64 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Thau, Chairman of the Board, President and Chief Executive Officer, co-
founded FullTime in September 1990. From September 1985 to January 1990, he was
employed at MicroMRP, a company that develops microcomputer-based
manufacturing, planning and control software, where he served as President and
Chief Executive Officer from November 1985 to January 1990 and as Vice
President, Sales and Marketing from September 1985 to November 1985. From
January 1984 to July 1985, he served as Vice President, Sales and Marketing for
General Parametrics, a hardware and software-based business presentation
systems company. Mr. Thau received a B.S. in engineering sciences from State
University of New York at Stony Brook in 1968 and attended the M.B.A. program
at the University of Santa Clara.
Mr. Felt, Vice President Finance and Chief Financial Officer, joined FullTime
in March 1994. From July 1992 to March 1994, he was an independent consultant.
From June 1989 to July 1992, Mr. Felt was Chief Financial Officer at
Renaissance Software Inc., a trading systems software company that he co-
founded. Mr. Felt received a B.S. in accounting from the University of South
Carolina in 1980 and an M.B.A. from Stanford University, Graduate School of
Business in 1989. Mr. Felt is a Certified Public Accountant.
Mr. Malmstedt, Senior Vice President of Field Operations, joined FullTime in
January 1998. From August 1995 to January 1998 Mr. Malmstedt was Vice
President, Americas, for Candle Corporation, a systems management software
company. From November 1989 to August 1995 Mr. Malmstedt served as Vice
President, Central Area, for Legent Corporation. From 1984 to 1989 he was
Regional Director for Business Software Technology, a company which he founded.
From 1980 to 1984 he was a Regional Manager for Cullinet Software, Inc. From
1976 to 1980 Mr. Malmstedt held various positions within Pansophic Systems,
Inc.
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Mr. Kingman, Vice President of Human Resources, joined FullTime in January
1998. From June 1992 to January 1998, Mr. Kingman was Vice President of Human
Resources at MDL Information Systems. From July 1987 to October 1991 he was
employed at Appian Technology Inc. as Vice President of Corporate Resources.
From November 1978 to July 1987 Mr. Kingman served in various management
positions at Signetics Corporation. He received a B.S. in commerce from Santa
Clara University in 1976.
Mr. Symons, Vice President of Engineering/Technical Services, joined FullTime
in April 1996. From May 1995 to April 1996, Mr. Symons was an independent
consultant. From April 1993 to April 1995, he was Vice President of Marketing
at Software Research, Inc., a software testing tools company. From January 1993
to March 1993 he served as an independent consultant. From September 1990 to
December 1992, he was Vice President, Marketing at PROCASE Corp., a development
software manufacturer. Mr. Symons received a B.A. in management science and a
B.A. in computer science in 1981 from the University of California, San Diego
and an M.B.A. in 1983 from the University of California, Los Angeles.
Mr. Cole has served as a director of FullTime since October 1997. Mr. Cole is
Chairman of the Board, President and Chief Executive Officer of Legato. Mr.
Cole joined Legato as President, Chief Executive Officer and a director in June
1989; he has served as Chairman of the Board since April 1995. Before joining
Legato, 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 holds
a B.S. in mathematics and education from Pennsylvania State University at
Edinboro.
Mr. Goldman has served as a director of FullTime since May 1998. He has
served as the Senior Vice President and Chief Financial Officer of @ Home
Network since he joined @ Home Network in July 1996. From July 1992 to July
1996, he was Senior Vice President and Chief Financial Officer of Sybase, Inc.,
a database software and services company. From 1989 to July 1992, Mr. Goldman
was Vice President of Finance and Administration and Chief Financial Officer at
Cypress Semiconductor Corporation, a semiconductor manufacturer. From 1983 to
1989, he was Vice President and Chief Financial Officer of VLSI Technology Inc.
Mr. Goldman serves on the board of directors of Global Village Inc. He holds a
B.S. degree in electrical engineering from Cornell University and an M.B.A.
degree from the Harvard Business School.
Mr. Hart has served as a director of FullTime since December 1991. He is a
Managing Partner of Technology Partners, a venture capital management firm that
he founded in 1980. Mr. Hart serves on the Boards of Directors of Trimble
Navigation Ltd., CellNet Data Systems, Inc., Silicon Gaming, Inc. and several
private technology companies. He received a B.S. in engineering from Rensselaer
Polytechnic Institute in 1965 and an M.B.A. from the Amos Tuck School at
Dartmouth College in 1967.
Mr. Jobe has served as a director of FullTime since April 1995. He has served
as a private venture capitalist and computer industry advisor since July 1991.
From June 1990 to July 1991, Mr. Jobe was President of MIPS Technology
Development, a computer hardware company. From August 1987 to June 1990, he was
Executive Vice President, Sales, Marketing and Service for MIPS. Mr. Jobe
serves on the Board of Directors of Multimedia Access Corp. Mr. Jobe received a
B.S.M.E.
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and M.S.M.E. from Texas A&M University in 1962 and a P.M.D. from Harvard
Business School in 1977.
Mr. Wolken has served as a director of FullTime since 1990. Mr. Wolken is a
General Partner of AVI Management Partners I, II and III which manage various
private venture capital limited partnerships, having co-founded AVI in 1981. He
serves as a director of a number of private technology companies in Silicon
Valley. Mr. Wolken received a B.S. in mechanical engineering from the
University of California, Berkeley in 1959 and a B.F.T. in international
marketing from the American Graduate School for International Management in
1960.
FullTime Board Meetings and Committees
During the fiscal year ended June 30, 1998, the FullTime Board held 4
meetings and acted by written consent on 2 occasions. For the fiscal year, each
of the current directors attended at least 75% of the aggregate of (i) the
total number of meetings of the FullTime Board and (ii) the total number of
meetings held by all committees of the FullTime Board on which each such
director served. The FullTime Board has two standing committees: the Audit
Committee and the Compensation Committee.
During the fiscal year ended June 30, 1998, the Audit Committee of the
FullTime Board held one meeting. The Audit Committee is responsible for
reviewing the results and scope of audits and other services provided by
FullTime's independent auditors. The members of the Audit Committee are
Mr. Goldman and Mr. Wolken.
During the fiscal year ended June 30, 1998, the Compensation Committee of the
FullTime Board held no meetings and acted by written consent on 11 occasions.
The Compensation Committee makes recommendations concerning the salaries and
incentive compensation of employees of, and consultants to, FullTime. The
Compensation Committee also administers FullTime's 1997 Plan and Employee Stock
Purchase Plan. The members of the Compensation Committee are Mr. Hart and
Mr. Jobe.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the FullTime Board was formed on July 16, 1996,
and the members of the Compensation Committee are Mr. Hart and Mr. Jobe.
Neither of these individuals was at any time during fiscal year 1998, or at any
other time, an officer or employee of FullTime. No executive officer of
FullTime 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 FullTime Board or Compensation Committee.
Director Compensation
Except for grants of stock options, directors of FullTime generally do not
receive compensation for services provided as a director. FullTime also does
not pay compensation for committee participation or special assignments of the
FullTime Board.
Non-employee FullTime Board members are eligible for option grants pursuant
to the provisions of the automatic grant program under FullTime's 1997 Plan.
Under the automatic grant program,
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each individual who becomes a non-employee FullTime Board member will be
granted an option to purchase 20,000 shares on the date such individual joins
the FullTime Board. In addition, at each annual stockholders meeting, each
individual who continues to serve and has served as a non-employee FullTime
Board member for at least six months prior to such annual stockholders meeting
receives an additional option grant to purchase 10,000 shares of common stock,
whether or not such individual is standing for re-election at that particular
meeting.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires FullTime's executive officers and
directors, and persons who own more than ten percent of a registered class of
FullTime's equity securities ("10% Stockholders") to file with the Commission
and the National Association of Securities Dealers, Inc. reports of ownership
on Form 3 and reports on changes in ownership on Form 4 or Form 5. Such
executive officers, directors and 10% Stockholders are also required by
Commission rules to furnish FullTime with copies of all Section 16(a) forms
that they file.
Based solely on its review of the copies of such forms received by FullTime,
or written representations from certain reporting persons that no Forms 5 were
required for such persons, FullTime believes that during the fiscal year ended
June 30, 1998, its executive officers, directors and 10% Stockholders complied
with all applicable Section 16(a) filing requirements.
Executive Compensation
The following Summary Compensation Table sets forth the compensation earned
by FullTime's Chief Executive Officer and the three other most highly
compensated executive officers who were serving as such at the end of fiscal
year 1998 (collectively, the "Named Officers"), each of whose aggregate
compensation for fiscal year 1998 exceeded $100,000, for services rendered in
all capacities to FullTime and its subsidiaries for the 1997 and 1998 fiscal
years. Also included is the compensation for two former employees of FullTime
who served as executive officers during fiscal 1998.
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Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ----------------------
Number of Securities All Other
Name and Principal Position Fiscal Year Salary ($)(1) Bonus ($)(1)(2) Underlying Options (#) Compensation ($)
- --------------------------- ----------- ------------- --------------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
Richard G. Thau, 1998 $190,000 $ 90,644 -- $11,400(7)
President and Chief
Executive 1997 180,292 81,852 50,000 7,680(7)
Officer 1996 150,000 62,206 70,000 --
David R. Malmstedt, 1998 96,970 84,388 200,000 --
Senior Vice President of
Field 1997 -- -- -- --
Sales Operations(3) 1996 -- -- -- --
Bruce C. Felt, 1998 124,500 31,063 30,000 --
Vice President, Finance
and 1997 102,099 61,718 16,000 --
Chief Financial Officer 1996 90,834 17,777 20,000 --
Arlington C. Glaze, 1998 55,359 45,415 -- --
Former Vice President, 1997 96,249 172,674 26,500 --
Sales(4) 1996 77,499 88,746 30,000 --
George J. Symons, 1998 130,000 32,678 30,000 --
Vice President of 1997 108,772 39,312 -- --
Engineering/Technical 1996 22,500 8,711 32,581 --
Services(5)
David P. Crocker, 1998 87,500 69,803 30,000 --
Former President,
Octopus 1997 198,388 83,473 40,000 --
Technologies Division(6) 1996 87,116 -- 41,568 --
</TABLE>
- --------
(1) Includes amounts deferred under FullTime's 401(k) plan.
(2) Bonus amounts include commissions earned in the respective fiscal years.
(3) Mr. Malmstedt joined FullTime in January 1998.
(4) Mr. Glaze terminated employment with FullTime in January 1998.
(5) Mr. Symons commenced employment with FullTime in April 1996.
(6) Mr. Crocker terminated employment with FullTime in March 1998.
(7) Represents an automobile expense allowance.
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The following table contains information concerning the stock option grants
made to each of the Named Officers during the fiscal year ended June 30, 1998.
No stock appreciation rights were granted to these individuals during such
fiscal year.
Option Grants in Last Fiscal Year
Individual Grants (1)
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percent of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation
Underlying Granted to Price for Option Term (4)
Options Employees Per Share Expiration ----------------------
Name Granted(#) in Fiscal 1998(2) ($/sh)(3) Date 5% ($) 10% ($)
---- ---------- ----------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David R. Malmstedt...... 200,000 12% $2.750 1/23/08 $ 345,892 $ 876,558
Bruce C. Felt........... 30,000 2% $2.750 1/23/08 51,884 131,484
George J. Symons........ 30,000 2% $2.750 1/23/08 51,884 131,484
David P. Crocker........ 30,000 2% $2.750 1/23/08 51,884 131,484
</TABLE>
- --------
(1) During the third quarter of fiscal 1998, FullTime approved a cancellation
and regrant of outstanding stock options for all holders of outstanding
options with exercise prices in excess of the reported Nasdaq National
Market closing selling price per share on January 23, 1998. The options
shown in the table were granted at the reported Nasdaq National Market
closing selling price per share on January 23, 1998, are incentive stock
options and will expire ten years from the date of grant, subject to
earlier termination upon termination of the optionee's employment. Each of
the options is immediately exercisable. The shares purchasable thereunder
are subject to repurchase by FullTime at the original exercise price paid
per share upon the optionee's cessation of service prior to vesting in such
shares. The repurchase right lapses as to 25% of the shares upon completion
of one year of service from the grant date and the balance in a series of
36 monthly installments thereafter.
(2) Based on an aggregate of 1,655,658 options granted in the 1998 fiscal year.
(3) The exercise price 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. FullTime 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.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Commission. There can be no assurance provided
to any executive officer or any other holder of FullTime'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.
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Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth, as to the named officers, certain information
concerning stock options exercised during fiscal 1998 and the number of shares
subject to both exercisable and unexercisable stock options as of June 30,
1998. Also reported are values for unexercised "in-the-money" options, exercise
prices of outstanding stock options and the fair market value of FullTime's
common stock as of June 30, 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options in-the-Money Options
Shares at Fiscal Year-End (#) at Fiscal Year-End ($)(2)
Acquired on ------------------------- -------------------------
Name Exercise (#) Value Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ --------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Thau......... 25,000 $ 64,530 30,722 31,698 $16,339 $ 5,247
David R. Malmstedt...... -- -- -- 200,000 -- --
Bruce C. Felt........... 16,100 42,007 4,233 45,667 -- 11,278
George J. Symons........ -- -- 19,026 44,174 33,067 24,634
David P. Crocker........ -- -- 55,707 69,717 16,807 --
Arlington C. Glaze...... 47,163 128,866 -- -- -- --
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of
FullTime's common stock on the date of exercise minus the exercise price.
(2) Market value of underlying securities based on the closing price of
FullTime's common stock on June 30, 1998 (the last trading day of fiscal
1998) on the Nasdaq National Market of $1.938 minus the exercise price.
Employment Contracts and Change in Control Arrangements
Except as follows, none of the named officers have employment agreements with
FullTime, and their employment may be terminated at any time. FullTime has
entered into agreements with Mr. Thau, Chairman of the Board, President and
Chief Executive Officer, Mr. Malmstedt, Senior Vice President of Field Sales
Operations and Mr. Felt, Vice President, Finance and Chief Financial Officer.
Mr. Thau's employment agreement provides for severance payments equal to 50% of
his annual base compensation if he is terminated without cause or in certain
other circumstances. Mr. Felt's employment agreement provides that upon
termination without cause, he will continue to be paid during the 90-day period
after the date of termination at his then current base salary rate and will
receive 12 months' additional vesting of options granted and/or shares of
common stock purchased pursuant to his employment agreement. Mr. Malmstedt's
agreement provides for a base salary of $200,000 annually, a sign-on bonus of
$25,000 plus a first year bonus plan guaranteeing a payment of not less than
$50,000; a bonus of up to $100,000 may be earned if certain goals are achieved.
Should Mr. Malmstedt voluntarily resign or be terminated for cause during his
first year of employment with FullTime, he will be required to reimburse
FullTime for the sign-on bonus and any relocation expenses that may have been
paid to him. In connection with the merger, Messrs. Thau, Malmstedt and Symons
have entered into severance and employment arrangements which become effective
upon completion of the merger.
The compensation committee of the FullTime board of directors, as plan
administrator of FullTime's 1997 stock option plan, has the authority to
provide for accelerated vesting of the shares of common stock subject to
outstanding options held by the named officers and any other executive
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officer or director in connection with certain changes in control of FullTime
or the subsequent termination of the officer's employment following the change
in control event. If an option granted under Full Time's 1997 stock option plan
is not assumed or replaced with a cash incentive program in connection with a
change in control, then the vesting of such option will accelerate entirely.
Limitations on Liability and Indemnification
Delaware law authorizes a court to award or a corporation's board of
directors to grant indemnification to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities, including reimbursement for expenses incurred, arising under
the Securities Act of 1933. FullTime's bylaws provide for mandatory
indemnification of its directors and officers and permissible indemnification
of employees and other agents to the maximum extent permitted by Delaware law.
FullTime's certificate of incorporation provides that, pursuant to Delaware
law, its directors will not be liable for monetary damages for breach of their
fiduciary duty as directors to FullTime and its stockholders. This provision in
the certificate of incorporation does not eliminate the fiduciary duty of the
directors, and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each FullTime director will continue to be subject
to liability for breach of the director's duty of loyalty to FullTime for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision of FullTime's
certificate of incorporation also does not affect a director's responsibilities
under any other law, such as the federal securities laws or state or federal
environmental laws. FullTime has entered into indemnification agreements with
its officers and directors. The indemnification agreements provide FullTime's
officers and directors with further indemnification to the maximum extent
permitted by Delaware law.
Stock Plans
Stock Option Plans. Pursuant to FullTime's three separate stock option plans
and the reorganization agreement, Legato will assume the outstanding options to
purchase shares of FullTime common stock. These assumed options will be
exercisable for a number of shares of Legato common stock equal to the product
of (a) the number of shares of Full Time common stock that were issuable upon
exercise of such options immediately prior to completion of the merger
multiplied by (b) the share exchange ratio, and rounded down to the nearest
whole number of shares of Legato common stock. The per share exercise price for
the shares of Legato common stock issuable upon exercise of such assumed
options will be equal to the quotient determined by dividing the exercise price
per share of FullTime common stock at which such options were exercisable
immediately prior to the completion of the merger, by the share exchange ratio,
rounded up to the nearest whole cent. Each officer, employee or consultant who
exercises his or her FullTime options prior to the merger will receive shares
of Legato common stock upon completion of the merger. FullTime officers,
including Richard G. Thau, Bruce C. Felt, David R. Malmstedt, Dan E. Kingman,
Rebel Brown and George J. Symons, hold outstanding FullTime options granted
under the option plans.
Under the FullTime 1997 stock option plan, options to purchase FullTime
common stock that were granted to non-employee members of the FullTime board of
directors after FullTime's initial
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public offering will become fully exercisable and vested in connection with the
merger. The following non-employee board members of FullTime hold options to
purchase shares of FullTime common stock that were granted under the 1997 stock
option plan after FullTime's initial public offering: Louis C. Cole, Kenneth A.
Goldman, William Hart, William D. Jobe and Peter L. Wolken.
FullTime officers, including Bruce C. Felt, David R. Malmstedt, Dan E.
Kingman, Rebel Brown and George J. Symons, hold outstanding options granted
under the 1997 stock option plan. Under the 1997 plan, in the event that the
employment of an optionee, including a FullTime officer, is involuntarily
terminated within twelve (12) months following the merger, then the
exercisability or vesting of each outstanding option held by such optionee will
automatically accelerate and each option will become fully vested. The
accelerated option will remain exercisable until the earlier of the expiration
of the option term or the expiration of the one-year period measured from the
date of the involuntary termination. Involuntary termination is defined in the
1997 stock option plan to include
. A termination by FullTime without misconduct; or
. A voluntary resignation by the optionee following:
(1) a change in the optionee's position which materially reduces the
optionee's level of responsibility;
(2) a reduction by more than 15% in the optionee's level of
compensation, including base salary, fringe benefits, bonuses or
incentives; or
(3) a change in the optionee's place of employment which is more than
50 miles from the optionee's place of employment prior to the
change,
provided such change or reduction is effected without the optionee's consent.
As of December 31, 1998, FullTime officers hold the following options to
purchase shares of FullTime common stock: Richard G. Thau: 62,420 shares at
exercise prices ranging from $0.20 to $5.625 per share; Bruce C. Felt: 49,900
shares at exercise prices ranging from $0.20 to $5.625 per share; David
Malmstedt: 200,000 shares at an exercise price of $2.75 per share; Rebel Brown:
50,000 shares at an exercise price of $1.938 per share; and George J. Symons:
73,200 shares at exercise prices ranging from $0.20 to $2.75 per share.
Employee Stock Purchase Plan. The FullTime employee stock purchase plan
provides that, prior to the completion of the merger, all outstanding purchase
rights under the employee stock purchase plan will be exercised upon the
earlier of February 26, 1999 or immediately prior to the completion of the
merger. In the event that the completion of the merger is later than February
26, 1999, then a new purchase period will commence on March 1, 1999 and will
end upon the earlier of August 31, 1999 or immediately prior to the completion
of the merger. In such a case, each participant in the employee stock purchase
plan will be issued shares of FullTime common stock at that time pursuant to
the terms of the employee stock purchase plan and each share of FullTime common
stock so issued will automatically be converted into the right to receive a
fraction of a share of Legato common stock based on the share exchange ratio.
Certain of the FullTime officers contributes through payroll deduction to the
employee stock purchase plan and will purchase a maximum of 2,000 shares of
FullTime common stock immediately prior to consummation of the merger.
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<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1998 certain information
with respect to shares beneficially owned by (i) each person who is known by
FullTime to be the beneficial owner of more than five percent (5%) of
FullTime's outstanding shares of common stock, (ii) each of FullTime'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 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>
Amount and Nature of
Name and Address of Beneficial Owners Beneficial Ownership(1)(2) Percent of Class
- ------------------------------------- -------------------------- ----------------
<S> <C> <C>
Beneficial Owners of more than five
percent (5%) of FullTime's
outstanding shares of common
stock:
H & Q London Ventures (3).......... 631,172 5.8%
One Bush Street
San Francisco, CA 94104
Technology Partners West Fund IV
(4)............................... 771,729 7.1%
1550 Tiburon Boulevard, Suite A
Belvedere, CA 94920
Directors and Executive Officers:
Richard G. Thau (5)................ 712,000 6.6%
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
Bruce C. Felt (6).................. 180,000 1.7%
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
Dan E. Kingman..................... 61,000 *
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
David R. Malmstedt (7)............. 224,300 2.1%
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owners Beneficial Ownership(1)(2) Percent of Class
- ------------------------------------- -------------------------- ----------------
<S> <C> <C>
George J. Symons (8)............... 103,981 1.0%
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
Louis C. Cole (9).................. 6,792 *
c/o FullTime Software, Inc.
3210 Porter Drive
Palo Alto, CA 94304
Kenneth A. Goldman................. 22,000 *
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
William Hart (10).................. 817,525 7.6%
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
William D. Jobe (11)............... 61,396 *
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
Peter L. Wolken (12)............... 65,312 *
c/o FullTime Software, Inc.
177 Bovet Road, 2nd Floor
San Mateo, CA 94402
All current executive officers and
directors as a
group (11 persons, including those
listed above)..................... 2,254,306 20.9%
</TABLE>
- --------
* 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 FullTime'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) Percentage of beneficial ownership is calculated assuming 10,702,976
shares of common stock were outstanding on December 31, 1998. 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 December 31, 1998. However, such common stock shall not be deemed
outstanding for the purpose of computing the percentage owned by any other
individual or entity. Such calculation is required by General Rule
13d-3(1)(i) under the Exchange Act.
(3) The natural persons with sole, shared or depositive voting powers owned by
H&Q London Ventures are the general partners thereof which according to
Schedule 13G signed on February 17, 1998 included William R. Hambrecht.
(4) The natural persons with sole, shared or depositive voting powers by
Technology Partners West Fund IV Partners are the general partners thereof
which consist of William Hart, Roger J. Quy and John E. Ardelle, III.
(5) Includes 50,000 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
(6) Includes 46,000 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
115
<PAGE>
(7) Includes 200,000 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
(8) Includes 72,982 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
(9) Includes 6,792 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
(10) Includes 771,729 shares beneficially owned by Technology Partners West
Fund IV. Mr. Hart, a director of FullTime, is a general partner of the
general partner of Technology Partners West Fund IV. Mr. Hart disclaims
beneficial ownership of all shares of common stock held by Technology
Partners West Fund IV, except to the extent of his pecuniary interest
therein. Includes 5,796 shares issuable pursuant to stock options that may
be exercised within sixty (60) days after December 31, 1998.
(11) Includes 7,396 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
(12) Includes 5,796 shares issuable pursuant to stock options that may be
exercised within sixty (60) days after December 31, 1998.
116
<PAGE>
FULLTIME CERTAIN TRANSACTIONS
Certain Relationships and Related Transactions
FullTime has entered into indemnification agreements with each of its
officers and directors containing provisions that may require FullTime, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceedings
against them as to which they could be indemnified and to obtain directors' and
officers' liability insurance if available on reasonable terms. FullTime
maintains an insurance policy covering officers and directors under which the
insurer has agreed to pay the amount of any claim made against the officers or
directors of FullTime for wrongful acts that such officers and directors may
otherwise be required to pay or for which FullTime is required to indemnify
such officers and directors, subject to certain exclusions.
In May 1996, Mr. Bruce Felt, Vice President, Finance and Chief Financial
Officer, exercised a warrant to purchase 40,000 shares of Series D Preferred
Stock at a price of $2.40 per share, or an aggregate price of $96,000. The
purchase price was paid by a promissory note made by Mr. Felt in favor of
FullTime. Principal and accrued interest on the note is due in 10 years from
the note's issue date. The note bears interest at the rate of 6.83% per annum
and is secured by a pledge of the shares purchased with it.
In January 1998, Mr. Dan Kingman, Vice President of Human Resources,
exercised an option to purchase 60,000 shares of FullTime common stock at a
price of $2.75 per share, or an aggregate price of $165,000. The purchase price
was paid by a promissory note made by Mr. Kingman in favor of FullTime.
Principal and accrued interest on the note is due in 10 years from the note's
issue date. The note bears interest at the rate of 6.13% per annum and is
secured by a pledge of the shares purchased with it.
117
<PAGE>
COMPARISON OF CAPITAL STOCK
Description of Legato Capital Stock
The authorized capital stock of Legato consists of 100,000,000 shares of
common stock, $0.0001 par value per share, and 5,000,000 shares of preferred
stock, $0.0001 par value per share.
Legato Common Stock
As of December 31, 1998, there were 37,627,121 shares of Legato common stock
outstanding held of record by approximately 90 stockholders. Legato common
stock is listed on The Nasdaq National Market under the symbol LGTO. Holders of
Legato common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. Pursuant to the Legato Amended and Restated
Certificate of Incorporation, the stockholders do not have a right to take
action by written consent, nor may they cumulate votes in connection with the
election of directors. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of Legato common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Legato board of directors out of funds legally available therefor. In the
event of a liquidation, dissolution or winding up of Legato, the holders of
Legato common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the rights of holders of Legato preferred
stock that may be then outstanding. The Legato common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Legato common stock. All outstanding
shares of Legato common stock are fully paid and non-assessable.
Legato Preferred Stock
Legato has 5,000,000 shares of preferred stock authorized, of which 30,000
shares are designated Series A Preferred Stock. No shares of Legato preferred
stock are outstanding. The Legato board of directors has the authority to issue
the undesignated shares of Legato preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued and undesignated shares of Legato preferred stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. Although it
presently has no intention to do so, the Legato board of directors, without
stockholder approval, can issue preferred stock with voting and conversion
rights, which could adversely affect the voting power or other rights of the
holders of Legato common stock and the issuance of Legato preferred stock may
have the effect of delaying, deferring or preventing a change in control of
Legato.
Legato Rights Agreement
On May 23, 1997, Legato adopted the rights agreement between Legato and
Harris Trust and Savings Bank, as rights agent, covering each share of Legato
common stock outstanding as of June 27, 1997 and each share issued thereafter.
When exercisable, each right under the Legato rights agreement initially
entitles the holder to purchase one one-thousandth of a share of Legato
preferred stock, par value $0.0001 per share, at a price of $115.00 per one
one-thousandth of a Legato preferred share, subject to adjustment. The Legato
rights become exercisable on the earlier of: (a) 10 days following a public
announcement that a person or group or affiliated or associated persons (a
118
<PAGE>
Legato acquiring person) has acquired beneficial ownership of 15%, or in the
case of certain exempt persons, 20%, or more of the outstanding Legato common
stock or (b) 10 business days, or such later date as may be determined by
action of the Legato board of directors prior to such time as any person
becomes a Legato acquiring person, following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of such outstanding Legato common stock. The Legato rights
expire on May 23, 2007.
The Legato rights agreement was designed to protect and maximize the value of
the outstanding equity interests in Legato in the event of an unsolicited
attempt by an acquiror to take over Legato in a manner or on terms not approved
by the Legato board of directors.
Transfer Agent and Registrar
The transfer agent and registrar of the Legato common stock is Harris Trust
Company of California and its telephone number is (213) 239-0672.
Description of FullTime Capital Stock
The authorized capital stock of FullTime consists of 20,000,000 shares of
common stock, $0.001 par value per share, and 5,000,000 shares of preferred
stock, $0.001 par value per share.
FullTime Common Stock
As of the record date, there were 10,868,835 shares of FullTime common stock
outstanding held of record by approximately 123 stockholders, although FullTime
has been informed that there are in excess of 1,324 beneficial owners. FullTime
common stock is listed on the Nasdaq National Market under the symbol FTSW.
Holders of FullTime common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Pursuant to FullTime's
certificate of incorporation, the stockholders do not have a right to take
action by written consent nor may they cumulate votes in connection with the
election of FullTime directors. Subject to preferences that may be applicable
to any outstanding preferred stock, the holders of FullTime common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the FullTime board of directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of FullTime,
the holders of FullTime common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the rights of holders
of FullTime preferred stock that may be then outstanding. The FullTime common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the FullTime
common stock. All outstanding shares of FullTime common stock are fully paid
and non-assessable, and the shares of Legato common stock which are to be
received in exchange for the FullTime common stock to be outstanding upon
completion of the Merger will be fully paid and non-assessable.
FullTime Preferred Stock
FullTime has 5,000,000 shares of preferred stock authorized, of which 65,000
shares are designated Series A Preferred Stock and, as of the record date, no
shares of FullTime preferred stock
119
<PAGE>
are outstanding. The FullTime board of directors has the authority to issue the
undesignated shares of FullTime preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued and undesignated shares of FullTime preferred stock and to
fix the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. Although it
presently has no intention to do so, the FullTime board of directors, without
stockholder approval, can issue preferred stock with voting and conversion
rights which could adversely affect the voting power or other rights of the
holders of FullTime common stock and the issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of
FullTime.
FullTime Rights Agreement
On July 31, 1997, FullTime adopted the rights agreement between FullTime and
ChaseMellon Shareholder Services, L.L.C., as rights agent, covering each share
of FullTime common stock outstanding as of August 20, 1997 and each share
issued thereafter. When exercisable, each right under the FullTime rights
agreement initially entitles the holder to purchase one one-thousandth of a
share of FullTime Series A Preferred Stock, par value $0.001 per share, at a
price of $60.00 per one one-thousandth of a FullTime preferred share, subject
to adjustment. The FullTime rights become exercisable on the earlier of: (a) 10
days following a public announcement that a person or group or affiliated or
associated persons, a FullTime acquiring person, has acquired beneficial
ownership of 15% or more of the outstanding FullTime common stock or (b) 10
business days, or such later date as may be determined by action of the
FullTime board of directors prior to such time as any person becomes a FullTime
acquiring person, following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 15% or more of
such outstanding FullTime common stock. The FullTime rights expire on July 30,
2007.
The FullTime rights agreement was designed to protect and maximize the value
of the outstanding equity interests in FullTime in the event of an unsolicited
attempt by an acquiror to take over FullTime in a manner or on terms not
approved by the FullTime board of directors. Pursuant to the reorganization
agreement, FullTime has taken all necessary actions, including effectuating an
amendment to the FullTime rights agreement, so that the reorganization
agreement and the consummation of the merger will not cause any change, effect
or result under the FullTime rights agreement which is adverse to the interests
of Legato.
Transfer Agent and Registrar
The transfer agent and registrar of the FullTime common stock is ChaseMellon
Shareholder Services and its telephone number is (415) 743-1423.
120
<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF LEGATO, MERGER SUB AND FULLTIME
FullTime, Legato and Merger Sub are all Delaware corporations and therefore
FullTime stockholders' rights will remain governed by Delaware corporate law
after the merger. FullTime stockholders' rights will, however, be governed
after the merger by Legato's and Merger Sub's respective certificates of
incorporation and bylaws.
The following is a summary of the material differences between the rights of
holders of FullTime common stock and the rights of holders of Legato common
stock. These differences arise from differences between FullTime's amended and
restated certificate of incorporation, FullTime's bylaws, Legato's amended and
restated certificate of incorporation, Legato's bylaws, Merger Sub's
certificate of incorporation and Merger Sub's bylaws, respectively.
Nominations for Board of Directors and Advance Notice of Stockholder Nominees
Legato's bylaws provide that nominations for election to the board of
directors must be made
. Pursuant to Legato's notice with respect to such meeting,
. By direction of the Legato board of directors, or
. By any Legato stockholder of record of any outstanding class of capital
stock of Legato entitled to vote for the election of directors who has
complied with certain notice provisions.
Nominations, other than those made by Legato's board of directors must be
preceded by notification in writing received by the secretary of the
corporation not less than 60 days prior to the first anniversary of the prior
year's annual meeting; provided, however, that if the date of the annual
meeting is advanced more than 30 days prior to or delayed more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. FullTime's bylaws
provide that the election of the board of directors of FullTime shall be held
at the time and place fixed by the FullTime board of directors and does not
specify a nomination procedure.
Amendment To Governing Documents
Delaware law requires a vote of the corporation's board of directors followed
by the affirmative vote of a majority of the outstanding stock of each class
entitled to vote for any amendment to the certificate of incorporation, unless
a greater level of approval is required by the certificate of incorporation. If
an amendment would alter the powers, preferences or special rights of a
particular class or series of stock so as to affect them adversely, the class
or series shall be given the power to vote as a class notwithstanding the
absence of any specifically enumerated power in the certificate of
incorporation.
Delaware law also provides that the power to adopt, amend or repeal a
corporation's bylaws shall be in the stockholders entitled to vote, provided
that the corporation in its certificate
121
<PAGE>
incorporation may confer such power on its board of directors in addition to
the stockholders. The certificates of incorporation of FullTime, Legato and
Merger Sub each expressly authorizes the respective boards of directors to
make, repeal, alter, amend and rescind the FullTime bylaws, Legato bylaws and
Merger Sub bylaws, respectively.
Stockholder Consent in Lieu of Meeting
Under Delaware corporate law, unless otherwise provided in a corporation's
certificate of incorporation, any action required to be taken or which may be
taken at an annual or special meeting of stockholders may be taken without a
meeting by proper written consent. Proper written consent is a consent in
writing signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize such action at a
meeting at which all shares entitled to vote were present and voted. The
certificates of incorporation of Legato and FullTime each provides that
stockholders may not take any action by written consent in lieu of a meeting.
Anti-Takeover Provisions
Legato's bylaws provide that special meetings of its stockholders may only be
called by the president or a majority of the Legato board of directors. Merger
Sub's bylaws and FullTime's bylaws provide that special meetings of their
stockholders may only be called by the president, a majority of the respective
board of directors, or stockholders owning not less than 10 percent of the
entire capital stock of the corporation issued and outstanding and entitled to
vote. Each of Legato and FullTime have adopted shareholder rights plans that
are substantially similar in nature. See "Comparison of Capital Stock."
Cumulative Voting
None of the bylaws or certificates of incorporation of Legato, FullTime or
Merger Sub provides for cumulative voting in elections of directors. Therefore,
under Delaware law, cumulative voting rights are not available to Legato,
FullTime or Merger Sub stockholders.
The foregoing discussion of certain similarities and material differences
between the rights of FullTime stockholders, the rights of Legato stockholders
and the rights of the Merger Sub stockholders under the respective certificates
of incorporation and bylaws is only a summary of certain provisions in each of
these documents. This discussion does not purport to be a complete description
of such similarities and differences, and is qualified by reference to the
Delaware General Corporate Law, the common law thereunder and the full text of
Legato's, FullTime's and Merger Sub's certificates of incorporation and bylaws.
EXPERTS
The consolidated balance sheets of Legato as of December 31, 1997 and
December 31, 1996 and the consolidated statements of income, retained earnings
and cash flows for each of the three years in the period ended December 31,
1997, incorporated by reference in this proxy statement/prospectus have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
122
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The consolidated financial statements of FullTime as of June 30, 1998 and
June 30, 1997 and for each of the three years in the period ended June 30,
1998, included in this proxy statement/prospectus and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Legato common stock offered hereby, the federal
income tax consequences in connection with the merger and certain other matters
relating to the Merger and the transactions contemplated thereby will be passed
upon for Legato by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. A spouse of a partner of Gunderson Dettmer
beneficially owns 399,253 shares of FullTime's common stock. Certain legal
matters with respect to federal income tax consequences in connection with the
Merger and certain other legal matters relating to the merger and the
transactions contemplated thereby will be passed upon for FullTime by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
123
<PAGE>
INDEX TO QUALIX GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUALIX GROUP, INC. (doing business as FullTime Software, Inc.)
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at June 30, 1998 and 1997.................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1998,
1997 and 1996........................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1998, 1997 and 1996................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Condensed Consolidated Balance Sheets at December 31, 1998 (unaudited)
and June 30, 1998....................................................... F-19
Condensed Consolidated Statements of Operations for the Six Months Ended
December 31, 1998 and 1997 (unaudited).................................. F-20
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1998 and 1997 (unaudited).................................. F-21
Notes to Condensed Consolidated Financial Statements (unaudited)......... F-22
Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts........................... S-1
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Qualix Group, Inc.:
We have audited the accompanying consolidated balance sheets of Qualix Group,
Inc. and subsidiaries ("the Company") as of June 30, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1998. Our audits
also included the consolidated financial statement schedule listed in the Index
at F-1. These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Qualix Group, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Jose, California
July 23, 1998
F-2
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30,
-----------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 6,869 $ 9,617
Temporary investments..................................... 5,005 9,541
Accounts receivable, less allowance for doubtful accounts
($537 in 1998 and $386 in 1997).......................... 4,236 5,147
Inventories............................................... 142 194
Prepaid expenses.......................................... 910 276
-------- -------
Total current assets.................................... 17,162 24,775
Property and equipment, net................................. 3,772 1,559
-------- -------
Total assets............................................ $ 20,934 $26,334
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... 851 1,280
Accrued liabilities....................................... 2,743 2,748
Deferred revenue and advances............................. 2,856 1,795
Income taxes payable...................................... -- 91
Current portion of long-term obligations.................. 258 126
-------- -------
Total current liabilities............................... 6,708 6,040
Long-term obligations....................................... 87 191
Commitments and contingencies (Note 7)
Stockholders' Equity:
Convertible preferred stock--par value $0.001; 5,000,000
shares authorized; shares outstanding: none in 1998 or
1997..................................................... -- --
Common stock--par value $0.001; 20,000,000 shares
authorized; shares outstanding: 10,635,456 shares in 1998
and 10,305,605 shares in 1997............................ 25,469 24,862
Notes receivable from sale of stock....................... (345) (175)
Net unrealized loss on available-for-sale securities...... -- (43)
Accumulated deficit....................................... (10,985) (4,541)
-------- -------
Total stockholders' equity.............................. 14,139 20,103
-------- -------
Total liabilities and stockholders' equity.............. $ 20,934 $26,334
======== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Reliability software............................... $16,034 $16,868 $ 8,965
Other products..................................... 8,027 10,336 5,360
Support, maintenance and consulting................ 5,954 4,942 2,210
------- ------- -------
Total revenue.................................... 30,015 32,146 16,535
------- ------- -------
Cost of revenue:
Cost of reliability software....................... 976 3,738 3,640
Cost of other products............................. 5,758 7,289 3,781
Cost of support, maintenance and consulting........ 2,103 1,871 1,021
------- ------- -------
Total cost of revenue............................ 8,837 12,898 8,442
------- ------- -------
Gross profit......................................... 21,178 19,248 8,093
Operating expenses:
Sales and marketing................................ 19,878 11,280 5,101
General and administrative......................... 4,724 2,878 1,920
Research and development........................... 3,823 2,272 620
Merger expenses.................................... -- 595 --
Purchased in-process technology.................... -- -- 740
------- ------- -------
Total operating expenses......................... 28,425 17,025 8,381
------- ------- -------
Income (loss) from operations........................ (7,247) 2,223 (288)
Other income (expense):
Gain on sale of investments........................ 2 528 763
Interest income.................................... 830 403 88
Interest expense................................... (29) (41) (5)
------- ------- -------
Total other income............................... 803 890 846
------- ------- -------
Income (loss) before income taxes.................... (6,444) 3,113 558
Provision for income taxes........................... -- 406 --
------- ------- -------
Net income (loss)................................ $(6,444) $ 2,707 $ 558
======= ======= =======
Earnings (loss) per share:
Basic.............................................. $ (0.62) $ 0.41 $ 0.21
======= ======= =======
Diluted............................................ $ (0.62) $ 0.29 $ 0.07
======= ======= =======
Shares used in per share computation:
Basic.............................................. 10,336 6,620 2,665
======= ======= =======
Diluted............................................ 10,336 9,312 8,177
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Net
Unrealized
Convertible Notes Gain (Loss)
Preferred Stock Common Stock Receivable on Available-
------------------- ------------------ from Sale for-Sale Accumulated
Shares Amount Shares Amount of Stock Securities Deficit Total
---------- ------- ---------- ------- ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1995.. 3,915,660 $ 7,879 2,324,324 $ 1,396 $ (8) $1,018 $ (7,806) $ 2,479
Exercise of Series C
preferred stock
options............... 23,333 56 -- -- (56) -- -- --
Exercise of Series D
preferred stock
options............... 40,000 96 -- -- (96) -- -- --
Conversion of short-
term notes for common
stock, net of issuance
costs of $11.......... -- -- 457,246 319 -- -- -- 319
Exercise of stock
options............... -- -- 99,172 20 (9) -- -- 11
Issuance of common
stock for services
rendered.............. -- -- 62,760 12 -- -- -- 12
Net unrealized gain
(loss) on available-
for-sale securities... -- -- -- -- -- (533) -- (533)
Net income............. -- -- -- -- -- -- 558 558
---------- ------- ---------- ------- ----- ------ -------- -------
Balances, June 30,
1996................... 3,978,993 8,031 2,943,502 1,747 (169) 485 (7,248) 2,846
Conversion of preferred
stock................. (3,978,993) (8,031) 4,774,791 8,031 -- -- -- --
Initial public
offering, net of
issuance costs of
$1,433................ -- -- 2,201,981 14,950 -- -- -- 14,950
Exercise of stock
options............... -- -- 112,419 26 (6) -- -- 20
Exercise of stock
warrants.............. -- -- 272,912 108 -- -- -- 108
Net unrealized gain
(loss) on available-
for-sale securities... -- -- -- -- (528) -- (528)
Net income............. -- -- -- -- -- -- 2,707 2,707
---------- ------- ---------- ------- ----- ------ -------- -------
Balances, June 30,
1997................... -- -- 10,305,605 24,862 (175) (43) (4,541) 20,103
Exercise of stock
options............... -- -- 212,530 200 (170) -- -- 30
Purchases under
employee stock
purchase plan......... -- -- 117,321 407 -- -- -- 407
Net unrealized gain
(loss) on available-
for-sale securities... -- -- -- -- -- 43 -- 43
Net loss............... -- -- -- -- -- -- (6,444) (6,444)
---------- ------- ---------- ------- ----- ------ -------- -------
Balances, June 30,
1998................... -- $ -- 10,635,456 $25,469 $(345) $ -- $(10,985) $14,139
========== ======= ========== ======= ===== ====== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ (6,444) $ 2,707 $ 558
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 932 323 87
Amortization of discount on long-term
obligations.................................... 28 36 --
(Gain) loss on disposal of fixed assets......... 164 -- --
Gain on sale of available-for-sale securities... -- (528) (763)
Purchased in-process technology................. -- -- 740
Changes in:
Accounts receivable............................ 911 (2,342) (1,300)
Inventories.................................... 52 (86) (5)
Prepaid expenses............................... (634) (216) (14)
Accounts payable............................... (429) 283 250
Accrued liabilities............................ (5) 1,333 572
Income taxes payable........................... (91) 91 --
Deferred revenue and advances.................. 1,061 708 735
Liability under employment termination
agreement..................................... -- (151) (72)
-------- -------- -------
Net cash provided by (used in) operating
activities..................................... (4,455) 2,158 788
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment, net......... (3,309) (1,539) (267)
Purchase of temporary investments................ (12,819) (21,240) 847
Proceeds from maturity or sale of temporary
investments..................................... 17,398 12,185 --
Business acquisition............................. -- -- (617)
-------- -------- -------
Net cash provided by (used in) investing
activities..................................... 1,270 (10,594) (37)
-------- -------- -------
Cash flows from financing activities:
Issuance of convertible promissory notes......... -- -- 315
Repayments of capital lease obligations, net..... -- (1) (7)
Issuance of long-term obligations................ -- -- 405
Repayment of long-term obligations............... -- (125) --
Proceeds from issuance of preferred and common
stock, net...................................... 437 15,077 27
-------- -------- -------
Net cash provided by financing activities....... 437 14,951 740
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents...................................... (2,748) 6,515 1,491
Cash and cash equivalents, beginning of year...... 9,617 3,102 1,611
-------- -------- -------
Cash and cash equivalents, end of year............ $ 6,869 $ 9,617 $ 3,102
======== ======== =======
Noncash investing and financing activities:
Conversion of preferred shares to common stock... -- $ 8,031 --
======== ======== =======
Exercise of options for stockholder notes
receivable...................................... $ 170 $ 10 $ 161
======== ======== =======
Conversion of promissory notes for stock, net of
issuance costs.................................. $ -- $ -- $ 315
======== ======== =======
Issuance of common stock for services rendered... $ -- $ -- $ 13
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........... $ -- $ 41 $ 28
======== ======== =======
Cash paid during the year for income taxes....... $ -- $ 314 $ --
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Qualix Group, Inc. ("the Company") was incorporated in
Delaware in September 1990. The Company develops or acquires, markets and
supports reliability software for distributed computing systems based on Unix
and Windows NT operating systems. The Company's customers are in a variety of
industries, including telecommunications, finance, manufacturing and energy.
The Company markets its software and services to Fortune 2000 accounts
primarily through its field sales organization located in the United States,
Europe and the Pacific Rim, complemented by other sales channels, including
systems integrators, OEMs, VARs and international distributors.
Basis of Presentation. The Company acquired Octopus Technologies, Inc.
("Octopus") in August 1996. The acquisition was accounted for as a pooling-of-
interests. All financial data of the Company has been restated to include the
historical financial information of Octopus.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. Accounts
denominated in foreign currencies have been remeasured into the functional
currency, using the U.S. dollar as the functional currency. Foreign currency
gains and losses from remeasurement, which have been insignificant, are
included in the consolidated statements of income.
Cash Equivalents. Cash equivalents include highly liquid investments with
original maturities of 90 days or less at the time of acquisition. The recorded
carrying amounts of cash equivalents approximate their fair market value.
Temporary Investments. Temporary investments consist of highly liquid
investments acquired with maturities exceeding three months and are classified
as "available-for-sale securities." The investments are reported at fair value
with unrealized gains or losses excluded from earnings and reported as a
separate component of stockholders' equity, net of taxes. Any gains or losses
on sales of investments are computed on a specific identification basis.
Inventories. Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of computer products, software and
component parts purchased for resale.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the shorter of the estimated useful lives, generally three to seven years, or
the lease term, as appropriate.
Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such management estimates include the allowance
for potentially
F-7
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
uncollectible accounts receivable, the valuation allowance on deferred tax
assets and certain reserves and accruals. Actual results could differ
materially from those estimates.
Software Development Costs. Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs are capitalized. The costs to develop such
software have not been capitalized as the Company believes its current software
development process is essentially complete concurrent with the establishment
of technological feasibility.
Revenue Recognition Policy. Software license revenue is recognized when
either a noncancelable license agreement or purchase order has been executed,
the product has been shipped, all significant contractual obligations have been
satisfied and collection of the resulting receivable is probable. Maintenance
revenue is recognized ratably over the maintenance period, generally one year,
and revenue from consulting and training services is recognized as services are
performed.
Warranty. The Company generally warrants its products for 90 days or less.
The Company has no provision for warranty costs at June 30, 1998, as
historically costs have not been significant.
Income Taxes. Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to account for income taxes
and requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
Stock-Based Compensation. The Company accounts for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and, accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans.
Earnings (Loss) Per Share. During the second quarter of fiscal 1998, the
Company adopted Statement of Financial Accounting Standards No. 128, Earnings
Per Share. All prior periods have been restated to conform with this Statement.
Net income (loss) per basic share is computed using the weighted average number
of common shares outstanding during the periods presented, excluding
contingently issuable shares.
For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive common
shares outstanding. Potentially dilutive common shares consist of shares
issuable upon the assumed exercise of dilutive stock options. Pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletins and staff
policy, all outstanding preferred stock and warrants that were converted into
common stock in the initial public offering are included in the computation as
potentially dilutive shares when the effect is
F-8
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
dilutive. Prior to the Company's initial public offering in February 1997,
potentially dilutive shares include preferred stock and certain warrants (using
the "if converted" method) as well as common and potentially dilutive shares
issued within 12 months preceding the initial filing date.
Options to purchase 200,000 shares of common stock were outstanding during
fiscal 1998 but were not included in the computation of diluted earnings per
share as the effect was anti-dilutive.
Certain Significant Risks and Uncertainties. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, temporary cash investments and accounts
receivable. The Company invests in a variety of financial instruments with an
investment credit rating of AA and better. The Company, by policy, limits the
amount of credit exposure with any one financial instrument or commercial
issuer. The Company also places its cash, cash equivalents and investments for
safekeeping with high-credit-quality financial institutions. The Company sells
its products primarily to companies in diversified industries in North America,
Europe and the Pacific Rim, and generally does not require its customers to
provide collateral or other security to support accounts receivable. To reduce
credit risk, management performs ongoing credit evaluations of its customers'
financial condition. While the Company maintains allowances for potential bad
debt losses, actual losses to date have not been material. No customer
accounted for more than 10% of total revenue in 1998, 1997 and 1996; one
customer accounted for 11% of accounts receivable in fiscal 1998. Export sales
from the United States represented 22%, 17% and 17% of total revenue in fiscal
1998, 1997 and 1996, respectively.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position or results of operations: advances
and trends in new technologies; competitive pressures in the form of new
products or price reductions on current products; changes in product mix;
changes in the overall demand for products and services offered by the Company;
changes in certain strategic partnerships or customer relationships; litigation
or claims against the Company based on intellectual property, patent, product,
regulatory or other issues or factors; risks associated with changes in
domestic and international economic and/or political conditions or regulations;
availability of necessary components; performance of third-party suppliers and
vendors; year 2000 compliance issues; and the Company's ability to attract and
retain employees necessary to support its growth.
Recently Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards (SFAS)
No.130, "Reporting Comprehensive Income," which requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources; and SFAS No.131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual
and interim reporting standards for a company's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has not yet identified its SFAS 131 reporting segments. Adoption of
these statements will not impact the Company's
F-9
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
consolidated financial position, results of operations or cash flows. Both
statements are effective for the Company beginning July 1, 1998, with earlier
application permitted.
2. BUSINESS COMBINATIONS
Merger with Octopus Technologies, Inc. In August 1996, the Company acquired
Octopus by issuing 1,597,173 shares of its common stock and 280,673 shares of
Series E preferred stock in exchange for all of the outstanding common stock
and preferred stock of Octopus. The Company also assumed and exchanged all
options to purchase Octopus stock for options to purchase an aggregate of
149,590 shares of the Company's common stock with an average exercise price of
$2.60 per share. The merger was accounted for as a pooling-of-interests.
Octopus develops, markets and supports real time data protection software
throughout the United States and internationally. Approximately $595,000 of
costs directly attributable to the business combination, primarily professional
fees associated with investment bankers, attorneys and accountants, were
incurred by the Company.
Purchase of Anthill Incorporated. In May 1996, the Company acquired
substantially all of the assets and assumed certain of the liabilities of
Anthill Incorporated ("Anthill"). The purchase price totaled approximately
$675,000, of which $175,000 was paid at the closing of the transaction with the
remaining purchase price to be paid in four annual installments of $125,000
each (see Note 7). Anthill was engaged in the development of a hierarchical
storage management product.
The acquisition was accounted for as a purchase, and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The aggregate purchase of $675,000, plus
$116,000 of costs directly attributable to the completion of the acquisition,
has been allocated to the assets and liabilities acquired. Approximately
$740,000 of the total purchase price represented the value of in-process
technology which had no future alternative use and was charged to the Company's
operations in the fourth quarter of fiscal 1996.
3. TEMPORARY INVESTMENTS
Available-for-sale securities at June 30, 1998 consist of:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Municipal bonds....................... $1,300 $1,300
Corporate bonds....................... 1,955 $ 1 $(1) 1,955
Certificates of deposit............... 1,750 1,750
------ --- --- ------
$5,005 $ 1 $(1) $5,005
====== === === ======
</TABLE>
F-10
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Available-for-sale securities at June 30, 1997 consist of:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Commercial paper...................... $3,935 $3,935
Municipal bonds....................... 3,605 $ (5) 3,600
Corporate bonds....................... 1,015 (18) 997
Agency securities..................... 1,029 (20) 1,009
------ ---- ---- ------
$9,584 $ -- $(43) $9,541
====== ==== ==== ======
</TABLE>
At June 30, 1998, the municipal bonds had maturities greater than 10 years.
The estimated market value of corporate bonds with maturities between one and
five years was $949,000 with the remaining available-for-sale securities
maturing within one year. All certificates of deposit mature during fiscal
1999.
At June 30, 1995, the Company held 46,121 shares of common stock of a public
company which were subject to certain holding restrictions. During 1996, the
Company sold 34,590 shares and realized a gain of $763,000, net of legal costs
of $84,500. In June 1997, the Company sold the remaining shares and realized a
gain of $828,000. The gain on the sale of stock was recorded, net of legal
costs of $300,000. The Company realized an insignificant gain on the sale of
investments in fiscal 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Computer equipment and software........................... $ 4,041 $2,250
Furniture and fixtures.................................... 554 67
Office equipment.......................................... 176 14
Leasehold improvements.................................... 697 39
------- ------
5,468 2,370
Less accumulated depreciation and amortization............ (1,696) (811)
------- ------
Property and equipment--net............................... $ 3,772 $1,559
======= ======
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Compensation, bonuses and related benefits................. $1,143 $ 988
Royalties payable and costs associated with product
acquisition............................................... 130 666
Other accrued liabilities.................................. 1,470 1,094
------ ------
Total.................................................... $2,743 $2,748
====== ======
</TABLE>
F-11
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $ -- $ 83 $ --
State.................................................... -- 367 --
---- ---- ----
-- 450 --
---- ---- ----
Deferred:
Federal.................................................. -- -- --
State.................................................... -- (44) --
---- ---- ----
-- (44) --
---- ---- ----
$ -- $406 $ --
==== ==== ====
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal rate to the income (loss) before income taxes as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Taxes computed at federal statutory rate............. (35.0)% 35.0% 35.0%
State taxes net of federal income tax benefit........ -- 6.0 6.1
Nondeductible merger and other costs................. (2.6) 6.7 6.6
Change in valuation allowance........................ 36.6 (36.2) (50.0)
Other................................................ 1.0 1.5 2.3
----- ----- -----
Total provision.................................... --% 13.0% --%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to deferred taxes are
as follows at June 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Deferred tax assets:
Deferred revenue......................................... $ 299 $ --
Expenses not currently deductible for tax purposes....... 557 144
Tax net operating loss carryforwards..................... 2,168 292
Tax credit carryforwards................................. 416 87
Purchased in-process technology.......................... 260 278
------- -----
Total deferred tax assets.............................. 3,700 801
Valuation allowance........................................ (3,656) (757)
------- -----
Net deferred tax assets................................ $ 44 $ 44
======= =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. The deferred tax assets at June 30, 1998 and
1997 are $3,700,000 and $801,000, respectively, and have been substantially
reserved as the Company believes that, due to its history of operating losses
and the expiration dates
F-12
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
of the carryforwards, it is more likely than not that the majority of such
benefits will not be realized. Deferred tax assets are presented within prepaid
expenses on the Consolidated Balance Sheet as of June 30, 1998.
At June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $6,000,000 and 1,400,000 available to reduce
future federal and state taxable income, respectively. The federal and state
carryforwards begin to expire in 2011 and 2003, respectively. The Company has
federal research and experimental credit carryforwards of $377,000, which
expire beginning in 2018, and minimum tax credit carryforwards of $39,000,
which do not expire. The extent to which the loss and credit carryforwards can
be used to offset future taxable income or taxes may be limited, depending on
the extent of ownership changes within any three-year period as provided by
Section 382 of the Internal Revenue Code and applicable California state tax
law.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases certain office facilities under
noncancellable operating leases, which expire through May 31, 2003. Under the
terms of the facility leases, the Company is responsible for its proportionate
share of maintenance, property tax and insurance expenses. The corporate
headquarters lease provides an option to extend the lease for five years. The
future minimum annual rental payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
<S> <C>
1999............................................................. $ 959
2000............................................................. 893
2001............................................................. 681
2002............................................................. 591
2003............................................................. 500
------
$3,624
======
</TABLE>
Facilities rent expense under operating leases was approximately $812,000,
$441,000, and $243,000 for fiscal years 1998, 1997 and 1996, respectively.
Anthill Acquisition. In connection with the Anthill acquisition, the Company
has a remaining obligation to pay three annual installments of $125,000 each
(see Note 2). The present value of the obligation is discounted at 9% and
aggregates approximately $345,000. The Company has granted a security interest
in the software technology acquired from Anthill in order to secure the
obligation.
Software License Agreement. In April 1998, the Company entered into a
Development and License Agreement (the "Agreement") which provides the Company
an exclusive, perpetual worldwide right to license certain of the Licensor's
product, as well as a non-exclusive, perpetual, worldwide right to license
related support software tools. Under the terms of the agreement, the Company
is required to pay a specified royalty based on a percentage of revenue
generated from products sold with technology therein up to a maximum of
$3,000,000, at which time all technology rights will transfer to the Company.
At June 30, 1998, the Company had prepaid $500,000 under the
F-13
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Agreement. If and when the Company develops the existing object code to run on
other software platforms, the Licensor will have the right to sublicense such
software and will pay a specified royalty based on a percentage of revenue
generated from products sublicensed with the related technology therein.
Contingency. The industry in which the Company operates is characterized by
frequent litigation. The Company filed a lawsuit against Anthill in May, 1998;
in the suit the Company contends that the software acquired from Anthill did
not function as had been represented by Anthill, and it seeks a declaration
that it need not remit the remaining payments to Anthill under the Agreement,
rescission of the Agreement and damages of $300,000 or more based upon payments
already made to Anthill.
On August 12, 1998, Anthill commenced arbitration proceedings against the
Company alleging that the Company breached its agreement with Anthill by not
making the annual installment payment due in May 1998 (See Note 2). Anthill
seeks damages of $375,000, plus interest, for the three remaining payments
allegedly due under the Agreement.
The Company has denied the claims made by Anthill in the arbitration and
intends to vigorously defend those claims. The Company has also submitted a
counterclaim in the arbitration, in which it seeks the same relief it is
demanding in its lawsuit. Management does not believe that the disposition of
these actions will have a material adverse effect on the Company's business,
financial condition or results of operations.
8. STOCKHOLDERS' EQUITY
Initial Public Offering. In February 1997, the Company completed its initial
public offering and issued 2,201,981 shares of common stock to the public at a
price of $8.00 per share. As a result of this offering, the Company received
$14,950,000, net of underwriting discounts, commissions, offering costs and
expenses payable by the Company. Simultaneously, all outstanding preferred
shares were automatically converted into common stock.
Shareholder Rights Plan. In July 1997, the Company's Board of Directors
approved a stock purchase rights plan which provides a dividend distribution of
one common stock purchase right for each outstanding share of its common stock.
The rights become exercisable based on certain limited conditions related to
acquisitions of stock, tender offers and certain business combination
transactions of the Company. In the event one of the limited conditions is
triggered, each right entitles the registered holder to purchase for $60 per
one-thousandth of a Preferred Share of Qualix Series A Junior Participating
Preferred Stock with a par value of $.001 per share. The rights are redeemable
at the Company's option for $0.01 per right and expire on July 30, 2007.
Employee Stock Purchase Plan. The Company has an employee stock purchase
plan, under which employees may, subject to certain restrictions, purchase
shares of common stock at six month
F-14
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
intervals at a price not less than 85 percent of the lower of the fair market
value as of the beginning or the end of the two year offering period. 117,321
shares have been issued under this Plan to date as of June 30, 1998. At June
30, 1998, 232,679 shares were reserved for future issuance.
Restricted Stock. During 1994, an officer of the Company was granted
nonstatutory stock options to purchase 48,000 shares of common stock at $.20
per share and 40,000 shares of Series D preferred stock at $2.40 per share. In
May 1996, the holder exercised the options in exchange for a full recourse
promissory note, bearing interest at 6.83% per annum, due May 2006 and secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
During 1996, an officer of the Company was granted a nonstatutory stock
option to purchase 23,333 shares of Series C preferred stock at $2.40 per
share. The option was exercised in exchange for a full recourse promissory note
which bears interest at 7.04% per annum, is due May 2006 and is secured by the
underlying stock. The preferred shares subsequently were converted to common
shares in connection with the Company's initial public offering in February
1997. The related shares of common stock are subject to repurchase by the
Company at the original purchase price per share upon termination of employment
prior to vesting of such shares. These restricted shares vest over four years
in accordance with the terms of the original stock options.
In July 1996, two officers exercised unvested stock options to purchase
50,266 shares of common stock at $0.20 per share. The options were exercised in
exchange for full recourse promissory notes which bear interest at 6.74% per
annum, are due July 2001 and are secured by the underlying stock. The related
shares of common stock are subject to repurchase by the Company at the original
purchase price per share upon termination of employment prior to vesting of
such shares. These restricted shares vest over four years in accordance with
the terms of the original stock options.
In January 1998, an officer exercised unvested stock options to purchase
60,000 shares of common stock at $2.75 per share with a full recourse
promissory note which bears interest at 6.13% per annum. The note is due in
January 2008 and is secured by the underlying stock. The related shares of
common stock are subject to repurchase by the Company at the original purchase
price per share upon termination of employment prior to vesting of such shares.
These restricted shares vest over four years in accordance with the terms of
the original stock options.
At June 30, 1998, 91,751 outstanding shares of such common stock were subject
to repurchase.
In January 1998 an officer exercised vested stock options to purchase 10,000
shares of common stock at $0.20 per share with a full recourse promissory note
which bears interest at 5.83% per annum. The note is due January 2003 and is
secured by the underlying stock.
F-15
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Warrants. In connection with the issuance of convertible promissory demand
notes and the issuance of preferred stock during 1995, warrants were granted to
purchase 121,167 and 160,325 shares of common stock at $2.00 and $0.20 per
share, respectively. In February 1997, at the time of the Company's initial
public offering, 272,912 warrants were exercised for common stock and the
remainder expired unexercised.
Stock Option Plans. The Company has stock option plans (the "Plans") under
which shares are reserved for issuance to employees, consultants and directors.
The Plans authorize the direct award or sale of common stock or the grant of
incentive and nonstatutory stock options. Incentive stock options are granted
at fair market value (as determined by the Board of Directors) at the date of
grant; nonstatutory options and stock sales may be offered at not less than 85%
of fair market value. Options become exercisable over four years and expire ten
years after the date of grant.
A summary of option transactions under the plans are summarized as follows:
<TABLE>
<CAPTION>
Outstanding
Options
-------------------
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance, July 1, 1995....................................... 232,840 $0.47
Granted (weighted average fair value of $0.08)............ 478,078 0.59
Exercised................................................. (51,172) 0.20
Cancelled................................................. (56,151) 0.20
--------- -----
Balance, June 30, 1996...................................... 603,595 0.61
Granted (weighted average fair value of $3.23)............ 500,400 5.92
Exercised................................................. (112,419) 0.23
Cancelled................................................. (56,983) 2.66
--------- -----
Balance, June 30, 1997...................................... 934,593 3.38
Granted (weighted average fair value of $1.99)............ 1,660,381 3.50
Exercised................................................. (212,530) 0.95
Cancelled................................................. (913,358) 4.99
--------- -----
Balance, June 30, 1998...................................... 1,469,086 $2.85
=========
</TABLE>
At June 30, 1998, options for 768,483 shares were exercisable under the Plans
and 288,980 shares were available for future grant. At June 30, 1997 and 1996,
741,347 and 383,008 options, respectively, were exercisable at weighted average
exercise prices of $3.31 and $0.30, respectively.
F-16
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
The following table summarizes information concerning options outstanding and
exercisable as of June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
(in years)
<S> <C> <C> <C> <C> <C>
$0.08 9,600 6.08 $ 0.08 9,600 $ 0.08
$0.16-
$0.20 105,223 8.19 0.20 98,780 0.20
$0.40 3,000 7.98 0.04 3,000 0.04
$0.73 50,424 6.92 0.73 50,424 0.73
$1.60-
$2.50 108,372 8.19 2.12 48,996 2.12
$2.75-
$3.03 863,443 9.35 2.79 384,483 2.75
$3.06-
$4.44 175,863 8.88 3.56 82,113 3.20
$4.50-
$6.75 143,088 8.64 5.30 83,952 5.63
$8.00-
$8.50 8,389 8.62 8.39 5,451 8.40
$21.65 1,684 5.44 21.65 1,684 21.65
--------- ---- ------ ------- ------
1,469,086 8.94 $ 2.85 768,483 $ 2.65
========= =======
</TABLE>
Stock Option Repricing. During the third quarter of fiscal 1998, the Company
approved a cancellation and regrant of outstanding stock options for all
holders of outstanding options with exercise prices in excess of the closing
selling price per share on January 23, 1998. 464,378 options were repriced at
an exercise price of $2.75 per share, the fair market value of the stock on
January 23, 1998, the regrant date. The repriced options become exercisable in
accordance with the same exercise schedule in effect under the higher priced
option to which such new option relates except that no portion of the option
may be exercised prior to one year from the regrant date. The regrant applied
to all employees and consultants of the Company; officers of the Company were
excluded from the repricing arrangement.
Stock Based Compensation. The Company uses the intrinsic value method
specified by Accounting Principles Board Opinion No. 25 in accounting for its
employee stock options and, accordingly, has recorded no compensation expense
through June 30, 1998, as such issuances have been at the fair value of the
Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended June 30, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method prior to the
initial public
F-17
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
offering and the Black-Scholes option pricing model thereafter, with the
following weighted average assumptions for fiscal 1998, 1997 and 1996,
respectively: expected option life of six months following vesting; 89% and 80%
stock price volatility for 1998 and 1997, respectively; risk-free interest
rates of 5.6% for options granted during the year ended June 30, 1998, 6.1% for
options granted during the year ended June 30, 1997 and 5.9% for options
granted during the year ended June 30, 1996; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and recognition of forfeitures as they occur. The fair value
of the employee purchase rights under the Employee Stock Purchase Plan was
estimated using the same model, but with the following weighted average
assumptions for fiscal 1998 and 1997, respectively: risk-free interest rates of
5.6% and 5.7% and stock volatility of 89% and 80%. The weighted average fair
value of purchase rights granted in fiscal 1998 and 1997 was $2.54 and $3.55,
respectively. If the computed fair values of the fiscal 1998, 1997 and 1996
awards had been amortized to expense, pro forma net income (loss) and earnings
(loss) per share would have been ($8,205,000), (($0.79) per share, basic and
diluted) in fiscal 1998, $2,302,000 ($0.35 per share, basic and $0.25 per
share, diluted) in fiscal 1997 and $554,000 ($0.21 per share, basic and $0.07
per share, diluted) in fiscal 1996. The impact of outstanding non-vested stock
options granted prior to fiscal 1996 has been excluded from the pro forma
calculations; as such, the pro forma adjustments may not be indicative of
future period pro forma adjustments, which will include expenses for more than
three years of awards.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit-Sharing Plan (the Plan) for all
employees. Participants may contribute between 1% and 15% of their annual
compensation on a before-tax basis, but not to exceed the amount allowable as a
deduction for federal income tax purposes. Participants vest immediately in
their contributions. The Company was not required to contribute, nor has it
contributed, to the Plan for the fiscal years ended June 30, 1997 and 1996 and
through March 31, 1998. Commencing April 1, 1998, the Company instituted a
matching program with a maximum annual Company contribution of $500 per
employee. For the fiscal year ended June 30, 1998, the Company contributed
approximately $58,000 to the Plan.
F-18
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June
December 31, 30,
1998 1998
------------ -------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 2,049 $ 6,869
Temporary cash investments.............................. 5,300 5,005
Accounts receivable, net................................ 3,195 4,236
Other current assets.................................... 1,025 1,052
------- -------
Total current assets.................................. 11,569 17,162
Property and equipment, net............................... 3,489 3,772
------- -------
Total assets.......................................... $15,058 $20,934
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities................ $ 4,142 $ 3,594
Deferred revenue and advances........................... 2,228 2,856
Current portion of long-term obligations................ 102 258
------- -------
Total current liabilities............................. 6,472 6,708
------- -------
Long-term obligations..................................... -- 87
Stockholders' equity...................................... 8,586 14,139
------- -------
Total liabilities and stockholders' equity............ $15,058 $20,934
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands--unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Reliability software..................................... $ 6,519 $ 10,047
Other products........................................... 2,736 4,613
Support, maintenance and consulting...................... 2,976 2,857
-------- --------
Total revenue.......................................... 12,231 17,517
-------- --------
Cost of revenue:
Cost of reliability software............................. 531 502
Cost of other products................................... 1,953 3,319
Cost of support, maintenance and consulting.............. 1,092 999
-------- --------
Total cost of revenue.................................. 3,576 4,820
-------- --------
Gross profit............................................... 8,655 12,697
Operating expenses:
Sales and marketing...................................... 10,301 9,826
General and administrative............................... 2,551 2,172
Research and development................................. 1,817 1,779
-------- --------
Total operating expenses............................... 14,669 13,777
-------- --------
Loss from operations....................................... (6,014) (1,080)
Interest income (expense), net............................. 235 460
-------- --------
Loss before income taxes................................... (5,779) (620)
Provision for income taxes................................. 40 --
-------- --------
Net loss............................................... $ (5,819) $ (620)
======== ========
Basic loss per share....................................... $ (0.55) $ (0.06)
======== ========
Shares used in per share computation....................... 10,640 10,242
======== ========
Diluted loss per share..................................... $ (0.55) $ (0.06)
======== ========
Shares used in per share computation....................... 10,640 10,242
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (5,819) $ (620)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 743 34
Amortization of discounts on long-term obligations....... 7 1
Changes in:
Accounts receivable..................................... 1,041 (2,848)
Other current assets.................................... 27 (113)
Accounts payable and accrued liabilities................ 548 22
Deferred revenue and advances........................... (628) 12
-------- --------
Net cash used in operating activities.................... (4,081) (2,875)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment, net................... (460) (1,112)
Purchase of temporary cash investments.................... (1,180) (8,342)
Proceeds from maturity of temporary cash investments...... 900 5,737
-------- --------
Net cash used in investing activities.................... (740) (3,717)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............... 251 23
Repayment of long-term obligations........................ (250) --
-------- --------
Net cash provided by financing activities................ 1 23
-------- --------
Net decrease in cash and cash equivalents.................. (4,820) (6,353)
Cash and cash equivalents, beginning of period............. 6,869 9,617
-------- --------
Cash and cash equivalents, end of period................... $ 2,049 $ 3,264
======== ========
Cash paid during the period for income taxes............... $ 57 $ 10
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The Company completed its initial public offering on February 12, 1997. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. The interim condensed consolidated financial
statements should be read in conjunction with the June 30, 1998 consolidated
financial statements and notes thereto.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial
position, results of operations and cash flows at the dates and for the periods
presented have been included. The interim financial information herein is not
necessarily indicative of the results of any future period.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
2. NET LOSS PER SHARE
Net income (loss) per basic share has been computed based upon the weighted
average number of common shares outstanding for the periods presented,
excluding contingently issuable shares totalling 71,000 and 104,000 for the six
months ended December 31, 1998 and 1997, respectively.
For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive shares
outstanding. Potentially dilutive common shares consist of shares issuable upon
the assumed exercise of dilutive stock options and have been excluded in net
loss periods as their effect is antidilutive. Options to purchase 1,250,000
shares of common stock, representing potentially dilutive securities, were
outstanding at December 31, 1998.
3. COMPREHENSIVE INCOME
In the first quarter of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." Comprehensive loss represents net loss for the period as adjusted for
net unrealized gains (losses) on available-for-sale securities, net of taxes,
and was $(5,804,000) and $(652,000,) respectively, for the six months ended
December 31, 1998 and 1997.
4. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued SFAS No.131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for a company's business
segments and related disclosures about its products, services, geographic areas
and major customers. The Company has not yet identified its SFAS 131 reporting
segments. Adoption of this standard will not impact the Company's consolidated
financial position, results of operations or cash flows and is effective for
the Company for fiscal 1999.
F-22
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. SUBSEQUENT EVENT
The Company and Legato Systems, Inc. ("Legato") have entered into an
Agreement and Plan of Reorganization, dated as of October 25, 1998 (the
"reorganization agreement"). Pursuant to the reorganization agreement, Hat
Acquisition Corp. will merge (the "Merger") with and into the Company, with the
Company as the surviving corporation and becoming a wholly-owned subsidiary of
Legato; each share of the Company's common stock issued and outstanding
immediately prior to the effective time of the Merger (the "Effective Time")
will be canceled and extinguished and be converted automatically into the right
to receive a fraction of a share of Legato common stock (the "Exchange Ratio"),
the numerator of which will be equal to 1,721,000 shares and the denominator of
which will be equal to (i) the sum of (A) the aggregate number of shares of the
Company's common stock issued and outstanding as of the Effective Time, and
(ii) the aggregate number of shares of the Company's common stock issuable upon
exercise of all outstanding options to acquire shares of Company common stock
outstanding as of the Effective Time.
All outstanding options to purchase Company common stock will be assumed by
Legato and will become options to purchase shares of the Legato's common stock.
The transaction is intended to be accounted for as a pooling of interests and
qualify as a tax-free reorganization. The Merger has been approved by the
boards of directors of the Company and Legato, but is still subject to
regulatory review and approval, approval by the stockholders of the Company and
other conditions to closing.
The Company has agreed that if the Merger is not consummated as a result of
certain specified events (involving, in general, a change in Board support for
the Merger and/or an alternative transaction), it will pay to the Legato a
termination fee of $2.0 million. If the Merger is not consummated, expenses
incurred in connection with the proposed Merger (including the possible "break-
up" fees described above) could have a material adverse effect on the Company's
results of operations.
F-23
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
LEGATO SYSTEMS, INC.,
HAT ACQUISITION CORP.
AND
QUALIX GROUP, INC.
OCTOBER 25, 1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER..................................................... A-2
1.1 The Merger...................................................... A-2
1.2 Closing; Effective Time......................................... A-2
1.3 Effect of the Merger............................................ A-2
1.4 Certificate of Incorporation; Bylaws............................ A-2
1.5 Directors and Officers.......................................... A-2
1.6 Effect on Capital Stock......................................... A-3
1.7 Surrender of Certificates....................................... A-4
1.8 No Further Ownership Rights in Target Capital Stock............. A-5
1.9 Lost, Stolen or Destroyed Certificates.......................... A-5
1.10 Tax and Accounting Consequences................................. A-6
1.11 Taking of Necessary Action; Further Action...................... A-6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET...................... A-6
2.1 Organization, Standing and Power................................ A-6
2.2 Capital Structure............................................... A-7
2.3 Authority....................................................... A-8
2.4 SEC Documents; Financial Statements............................. A-9
2.5 Absence of Certain Changes...................................... A-9
2.6 Absence of Undisclosed Liabilities.............................. A-10
2.7 Litigation...................................................... A-10
2.8 Restrictions on Business Activities............................. A-10
2.9 Governmental Authorization...................................... A-10
2.10 Title to Property............................................... A-10
2.11 Intellectual Property........................................... A-11
2.12 Environmental Matters........................................... A-12
2.13 Taxes........................................................... A-13
2.14 Employee Benefit Plans.......................................... A-13
2.15 Employees and Consultants....................................... A-15
2.16 Insurance....................................................... A-16
2.17 Compliance with Laws............................................ A-16
2.18 Brokers' and Finders' Fees...................................... A-17
2.19 Pooling of Interests............................................ A-17
2.20 Voting Agreement; Irrevocable Proxies........................... A-17
2.21 Vote Required................................................... A-17
2.22 No Breach of Material Contracts................................. A-17
2.23 Registration Statement; Proxy Statement/Prospectus.............. A-17
2.24 Complete Copies of Materials.................................... A-18
2.25 Amendment of Rights Plan........................................ A-18
2.26 Opinion of Financial Advisor.................................... A-18
2.27 Board Approval.................................................. A-18
2.28 Section 203 of Delaware Law Not Applicable...................... A-18
2.29 Representations Complete........................................ A-19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB.... A-19
3.1 Organization, Standing and Power................................ A-19
3.2 Capital Structure............................................... A-20
3.3 Authority....................................................... A-20
3.4 SEC Documents; Financial Statements............................. A-21
3.5 Absence of Certain Changes...................................... A-22
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
3.6 Litigation..................................................... A-22
3.7 Compliance with Laws........................................... A-22
3.8 Registration Statement......................................... A-22
3.9 Board Approval................................................. A-23
3.10 Representations Complete....................................... A-23
3.11 Intellectual Property.......................................... A-23
3.12 Pooling of Interest............................................ A-23
3.13 Interim Operations of Merger Sub............................... A-23
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... A-23
4.1 Conduct of Business of Target and Acquiror..................... A-23
4.2 Conduct of Business of Target.................................. A-24
4.3 Conduct of Business of Acquiror................................ A-26
4.4 Notices........................................................ A-26
ARTICLE V ADDITIONAL AGREEMENTS......................................... A-27
5.1 No Solicitation................................................ A-27
5.2 Proxy Statement/Prospectus; Registration Statement............. A-28
5.3 Stockholders Meeting........................................... A-28
5.4 Access to Information.......................................... A-29
5.5 Confidentiality................................................ A-29
5.6 Public Disclosure.............................................. A-29
5.7 Consents; Cooperation.......................................... A-29
5.8 Pooling Accounting............................................. A-30
5.9 Update Disclosure; Breaches.................................... A-30
5.10 Stockholder Agreements......................................... A-31
5.11 Indemnification................................................ A-31
5.12 Irrevocable Proxies............................................ A-32
5.13 Legal Requirements............................................. A-32
5.14 Tax-Free Reorganization........................................ A-32
5.15 Stock Options.................................................. A-32
5.16 Listing of Additional Shares................................... A-33
5.17 Additional Agreements; Reasonable Efforts...................... A-33
5.18 Employee Benefits.............................................. A-33
5.19 Pooling Letters................................................ A-34
5.20 No Rights Plan Amendment....................................... A-34
ARTICLE VI CONDITIONS TO THE MERGER..................................... A-35
6.1 Conditions to Obligations of Each Party to Effect the Merger... A-35
6.2 Additional Conditions to Obligations of Target................. A-36
6.3 Additional Conditions to the Obligations of Acquiror........... A-37
ARTICLE VII TERMINATION, EXPENSES, AMENDMENT AND WAIVER................. A-38
7.1 Termination.................................................... A-38
7.2 Effect of Termination.......................................... A-39
7.3 Expenses and Termination Fees.................................. A-39
7.4 Amendment...................................................... A-40
7.5 Extension; Waiver.............................................. A-40
ARTICLE VIII GENERAL PROVISIONS......................................... A-40
8.1 Notices........................................................ A-40
8.2 Interpretation................................................. A-41
8.3 Counterparts................................................... A-42
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
8.4 Entire Agreement; No Third Party Beneficiaries................... A-42
8.5 Severability..................................................... A-42
8.6 Remedies Cumulative.............................................. A-42
8.7 Governing Law.................................................... A-42
8.8 Assignment....................................................... A-42
8.9 Rules of Construction............................................ A-42
</TABLE>
SCHEDULES
Target Disclosure Letter
Acquiror Disclosure Letter
<TABLE>
<C> <S>
Schedule 6.3(c) Consents
Schedule 6.3(f) Employees Executing Employment Agreements
Schedule 6.3(g) Employees Executing Separation Agreements
</TABLE>
EXHIBITS
<TABLE>
<C> <S>
Exhibit A Stock Option Agreement
Exhibit B Certificate of Merger
Exhibit C Voting and Proxy Agreement
Exhibit D-1 Target Affiliates Agreement
Exhibit D-2 Acquiror Affiliates Agreement
Exhibit E Employment Agreement
Exhibit F Separation Agreement
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of October 25, 1998, by and among Legato Systems, Inc., a
Delaware corporation ("Acquiror"), Hat Acquisition Corp., a Delaware
corporation ("Merger Sub") and Qualix Group, Inc., a Delaware corporation
("Target").
RECITALS
A. The Boards of Directors of Target, Acquiror and Merger Sub believe it is
in the best interests of their respective companies and the stockholders of
their respective companies that Target and Merger Sub combine into a single
company through the statutory merger of Merger Sub with and into Target (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, each outstanding share of
capital stock of Target ("Target Capital Stock"), shall be converted into
shares of Common Stock of Acquiror, $.0001 par value ("Acquiror Common Stock"),
at the rate set forth herein.
C. Target, Acquiror and Merger Sub desire to make certain representations and
warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E)
of the Code.
E. The parties intend for the Merger to be accounted for as a pooling of
interests.
F. Concurrently with the execution and delivery of this Agreement and as a
condition and inducement to Acquiror to enter into this Agreement, Acquiror and
Target have entered into a Stock Option Agreement dated as of the date of this
Agreement and attached hereto as Exhibit A (the "Stock Option Agreement"),
pursuant to which Target shall grant Acquiror an option to purchase shares of
Common Stock of Target under certain circumstances;
G. Concurrent with the execution of this Agreement and as an inducement to
Acquiror to enter into this Agreement, certain of the affiliates of Target who
are stockholders, officers or directors are entering into an agreement to vote
the shares of Target's Common Stock owned by such persons to approve the Merger
and against any competing proposals.
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NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject
to and upon the terms and conditions of this Agreement, the Certificate of
Merger attached hereto as Exhibit B (the "Certificate of Merger"), and the
applicable provisions of the Delaware General Corporation Law ("Delaware Law"),
Merger Sub shall be merged with and into Target, the separate corporate
existence of Merger Sub shall cease and Target shall continue as the surviving
corporation. Target as the surviving corporation after the Merger is
hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the date on which the
Closing shall occur, the "Closing Date"). The Closing shall take place at the
offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 155
Constitution Drive, Menlo Park, California 94025, or at such other location as
the parties hereto agree. On the Closing Date, the parties hereto shall cause
the Merger to be consummated by filing the Certificate of Merger, together with
the required officers' certificates, with the Secretary of State of the State
of Delaware, in accordance with the relevant provisions of Delaware Law (the
time and date of such filing being the "Effective Time" and the "Effective
Date," respectively).
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of Target and Merger Sub shall vest
in the Surviving Corporation, and all debts, liabilities and duties of Target
and Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by Delaware Law and such Certificate of Incorporation; provided, however, that
Article I of the Certificate of Incorporation shall be amended to read as
follows: "The name of the corporation is FullTime Software, Inc.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter
amended.
1.5 Directors and Officers. At the Effective Time, the directors of Merger
Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation, to hold office until such time as such directors resign,
are removed or their respective successors are duly elected or
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appointed and qualified. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation, to hold
office until such time as such officers resign, are removed or their respective
successors are duly elected or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any action
on the part of Acquiror, Merger Sub, Target or the holders of any of Target's
securities:
(a) Conversion of Target Capital Stock. At the Effective Time, each share
of Target Common Stock (including, with respect to each such share of
Target Common Stock, the associated Rights (as defined in that certain
Rights Agreement (the "Target Rights Plan"), dated as of July 31, 1997,
between Target and Chasemellon Shareholder Services, L.L.C., as Rights
Agent)) issued and outstanding immediately prior to the Effective Time
(other than any shares of Target Common Stock to be canceled pursuant to
Section 1.6(b)) will be canceled and extinguished and be converted
automatically into the right to receive a fraction of a share of Acquiror
Common Stock (the "Exchange Ratio"), the numerator of which is equal to
(i) 1,721,000 shares (the "Total Acquiror Shares"), and the denominator of
which is equal to (ii) the sum of (A) the aggregate number of shares of
Target Common Stock issued and outstanding as of the Effective Time, and
(B) the aggregate number of shares of Target Common Stock issuable upon
exercise of all outstanding options (the "Target Options") outstanding as
of the Effective Time and assumed by Acquiror pursuant to Section 5.15
hereof. No adjustment shall be made in the number of shares of Acquiror
Common Stock issued in the Merger as a result of (a) any increase or
decrease in the market price of Acquiror Common Stock prior to the
Effective Time or (b) any cash proceeds received by Target from the date
hereof to the Closing Date pursuant to the exercise of currently
outstanding Target Options.
(b) Cancellation of Target Capital Stock Owned by Acquiror or Target. At
the Effective Time, all shares of Target Capital Stock that are owned by
Target as treasury stock, and each share of Target Capital Stock owned by
Acquiror or any direct or indirect wholly owned subsidiary of Acquiror or
of Target immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(c) Target Stock Option Plans. At the Effective Time, the Target 1991
Stock Plan, Target 1995 Stock Option Plan and Target 1997 Stock Option Plan
(collectively, the "Target Stock Option Plans") and all options to purchase
Target Common Stock then outstanding under the Target Stock Option Plans
shall be assumed by Acquiror and all repurchase rights of the Target
Company with respect to such options shall be assigned to the Acquiror in
accordance with Section 5.15.
(d) (Intentionally Omitted)
(e) (Intentionally Omitted)
(f) Capital Stock of Merger Sub. At the Effective Time, each share of
Common Stock, $.0001 par value, of Merger Sub ("Merger Sub Common Stock"),
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, $.001 par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of
any such shares shall continue to evidence ownership of such shares of
capital stock of the Surviving Corporation.
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(g) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible
into Acquiror Common Stock or Target Capital Stock), reorganization,
recapitalization or other like change with respect to Acquiror Common Stock
or Target Capital Stock occurring after the date hereof and prior to the
Effective Time.
(h) Fractional Shares. No fraction of a share of Acquiror Common Stock
will be issued, but in lieu thereof each holder of shares of Target Capital
Stock who would otherwise be entitled to a fraction of a share of Acquiror
Common Stock (after aggregating all fractional shares of Acquiror Common
Stock to be received by such holder) shall receive from Acquiror an amount
of cash (rounded to the nearest whole cent) equal to the product of (i)
such fraction, multiplied by (ii) the average closing price of a share of
Acquiror Common Stock for the ten most recent days that Acquiror Common
Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on the Nasdaq National Market.
1.7 Surrender of Certificates.
(a) Exchange Agent. Harris Trust and Savings Bank shall act as exchange agent
(the "Exchange Agent") in the Merger.
(b) Acquiror to Provide Common Stock and Cash. Promptly after the Effective
Time, Acquiror shall make available to the Exchange Agent for exchange in
accordance with this Article I, through such reasonable procedures as Acquiror
may adopt, (i) the shares of Acquiror Common Stock issuable pursuant to Section
1.6(a) in exchange for shares of Target Capital Stock outstanding immediately
prior to the Effective Time, plus cash in an amount sufficient to permit
payment of cash in lieu of fractional shares pursuant to Section 1.6(g).
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") that immediately prior to the Effective
Time represented outstanding shares of Target Capital Stock, whose shares were
converted into the right to receive shares of Acquiror Common Stock (and cash
in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon receipt of the
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as Acquiror may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of Acquiror Common Stock (and cash in lieu of fractional
shares). Upon surrender of a Certificate for cancellation to the Exchange Agent
or to such other agent or agents as may be appointed by Acquiror, together with
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing the number of whole
shares of Acquiror Common Stock and payment in lieu of fractional shares that
such holder has the right to receive pursuant to Section 1.6, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that, prior to the Effective Time, represented
shares of Target Capital Stock will be deemed from and after the Effective
Time, for all corporate purposes, other than the payment of dividends, to
evidence the ownership of the number of full shares of Acquiror Common Stock
into which such shares of Target Capital Stock
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shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 1.6.
(d) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Acquiror Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Acquiror Common Stock represented thereby until
the holder of record of such Certificate surrenders such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Acquiror Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of any such dividends or other distributions
with a record date after the Effective Time that would have been previously
payable (but for the provisions of this Section 1.7(d)) with respect to such
shares of Acquiror Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Acquiror Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the Certificate so surrendered is properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares
of Acquiror Common Stock in any name other than that of the registered holder
of the Certificate surrendered, or established to the satisfaction of Acquiror
or any agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Target Capital Stock. All shares of
Acquiror Common Stock issued upon the surrender for exchange of shares of
Target Capital Stock in accordance with the terms hereof (including any cash
paid in lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Capital Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Acquiror Common
Stock (and cash in lieu of fractional shares) as may be required pursuant to
Section 1.6; provided, however, that Acquiror may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
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1.10 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) qualify for accounting treatment as a pooling
of interests. No party shall take any action that would, to such party's
knowledge, cause the Merger to fail to qualify as a reorganization within the
meaning of Section 368 of the Code or to qualify for accounting treatment as a
pooling of interests.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target and Merger Sub, the officers and directors of Target
and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and shall take, all such lawful and
necessary action, so long as such action is not inconsistent with this
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror and Merger Sub that the statements
contained in this Article II are true and correct, except as set forth (i) in
the disclosure letter delivered by Target to Acquiror prior to the execution
and delivery of this Agreement (the "Target Disclosure Letter") or (ii) in
Target's most recently filed Annual Report on Form 10-K (which report was filed
with the Securities and Exchange Commission (the "SEC") on September 28, 1998)
and any Target SEC Documents (as defined in Section 2.4) filed subsequent to
September 28, 1998. The Target Disclosure Letter shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article II, and the disclosure in any paragraph shall qualify only the
corresponding paragraph in this Article II. Any reference in this Article II to
an agreement being "enforceable" shall be deemed to be qualified to the extent
such enforceability is subject to (i) laws of general application relating to
bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the
availability of specific performance, injunctive relief and other equitable
remedies. In the remainder of this Article II, "Target" will be deemed to
include (and each representation and warranty will apply separately and
collectively to) Target and each of Target's subsidiaries, unless the context
otherwise requires.
2.1 Organization, Standing and Power. Target is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Target has the corporate power to own its properties and to carry
on its business as now being conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the failure to be so
qualified and in good standing would have a Material Adverse Effect (as defined
in Section 8.2) on Target. Target has delivered to Acquiror a true and correct
copy of the Certificate of Incorporation and Bylaws or other charter documents,
as applicable, of Target, each as amended to date. Target is not in violation
of any of the provisions of its Certificate of Incorporation or Bylaws or
equivalent organizational documents. Target is the owner of all outstanding
shares of capital stock of each of its subsidiaries and all such shares are
duly authorized, validly issued, fully paid and nonassessable. All of the
outstanding shares of capital stock of each such subsidiary are owned by Target
free and clear of any liens, charges, claims or encumbrances or rights of
others. There are no outstanding subscriptions, options, warrants, puts, calls,
rights, exchangeable or convertible securities or other
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commitments or agreements of any character relating to the issued or unissued
capital stock or other securities of any such subsidiary, or otherwise
obligating Target or any such subsidiary to issue, transfer, sell, purchase,
redeem or otherwise acquire any such securities. Target does not directly or
indirectly own any equity or similar interest in, or any interest convertible
or exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or
entity.
2.2 Capital Structure. The authorized capital stock of Target consists of
20,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares of
Preferred Stock, $0.001 par value, of which there were issued and outstanding
as of October 22, 1998, 10,675,536 shares of Common Stock and no shares of
Preferred Stock. No change in the Target's capitalization has occurred between
October 22, 1998 and the date hereof except (x) the issuance of shares of
Target Common Stock pursuant to the exercise of outstanding options or (y) the
cancellation of unvested options for Common Stock held by, or the repurchase of
unvested shares of Common Stock from, directors, employees, consultants or
other service providers of Target pursuant to the terms of their stock option,
stock purchase or stock restriction agreements. There are no other outstanding
shares of capital stock or voting securities and no outstanding commitments to
issue any shares of capital stock or voting securities after the date of this
Agreement, other than pursuant to the exercise of (i) options outstanding as of
the date of this Agreement under the Target Stock Option Plans, and (ii) the
exercise of subscription rights outstanding as of the date of this Agreement
under the Target Employee Stock Purchase Plan (the "Target ESPP"). All
outstanding shares of Target Capital Stock are duly authorized, validly issued,
fully paid and non-assessable and are free of any liens or encumbrances other
than any liens or encumbrances created by or imposed upon the holders thereof,
and are not subject to preemptive rights, rights of first refusal, rights of
first offer or similar rights created by statute, the Certificate of
Incorporation or Bylaws of Target or any agreement to which Target is a party
or by which it is bound. As of October 22, 1998, Target had reserved (i)
2,320,277 shares of Common Stock for issuance to employees, directors and
consultants pursuant to the Target Stock Option Plans, of which 1,437,391
shares are subject to outstanding, unexercised options and (ii) 350,000 shares
of Common Stock for issuance to employees pursuant to the Target ESPP, of which
181,831 shares are available for issuance. Except for (i) the rights created
pursuant to this Agreement, and (ii) Target's right to repurchase any unvested
shares under the Target Stock Option Plans, there are no other options,
warrants, calls, rights, commitments or agreements of any character to which
Target is a party or by which it is bound obligating Target to issue, deliver,
sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased
or redeemed, any shares of Target capital stock or obligating Target to grant,
extend, accelerate the vesting of, change the price of, or otherwise amend or
enter into any such option, warrant, call, right, commitment or agreement.
There are no contracts, commitments or agreements relating to the voting,
purchase or sale of Target Capital Stock (i) between or among Target and any of
its stockholders and (ii) to Target's knowledge, among any of Target's
stockholders or between any of Target's stockholders and any third party,
except for the stockholders delivering Voting Agreements (as defined below).
The terms of the Target Stock Option Plans permit the assumption of such Target
Stock Option Plans by Acquiror or the substitution of options to purchase
Acquiror Common Stock as provided in this Agreement, without the consent or
approval of the holders of the outstanding options, the Target stockholders, or
otherwise and without any acceleration of the exercise schedule or vesting
provisions in effect for such options. The current "Purchase Period" (as
defined in the Target ESPP)
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commenced under the Target ESPP on September 1, 1998 and will end prior to the
Effective Time, and except for the purchase rights granted on such commencement
date to participants in the current Purchase Period, there are no other
purchase rights or options outstanding under the Target ESPP. True and complete
copies of all agreements and instruments relating to or issued under the Target
Stock Option Plans and Target ESPP have been made available to Acquiror, and
such agreements and instruments have not been amended, modified or
supplemented, and there are no agreements to amend, modify or supplement such
agreements or instruments from the form made available to Acquiror. All
outstanding Common Stock was issued in compliance with all applicable federal
and state securities laws, except to the extent any such noncompliance would
not have a Material Adverse Effect on Target.
2.3 Authority.
(a) Target has all requisite corporate power and authority to enter into this
Agreement, the Certificate of Merger and the Option Agreement (collectively,
the "Transaction Documents") and to consummate the transactions contemplated
hereby and thereby. The execution and delivery this Agreement and the other
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Target, subject only to the approval and adoption of this
Agreement by Target's stockholders and the approval of the Merger by Target's
stockholders as contemplated by Section 6.1(a). This Agreement and the other
Transaction Documents have been duly executed and delivered by Target and
constitute the valid and binding obligations of Target, enforceable against
Target in accordance with their terms.
(b) The execution and delivery of this Agreement and the other Transaction
Documents by Target do not, and the consummation and performance of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default under (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or acceleration
of any obligation or loss of any benefit under, or require a consent to
assignment or a novation under (i) any provision of the Certificate of
Incorporation or Bylaws of Target, as amended, or (ii) any contract, agreement,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Target or any of its properties or
assets, except in the case of clause (ii) as would not have a Material Adverse
Effect on Target.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Target in connection with the execution and
delivery of this Agreement and the other Transaction Documents or the
consummation of the transactions contemplated hereby or thereby, except for (i)
the filing of the Certificate of Merger, together with the required officers'
certificates, as provided in Section 1.2; (ii) the filing of the Proxy
Statement (as defined in Section 2.24 hereof) with the SEC in accordance with
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
clearance thereof by the SEC; (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable state securities laws and the securities laws of any foreign
country; (iv) such filings as may be required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR"); and (v) such other
consents, authorizations, filings, approvals and
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registrations that, if not obtained or made, would not have a Material Adverse
Effect on Target and would not prevent, or materially alter or delay the
consummation of the Merger.
2.4 SEC Documents; Financial Statements. Target has made available to
Acquiror a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other filing filed with the
SEC by Target since January 1, 1997, and, prior to the Effective Time, Target
will have furnished Acquiror with true and complete copies of any additional
documents filed with the SEC by Target prior to the Effective Time
(collectively, the "Target SEC Documents"). In addition, Target has made
available to Acquiror all exhibits to the Target SEC Documents filed prior to
the date hereof, and will promptly make available to Acquiror all exhibits to
any additional Target SEC Documents filed prior to the Effective Time. All
documents required to be filed as exhibits to the Target SEC Documents have
been so filed, and all Material Contracts (as hereafter defined) so filed as
exhibits are in full force and effect, except those that have expired in
accordance with their terms, and neither Target nor any of its subsidiaries is
in default thereunder, except for any such default that individually or in the
aggregate would not or could not reasonably be expected to have a Material
Adverse Effect on Target. All contracts required to be filed as exhibits to the
Target SEC Documents or the Acquiror SEC Documents (as hereafter defined), as
applicable, pursuant to Item 601 of Regulation S-K are hereinafter defined as
the "Material Contracts." As of their respective filing dates (or if amended or
superseded by a filing prior to the date hereof, then on the date of such
subsequent filing), the Target SEC Documents complied in all material respects
with the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the Securities Act, as applicable, and none of the Target
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed Target
SEC Document. The financial statements of Target, including the notes thereto,
included in the Target SEC Documents (the "Target Financial Statements") fairly
present the consolidated financial condition and the related consolidated
statements of operations, of stockholder's equity, and of cash flows of Target
at the dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal, recurring year-end adjustments), complied as
to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto as of
their respective dates, and have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent throughout the
periods indicated and consistent with each other (except as may be indicated in
the notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Qs, as permitted by Form 10-Q and Regulation S-K of the
SEC).
2.5 Absence of Certain Changes. Since June 30, 1998, (the "Target Balance
Sheet Date"), Target has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect (as
defined in Section 8.2) on Target; (ii) any acquisition, sale or transfer of
any material asset of Target; (iii) any change in accounting methods or
practices (including any change in depreciation or amortization policies or
rates) by Target or any revaluation by Target of any of its assets; (iv) any
declaration,
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setting aside, or payment of a dividend or other distribution with respect to
the shares of Target, or any direct or indirect redemption, purchase or other
acquisition by Target of any of its shares of capital stock, except for the
repurchase at cost of unvested shares held by Target employees on the
termination of their employment; (v) any material contract entered into by
Target, other than as provided to Acquiror, or any material amendment or
termination of, or default under, any material contract to which Target is a
party or by which it is bound; (vi) any amendment or change to the Certificate
of Incorporation or Bylaws of Target; (vii) any increase in or modification of
the compensation or benefits payable or to become payable by Target to any of
its directors, officers, employees or consultants, other than, with respect to
non-officer employees and consultants only, any increase or modification in the
ordinary course consistent with past practice; or (viii) any agreement by
Target to do any of the things described in the preceding clauses (i) through
(vii).
2.6 Absence of Undisclosed Liabilities. Target has no material obligations or
liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the Balance Sheet for
the period ended June 30, 1998 (the "Target Balance Sheet"), (ii) those
incurred in the ordinary course of business since the Target Balance Sheet Date
in amounts consistent with prior periods, and (iii) those incurred in
connection with the execution of this Agreement and the consummation of the
transactions contemplated hereby.
2.7 Litigation. There is no private or governmental action, suit, proceeding,
claim, arbitration or investigation pending before any agency, court or
tribunal, foreign or domestic, or, to the knowledge of Target, threatened
(including allegations that could form the basis for future action) against
Target or any of its properties or officers or directors (in their capacities
as such), which, if adversely determined would or could reasonably be expected
to have a Material Adverse Effect on Target. There is no judgment, decree or
order against Target, or, to the knowledge of Target, any of its directors or
officers (in their capacities as such), that could prevent, enjoin, or
materially alter or delay any of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material Adverse
Effect on Target. All litigation to which Target is a party (or, to the
knowledge of Target, threatened to become a party) is disclosed in the Target
Disclosure Letter. Target does not have any plans to initiate any litigation,
arbitration or other proceeding against any third party.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Target that has or could reasonably be
expected to have the effect of prohibiting or impairing in any material respect
any current business practice of Target, any acquisition of property by Target
or the conduct of business by Target as currently conducted by Target.
2.9 Governmental Authorization. Target has obtained each federal, state,
county, local or foreign governmental consent, license, permit, grant, or other
authorization of a Governmental Entity (i) pursuant to which Target currently
operates or holds any interest in any of its properties or (ii) that is
required for the operation of Target's business or the holding of any such
interest ((i) and (ii) herein collectively called "Target Authorizations"), and
all of such Target Authorizations are in full force and effect, except where
the failure to obtain or have any such Target Authorizations could not
reasonably be expected to have a Material Adverse Effect on Target.
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2.10 Title to Property. Target has good and valid title to all of its
properties, interests in properties and assets, real and personal, necessary
for the conduct of its business as presently conducted or which are reflected
in the Target Balance Sheet or acquired after the Target Balance Sheet Date
(except properties, interests in properties and assets sold or otherwise
disposed of in the ordinary course of business since the Target Balance Sheet
Date), or with respect to leased properties and assets, valid leasehold
interests therein, in each case free and clear of all mortgages, liens,
pledges, charges or encumbrances of any kind or character, except (i) the lien
of current taxes not yet due and payable, (ii) such imperfections of title,
liens and easements as do not and will not materially detract from or interfere
with the use of the properties subject thereto or affected thereby, or
otherwise materially impair business operations involving such properties and
(iii) liens securing debt that are reflected on the Target Balance Sheet. For
purposes of this Section 2.10, the word "property" or "properties" does not
include Intellectual Property (as defined in Section 2.11). Target does not own
any real property.
2.11 Intellectual Property.
(a) Target owns or is licensed for, and in any event possesses sufficient
rights with respect to, all Intellectual Property (defined below) that is used,
exercised, or exploited ("Used") in, or that may be necessary for, its business
as currently conducted ("Target Intellectual Property," which term will also
include all other Intellectual Property owned by or licensed to Target now or
in the past) without any material conflict with or infringement or
misappropriation of any rights or property of others ("Infringement"). Such
ownership, licenses and rights are exclusive (A) except with respect to
Inventions (defined below) in the public domain that are not important
differentiators of Target's business and (B) except with respect to standard,
generally commercially available, "off-the-shelf" third party products
(including, but not limited to, customizations of such products) that are not
part of any current product, service or Intellectual Property offering of
Target. No Target Intellectual Property owned or developed by Target was
conceived or developed directly or indirectly with or pursuant to government
funding or a government contract. "Intellectual Property" means (i) inventions
(whether or not patentable); trade names, trade marks, service marks, logos and
other designations ("Marks"); works of authorship; mask works; data;
technology, know-how, trade secrets, ideas and information; designs; formulas;
algorithms; processes; schematics; computer software (in source code and/or
object code form); and all other intellectual and industrial property of any
sort ("Inventions") and (ii) patent rights; Mark rights; copyrights; mask work
rights; sui generis database rights; trade secret rights; moral rights; and all
other intellectual and industrial property rights of any sort throughout the
world, and all applications, registrations, issuances and the like with respect
thereto ("IP Rights"). With respect to patent rights, moral rights and Mark
rights, the representations and warranties of this Section 2.11(a) are made
only to Target's knowledge. All copyrightable matter within Target Intellectual
Property owned by Target has been created by persons who were employees of
Target at the time of creation, or by third parties that have assigned such
copyrights to Target, and no third party has or will have "moral rights" or
rights to terminate any assignment or license with respect thereto. Target has
not received any written communication alleging that Target has been or may be
engaged in, liable for or contributing to any Infringement, nor does Target
have any reason to expect that any such communication will be forthcoming.
(b) To the extent included in Target Intellectual Property and material to
Target's business as currently conducted, Section 2.11 of the Target Disclosure
Letter lists (by name, number, jurisdiction,
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owner and, where applicable, the name and address of each inventor, all to the
extent known by Target) all patents and patent applications; all registered
Marks; all registered copyrights, all software programs material to Target's
business as currently conducted, and, if material, mask works; and all other
issuances, registrations, applications and the like with respect to those or
any other IP Rights. No cancellation, termination, expiration or abandonment of
any of the foregoing (except natural expiration or termination or in accordance
with the laws governing such registrations) is anticipated by Target. Target is
not aware of any material questions or challenges (or any specific basis
therefor) with respect to the validity of any of the foregoing issued or
registered IP Rights (or any part or claim thereof).
(c) There is, to the knowledge of Target, no unauthorized Use, disclosure,
infringement or misappropriation of any Target Intellectual Property by any
third party, including, without limitation, any employee or former employee of
Target.
(d) Target has taken all reasonable and appropriate steps to protect and
preserve the confidentiality of all Target owned or licensed trade secrets and
confidential information that Target wishes to protect that is not otherwise
disclosed in published patents or patent applications or registered copyrights
("Target Confidential Information"). All use by and disclosure to employees or
others of Target Confidential Information has been pursuant to the terms of
valid and binding written confidentiality and nonuse/restricted-use agreements.
Except as set forth in Section 2.11 of the Target Disclosure Letter, Target has
not disclosed or delivered to any third party, or permitted the disclosure or
delivery to any escrow holder or other person any part of any source code.
(e) Except where the failure to do so would not have a Material Adverse
Effect on Target, each current and former employee and contractor of Target who
is or was involved in, or who has contributed to, the creation or development
of any Target Intellectual Property has executed and delivered (and to the
knowledge of Target is in compliance with) an enforceable agreement in
substantially the form of Target's standard Proprietary Information and
Inventions Agreement (in the case of an employee) or Target's standard
Consulting Agreement (in the case of a contractor).
(f) To Target's knowledge, Target is not Using, and it will not be necessary
to Use, (i) any Inventions of any of its past or present employees or
contractors (or people currently intended to be hired) made prior to or outside
the scope of their employment by Target or (ii) any confidential information or
trade secrets of any former employer of any such person.
2.12 Environmental Matters. Target is and has at all times operated its
business in material compliance with all Environmental Laws and to Target's
knowledge, no material expenditures are or will be required in order to comply
with such Environmental Laws. "Environmental Laws" means all applicable
statutes, rules, regulations, ordinances, orders, decrees, judgments, permits,
licenses, consents, approvals, authorizations, and governmental requirements or
directives or other obligations lawfully imposed by governmental authority
under federal, state or local law pertaining to the protection of the
environment, protection of public health, protection of worker health and
safety, the treatment, emission and/or discharge of gaseous, particulate and/or
effluent pollutants, and/or the handling of hazardous materials, including
without limitation, the Clean Air Act, 42 U.S.C. (S) 7401, et seq., the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), 42 U.S.C. (S) 9601, et seq., the Federal Water Pollution Control
Act, 33 U.S.C. (S) 1321, et seq., the Hazardous Materials Transportation Act,
49 U.S.C. (S) 1801, et seq.,
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the Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901, et seq.
("RCRA"), and the Toxic Substances Control Act, 15 U.S.C. (S) 2601, et seq.
2.13 Taxes. Target, and any consolidated, combined, unitary or aggregate
group for Tax purposes of which Target is or has been a member has timely filed
all Tax Returns required to be filed by it (other than those that are not,
individually or in the aggregate, material), has paid all Taxes shown thereon
to be due and has provided adequate accruals in all material respects in
accordance with generally accepted accounting principles in its financial
statements for any Taxes that have not been paid, whether or not shown as being
due on any returns. In addition, (i) no material claim for unpaid Taxes that
are currently, or will be prior to the Effective Time, due and payable has
become a lien against the property or is being asserted against Target, (ii) no
audit of any material Tax Return of Target is being conducted by a Tax
authority, (iii) no extension of the statute of limitations on the assessment
of any Taxes has been granted by Target and is currently in effect, except as a
result of obtaining an extension of time to file a Tax Return, and (iv) there
is no agreement, contract or arrangement to which Target is a party that may
result in the payment of any amount that would not be deductible pursuant to
Sections 280G, 162(a) (by reason of being unreasonable in amount), 162(b)
through (p) or 404 of the Code. For purposes of this Agreement, the following
terms have the following meanings: "Tax" (and, with correlative meaning,
"Taxes" and "Taxable") means any and all taxes including, without limitation,
(i) any net income, alternative or add-on minimum tax, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, value added,
net worth, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, environmental or windfall profit tax, custom,
duty or other tax governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or any penalty, addition to tax or
additional amount imposed by any Governmental Entity (a "Tax authority")
responsible for the imposition of any such tax (domestic or foreign), (ii) any
liability for the payment of any amounts of the type described in (i) as a
result of being a member of an affiliated, consolidated, combined or unitary
group for any Taxable period or as the result of being a transferee or
successor thereof and (iii) any liability for the payment of any amounts of the
type described in (i) or (ii) as a result of any express or implied obligation
to indemnify any other person. As used in this Section 2.13, the term "Target"
means Target and any entity included in, or required under generally accepted
accounting principles to be included in, any of the Target Financial
Statements. As used herein, "Tax Return" shall mean any return, report,
statement, declaration or other form or document required to be filed with any
governmental authority with respect to Taxes.
2.14 Employee Benefit Plans.
(a) For all purposes under this Section 2.14 "ERISA Affiliate" shall mean
each person (as defined in Section 3(9) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) that, together with Target, is
treated as a single employer under Section 4001(b) of ERISA or Section 414 of
the Code. Except for the plans and agreements listed in Section 2.14 of the
Target Disclosure Letter (collectively, the "Plans"), Target and its ERISA
Affiliates do not maintain, are not a party to, do not contribute to and are
not obligated to contribute to, and employees or former employees of Target and
its ERISA Affiliates and their dependents or survivors do not receive benefits
under, any of the following (whether or not set forth in a written document):
(i) Any employee benefit plan, as defined in section 3(3) of ERISA;
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(ii) Any bonus, deferred compensation, incentive, restricted stock, stock
purchase, stock option, stock appreciation right, phantom stock,
supplemental pension, executive compensation, cafeteria benefit, dependent
care, director or employee loan, fringe benefit, sabbatical, severance,
termination pay or similar plan, program, policy, agreement or arrangement;
or
(iii) Any plan, program, agreement, policy, commitment or other
arrangement relating to the provision of any benefit described in section
3(1) of ERISA to former employees or directors or to their survivors, other
than procedures intended to comply with the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA").
(b) Neither Target nor any ERISA Affiliate has terminated, suspended,
discontinued contributions to or withdrawn from any employee pension benefit
plan, as defined in section 3(2) of ERISA, including (without limitation) any
multiemployer plan, as defined in section 3(37) of ERISA.
(c) Target has provided to Acquiror complete, accurate and current copies of
each of the following:
(i) The text (including amendments) of each of the Plans, to the extent
reduced to writing;
(ii) A summary of each of the Plans, to the extent not previously reduced
to writing;
(iii) With respect to each Plan that is an employee benefit plan (as
defined in section 3(3) of ERISA), the following:
(1) The most recent summary plan description, as described in section
102 of ERISA;
(2) Any summary of material modifications that has been distributed
to participants but has not been incorporated in an updated summary
plan description furnished under Subparagraph (1) above; and
(3) The annual report, as described in section 103 of ERISA, and
(where applicable) actuarial reports, for the three most recent plan
years for which an annual report or actuarial report has been prepared;
and
(iv) With respect to each Plan that is intended to qualify under section
401(a) of the Code the most recent determination letter concerning the
plan's qualification under section 401(a) of the Code, as issued by the
Internal Revenue Service, and any subsequent determination letter
application.
(d) With respect to each Plan that is an employee benefit plan (as defined in
section 3(3) of ERISA), the requirements of ERISA applicable to such Plan have
been satisfied, except to the extent that a failure to satisfy any of such
requirements would not have a Material Adverse Effect.
(e) With respect to each Plan that is subject to COBRA, the requirements of
COBRA applicable to such Plan have been satisfied, except to the extent that a
failure to satisfy any of such requirements would not have a Material Adverse
Effect.
(f) With respect to each Plan that is subject to the Family Medical Leave Act
of 1993, as amended, the requirements of such Act applicable to such Plan have
been satisfied, except to the extent that a failure to satisfy any of such
requirements would not have a Material Adverse Effect.
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(g) Each Plan that is intended to qualify under section 401(a) of the Code
meets the requirements for qualification under section 401(a) of the Code and
the regulations thereunder, except to the extent that such requirements may be
satisfied by adopting retroactive amendments under section 401(b) of the Code
and the regulations thereunder. Each such Plan has been administered in
accordance with its terms (or, if applicable, such terms as will be adopted
pursuant to a retroactive amendment under section 401(b) of the Code) and the
applicable provisions of ERISA and the Code and the regulations thereunder,
except to the extent that a failure to be so administered would not have a
Material Adverse Effect.
(h) Neither Target nor any ERISA Affiliate has any accumulated funding
deficiency under section 412 of the Code or any termination or withdrawal
liability under Title IV of ERISA, except to the extent that any such liability
would not have a Material Adverse Effect.
(i) All contributions, premiums or other payments due from the Target to (or
under) any Plan have been fully paid or adequately provided for on the books
and financial statements of Target. All accruals (including, where appropriate,
proportional accruals for partial periods) have been made in accordance with
prior practices.
2.15 Employees and Consultants.
(a) Target has provided Acquiror with a true and complete list of all
individuals employed by Target as of the date hereof and the position and base
compensation payable to each such individual. The Target Disclosure Letter
contains a description of any written or oral employment agreements, consulting
agreements or termination or severance agreements to which Target is a party,
other than those that are terminable by Target on no more than thirty days
notice without liability or financial obligation.
(b) Target is not a party to or subject to a labor union or a collective
bargaining agreement or arrangement and is not a party to any labor or
employment dispute.
(c) The consummation of the transactions contemplated herein will not result
in (i) any amount becoming payable to any employee, director or independent
contractor of Target, (ii) the acceleration of payment or vesting of any
benefit, option or right to which any employee, director or independent
contractor of Target may be entitled, (iii) the forgiveness of any indebtedness
of any employee, director or independent contractor of Target or (iv) any cost
becoming due or accruing to Target or the Acquiror with respect to any
employee, director or independent contractor of Target.
(d) Target is not obligated and upon consummation of the Merger will not be
obligated to make any payment or transfer any property that would be considered
a "parachute payment" under section 280G(b)(2) of the Code.
(e) To the knowledge of Target, no employee of Target has been injured in the
work place or in the course of his or her employment except for injuries that
are covered by insurance or for which a claim has been made under workers'
compensation or similar laws.
(f) Target has complied in all material respects with the verification
requirements and the record-keeping requirements of the Immigration Reform and
Control Act of 1986 ("IRCA"); to the
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knowledge of Target, the information and documents on which Target relied to
comply with IRCA are true and correct; and there have not been any
discrimination complaints filed against Target pursuant to IRCA, and to the
knowledge of Target, there is no basis for the filing of such a complaint that
could reasonably be expected to have a Material Adverse Effect on Target.
(g) Target has not received or been notified of any complaint by any
employee, applicant, union or other party of any discrimination or other
conduct forbidden by law or contract, nor to the knowledge of Target, is there
a basis for any complaint, except such complaints as could not reasonably be
expected to have a Material Adverse Effect.
(h) Target's action in complying with the terms of this Agreement will not
violate any agreements with any of Target's employees that could reasonably be
expected to have a Material Adverse Effect on Target.
(i) Target has filed all required reports and information with respect to its
employees that are due prior to the Closing Date and otherwise has complied in
its hiring, employment, promotion, termination and other labor practices with
all applicable federal and state law and regulations, including without
limitation those within the jurisdiction of the United States Equal Employment
Opportunity Commission, United States Department of Labor and state and local
human rights or civil rights agencies, except to the extent that any such
failure to file or comply would not have a Material Adverse Effect on Target.
Target has filed and shall file any such reports and information that are
required to be filed prior to the Closing Date.
(j) Target is not aware that any of its employees or contractors is obligated
under any agreement, commitments, judgment, decree, order or otherwise (an
"Employee Obligation") that could reasonably be expected to interfere with the
use of his or her best efforts to promote the interests of Target or that could
reasonably be expected to conflict with any of Target's business as conducted
and that could reasonably be expected to have a Material Adverse Effect on
Target. Neither the execution nor delivery of this Agreement nor the conduct of
Target's business as conducted, will, to Target's knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any Employee Obligation that could reasonably be expected to
have a Material Adverse Effect on Target.
2.16 Insurance. Target has policies of insurance and bonds of the type and in
amounts customarily carried by persons conducting businesses or owning assets
similar to those of Target. There is no material claim pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid and Target is
otherwise in compliance with the terms of such policies and bonds. Target has
no knowledge of any threatened termination of, or material premium increase
with respect to, any of such policies.
2.17 Compliance with Laws. Target has complied with, is not in violation of,
and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for such
violations or failures to comply as could not be reasonably expected to have a
Material Adverse Effect on Target.
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2.18 Brokers' and Finders' Fees. Target has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or investment bankers' fees or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
2.19 Pooling of Interests. To the knowledge of Target, based on consultation
with its independent accountants, neither Target nor any of its directors,
officers, affiliates or stockholders has taken any action that could preclude
Acquiror's ability to account for the Merger as a pooling of interests.
2.20 Voting Agreement; Irrevocable Proxies. All of the persons and/or
entities deemed "Affiliates" of Target within the meaning of Rule 145
promulgated under the Securities Act who are also officers or directors have
agreed in writing to vote for approval of the Merger pursuant to a Voting and
Proxy Agreement attached hereto as Exhibit C (collectively, the "Voting
Agreements").
2.21 Vote Required. The affirmative vote of the holders of a majority of the
Target Common Stock outstanding on the record date set for the Target
Stockholders Meeting (as hereafter defined) is the only vote of the holders of
any of Target's Capital Stock necessary to approve this Agreement and the
transactions contemplated hereby.
2.22 No Breach of Material Contracts. The Target has performed all of the
obligations required to be performed by it and is entitled to all benefits
under, and is not alleged in writing, or, to Target's knowledge, otherwise
alleged to be in default in respect of any Material Contract, other than any
failure that individually or in the aggregate would not or could not reasonably
be expected to result in a material loss to Target. Each of the Material
Contracts is in full force and effect and there exists no default or event of
default or event, occurrence, condition or act, with respect to Target or to
Target's knowledge with respect to the other contracting party, or otherwise
that, with or without the giving of notice, the lapse of the time or the
happening of any other event or conditions, could reasonably be expected to (A)
become a default or event of default under any Material Contract, which default
or event of default could reasonably be expected to have a Material Adverse
Effect on Target or (B) result in the loss or expiration of any material right
or option by Target (or the gain thereof by any third party) under any Material
Contract, which loss or expiration (or gain) could reasonably be expected to
have a Material Adverse Effect on Target or (C) the release, disclosure or
delivery to any third party of any part of the source code. True, correct and
complete copies of all Material Contracts have been delivered to the Acquiror.
2.23 Registration Statement; Proxy Statement/Prospectus. The written
information supplied by Target expressly for the purpose of inclusion in the
registration statement on Form S-4 (or such other or successor form as shall be
appropriate) pursuant to which the issuance of the shares of Acquiror Common
Stock to be issued in the Merger will be registered with the SEC (the
"Registration Statement") shall not at the time the Registration Statement
(including any amendments or supplements thereto) is declared effective by the
SEC contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein not misleading.
The written information supplied by Target expressly for the purpose of
inclusion in the proxy statement/prospectus to be sent to the stockholders of
Target in connection with the meetings of Target's stockholders (the "Target
Stockholders Meeting") to be held in connection with the
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Merger (such proxy statement/prospectus as amended or supplemented is referred
to herein as the "Proxy Statement") shall not, on the date the Proxy Statement
is first mailed to Target's stockholders, at the time of the Target
Stockholders Meeting and at the Effective Time, contain any untrue statement of
a material fact, or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they
were made, not misleading. If at any time prior to the Effective Time any event
or information should be discovered by Target that should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
Target shall promptly inform Acquiror and Merger Sub. Notwithstanding the
foregoing, Target makes no representation, warranty or covenant with respect to
any information supplied by Acquiror or Merger Sub that is contained in any of
the foregoing documents.
2.24 Complete Copies of Materials. Target has delivered or made available
true and complete copies of each document that has been requested by Acquiror
or its counsel in connection with their technical, legal and accounting review
of Target.
2.25 Amendment of Rights Plan. The Target Rights Plan has been amended to (i)
render the Target Rights Plan inapplicable to the Merger and the other
transactions contemplated by this Agreement, the Stock Option Agreement, the
Target Affiliate Agreements and the Voting Agreements, (ii) ensure that (y)
neither Acquiror nor Merger Sub, nor any of their affiliates shall be deemed to
have become an Acquiring Person (as defined in the Target Rights Plan) pursuant
to the Target Rights Plan solely by virtue of the execution of this Agreement,
the Stock Option Agreement, the Target Affiliate Agreements and the Voting
Agreements or the consummation of the transactions contemplated hereby or
thereby and (z) a Distribution Date, a Section 11(a)(ii) Trigger Date or a
Shares Acquisition Date (as such terms are defined in the Target Rights Plan)
or similar event does not occur by reason of the execution of this Agreement,
the Stock Option Agreement, the Target Affiliate Agreements and the Voting
Agreements, the consummation of the Merger, or the consummation of the other
transactions contemplated hereby and thereby, (iii) provide that the exercise
of rights under the Target Rights Plan shall expire immediately prior to the
Effective Time, and (iv) provide that such amendment may not be further amended
by the Target without the prior consent of Acquiror in its sole discretion
(such Target Rights Plan amendment being the "Merger Permissive Amendment").
2.26 Opinion of Financial Advisor. Target has been advised in writing by its
financial advisor, Hambrecht & Quist LLC, that in its opinion, as of the date
of this Agreement, the Exchange Ratio is fair to the stockholders of Target
from a financial point of view.
2.27 Board Approval. The Board of Directors of Target has unanimously (except
that Louis Cole, a director of Target, has abstained from voting on such
matters) (i) approved this Agreement and the Merger, (ii) determined that the
Merger is in the best interest of the stockholders of Target and is on terms
that are fair to such stockholders and (iii) recommended that the stockholders
of Target approve this Agreement and the Merger.
2.28 Section 203 of Delaware Law Not Applicable. The Board of Directors of
Target has taken all actions so that the restrictions contained in Section 203
of the Delaware Law applicable to a "business combination" (as defined in
Section 203) will not apply to the execution, delivery or performance of this
Agreement or the Stock Option Agreement or the consummation of the Merger or
the other transactions contemplated by this Agreement or by the Stock Option
Agreement.
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2.29 Representations Complete. None of the representations or warranties made
by Target herein or in any Schedule hereto, including the Target Disclosure
Letter, or certificate furnished by Target pursuant to this Agreement or the
Target SEC Documents, when all such documents are read together in their
entirety, contains or will contain at the Effective Time any untrue statement
of a material fact, or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Acquiror and Merger Sub represent and warrant to Target that the statements
contained in this Article III are true and correct, except as set forth (i) in
the Disclosure Letter delivered by Acquiror to Target to prior to the execution
and delivery of this Agreement (the "Acquiror Disclosure Letter") or (ii) in
Acquiror's most recently filed Annual Report on Form 10-K (which report was
filed with the Securities and Exchange Commission (the "SEC") on March 27,
1998) and any Acquiror SEC Documents (as defined in Section 3.4) filed
subsequent to March 27, 1998. The Acquiror Disclosure Letter shall be arranged
in paragraphs corresponding to the numbered and lettered paragraphs contained
in this Article III, and the disclosure in any paragraph shall qualify only the
corresponding paragraph in this Article III. Any reference in this Article III
to an agreement being "enforceable" shall be deemed to be qualified to the
extent such enforceability is subject to (i) laws of general application
relating to bankruptcy, insolvency, moratorium and the relief of debtors, and
(ii) the availability of specific performance, injunctive relief and other
equitable remedies.
3.1 Organization, Standing and Power. Each of Acquiror and its subsidiaries
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization. Each of Acquiror and its
subsidiaries has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified and
in good standing would have a Material Adverse Effect on Acquiror. Acquiror has
delivered a true and correct copy of the Certificate of Incorporation and
Bylaws of Acquiror and Merger Sub, each as amended to date, to Target. Neither
Acquiror nor Merger Sub is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws. Acquiror is the owner of all
outstanding shares of capital stock of each of its subsidiaries and all such
shares are duly authorized, validly issued, fully paid and nonassessable. All
of the outstanding shares of capital stock of each such subsidiary are owned by
Acquiror free and clear of all liens, charges, claims or encumbrances or rights
of others. There are no outstanding subscriptions, options, warrants, puts,
calls, rights, exchangeable or convertible securities or other commitments or
agreements of any character relating to the issued or unissued capital stock or
other securities of any such subsidiary, or otherwise obligating Acquiror or
any such subsidiary to issue, transfer, sell, purchase, redeem or otherwise
acquire any such securities. Except as disclosed in the Acquiror SEC Documents
(as defined in Section 3.4), Acquiror does not directly or indirectly own any
equity or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
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3.2 Capital Structure. The authorized capital stock of Acquiror consists of
100,000,000 shares of Common Stock, $.0001 par value, and 5,000,000 shares of
Preferred Stock, $.0001 par value, of which there were issued and outstanding
as of September 30, 1998, 37,286,292 shares of Common Stock and no shares of
Preferred Stock. There are no other outstanding shares of capital stock or
voting securities of Acquiror other than shares of Acquiror Common Stock issued
after September 30, 1998, upon (i) the exercise of options issued under
Acquiror's 1995 Stock Option/Stock Issuance Plan (the "Acquiror Stock Option
Plan") or (ii) the exercise of subscription rights outstanding as of such date
under the Acquiror Employee Stock Purchase Plan (the "Acquiror ESPP"). The
authorized capital stock of Merger Sub consists of 1,000 shares of Common
Stock, $.0001 par value, all of which are issued and outstanding and are held
by Acquiror. All outstanding shares of Acquiror have been duly authorized,
validly issued, fully paid and are nonassessable and free of any liens or
encumbrances other than any liens or encumbrances created by or imposed upon
the holders thereof and are not subject to preemptive rights, rights of first
refusal or other similar rights created by statute, the Certificate of
Incorporation or Bylaws of Acquiror or Merger Sub or any agreement to which
Acquiror or Merger Sub is a party or by which it is bound. As of September 30,
1998, Acquiror had reserved (i) 12,450,982 shares of Common Stock for issuance
to employees, directors and independent contractors pursuant to the Acquiror
Stock Option Plan, of which 5,407,175 shares are subject to outstanding,
unexercised options, and (ii) 1,600,000 shares of Common Stock for issuance to
employees pursuant to the Acquiror ESPP, of which 929,113 shares are available
for issuance. Other than as set forth above and the commitment to issue shares
of Common Stock pursuant to this Agreement; there are no other options,
warrants, calls, rights, commitments or agreements of any character to which
Acquiror or Merger Sub is a party or by which either of them is bound
obligating Acquiror or Merger Sub to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Acquiror or Merger Sub or obligating Acquiror or
Merger Sub to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. The shares of Common Stock to be issued
pursuant to the Merger will be duly authorized, validly issued, fully paid, and
non-assessable, will not be subject to any preemptive or other statutory right
of stockholders, will be issued in compliance with applicable U.S. Federal and
state securities laws and will be free of any liens or encumbrances other than
any liens or encumbrances created by or imposed upon the holders thereof.
3.3 Authority.
(a) Each of Acquiror and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and the other Transaction Documents and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the other Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of each of Acquiror
and Merger Sub. This Agreement and the other Transaction Documents have been
duly executed and delivered by each of Acquiror and Merger Sub and constitute
the valid and binding obligations of each of Acquiror and Merger Sub,
enforceable against Acquiror and Merger Sub in accordance with their terms.
(b) The execution and delivery of this Agreement and the other Transaction
Documents do not, and the consummation of the transactions contemplated hereby
and thereby will not, conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give
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rise to a right of termination, cancellation or acceleration of any obligation
or loss of a benefit under, or require a consent to assignment or a novation
under (i) any provision of the Certificate of Incorporation or Bylaws of
Acquiror or any of its subsidiaries, as amended, or (ii) any contract,
agreement, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Acquiror or any of
its subsidiaries or any of their properties or assets, except in the case of
clause (ii) as would not have a Material Adverse Effect on Acquiror and its
subsidiaries, taken as a whole.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to Acquiror or any of its subsidiaries in connection with the execution
and delivery of this Agreement or the other Transaction Documents by Acquiror
or the consummation by Acquiror of the transactions contemplated hereby or
thereby, except for (i) the filing of the Certificate of Merger, together with
the required officers' certificates, as provided in Section 1.2, (ii) the
filing of a Form 8-K with the SEC and National Association of Securities
Dealers ("NASD") within 15 days after the Closing Date, (iii) any filings as
may be required under applicable state securities laws and the securities laws
of any foreign country, (iv) such filings as may be required under HSR, (v) the
filing with the Nasdaq National Market of a Notification Form for Listing of
Additional Shares with respect to the shares of Acquiror Common Stock issuable
upon conversion of the Target Capital Stock in the Merger and upon exercise of
the options under the Target Stock Option Plans assumed by Acquiror, (vi) the
filing of the Registration Statement with the SEC in accordance with the
Securities Act of 1933, as amended, and (vii) such other consents,
authorizations, filings, approvals and registrations that, if not obtained or
made, would not have a Material Adverse Effect on Acquiror and would not
prevent, materially alter or delay the consummation of the Merger.
3.4 SEC Documents; Financial Statements. Acquiror has made available to
Target a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other filing filed with the
SEC by Acquiror since January 1, 1997, and, prior to the Effective Time,
Acquiror will have furnished Target with true and complete copies of any
additional documents filed with the SEC by Acquiror prior to the Effective Time
(collectively, the "Acquiror SEC Documents"). In addition, Acquiror has made
available to Target all exhibits to the Acquiror SEC Documents filed prior to
the date hereof, and will promptly make available to Target all exhibits to any
additional Acquiror SEC Documents filed prior to the Effective Time. All
documents required to be filed as exhibits to the Acquiror SEC Documents have
been so filed, and all Material Contracts so filed as exhibits are in full
force and effect, except those that have expired in accordance with their
terms, and neither Acquiror nor any of its subsidiaries is in default
thereunder, except for any such default that individually or in the aggregate
would not or could not reasonably be expected to have a Material Adverse Effect
on Acquiror. As of their respective filing dates (or if amended or superseded
by a filing prior to the date hereof, then on the date of such subsequent
filing), the Acquiror SEC Documents complied in all material respects with the
requirements of the Exchange Act and the Securities Act, and none of the
Acquiror SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed Acquiror SEC Document. The financial
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statements of Acquiror, including the notes thereto, included in the Acquiror
SEC Documents (the "Acquiror Financial Statements") fairly present the
consolidated financial condition and the related consolidated statements of
operations, of stockholder's equity, and of cash flows of Acquiror at the dates
and during the periods indicated therein (subject, in the case of unaudited
statements, to normal, recurring year-end adjustments), complied as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto as of their
respective dates, and have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Qs, as permitted by Form 10-Q and Regulation S-K of the
SEC).
3.5 Absence of Certain Changes. Since June 30, 1998 (the "Acquiror Balance
Sheet Date"), Acquiror has conducted its business in the ordinary course
consistent with past practice and there has not occurred any (i) change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect on
Acquiror or (ii) any change by Acquiror in its accounting methods, principles
or properties.
3.6 Litigation. Except as disclosed in the Acquiror SEC Documents, there is
no private or governmental action, suit, proceeding, claim, arbitration or
investigation pending before any agency, court or tribunal, foreign or
domestic, or, to the knowledge of Acquiror or any of its subsidiaries,
threatened against Acquiror or any of its subsidiaries or any of their
respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Acquiror. There is
no judgment, decree or order against Acquiror or any of its subsidiaries or, to
the knowledge of Acquiror or any of its subsidiaries, any of their respective
directors or officers (in their capacities as such) that could prevent, enjoin,
or materially alter or delay any of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material Adverse
Effect on Acquiror.
3.7 Compliance with Laws. Each of Acquiror and its subsidiaries has complied
with, is not in violation of, and has not received any notices of violation
with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on Acquiror.
3.8 Registration Statement. The written information supplied by Acquiror and
Merger Sub expressly for the purpose of inclusion in the Registration Statement
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. If at any time prior to the Effective Time any
event or information should be discovered by Acquiror or Merger Sub that should
be set forth in an amendment to the Registration Statement Acquiror and Merger
Sub will promptly inform Target. Notwithstanding the foregoing, neither
Acquiror nor Merger Sub make any representation, warranty or covenant with
respect to any information supplied by Target that is contained in any of the
foregoing documents.
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3.9 Board Approval. The Board of Directors of Acquiror and Merger Sub have
unanimously approved this Agreement and the Merger (except that Louis Cole, a
director of Acquiror, shall have abstained from voting on such matters).
3.10 Representations Complete. None of the representations, warranties or
statements made by Acquiror or Merger Sub herein or in any Schedule hereto,
including the Acquiror Disclosure Letter, or certificate furnished by Acquiror
pursuant to this Agreement, or the Acquiror SEC Documents, when all such
documents are read together in their entirety, contains or will contain at the
Effective Time any untrue statement of a material fact, or omits or will omit
at the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
3.11 Intellectual Property. Acquiror and its subsidiaries own or are licensed
for and in any event possess sufficient rights with respect to all Intellectual
Property that is Used in, or that may be necessary for, the business of
Acquiror and its subsidiaries as currently conducted by Acquiror and its
subsidiaries ("Acquiror Intellectual Property"), except to the extent that the
failure to have such rights have not had and would not reasonably be expected
to have a Material Adverse Effect on Acquiror. Acquiror's rights to Acquiror
Intellectual Property is without any conflict with or infringement or
misappropriation of any rights or property of others. With respect to patent
rights, moral rights and Mark rights, the representations and warranties of
this Section 3.11 are make only to Acquiror's knowledge.
3.12 Pooling of Interest. To the knowledge of Acquiror, based on consultation
with its independent accountants, neither Acquiror nor any of its subsidiaries,
directors, officers, affiliates or stockholders has taken any action that could
preclude Acquiror's ability to account for the Merger as a pooling of
interests.
3.13 Interim Operations of Merger Sub. Merger Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of Target and Acquiror. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, Target and Acquiror each agree (except to
the extent expressly contemplated by this Agreement or as consented to in
writing by the other, which consent shall not be unreasonably withheld), to
carry on its and its subsidiaries' business in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted. Target further
agrees to (i) pay and to cause its subsidiaries to pay debts and Taxes when
due, subject to good faith disputes over such debts or Taxes, and (ii) to use
all reasonable efforts consistent with past practice and policies to preserve
intact its and its subsidiaries' present business organizations, keep available
the services of its and its subsidiaries' present officers and key employees
and preserve its and its subsidiaries' relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with
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it or its subsidiaries. Target and Acquiror agree to promptly notify the other
of any event or occurrence not in the ordinary course of its or its
subsidiaries' business, and of any event that could have a Material Adverse
Effect on it on a consolidated basis.
4.2 Conduct of Business of Target. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement or as
set forth in the Target Disclosure Letter, Target shall not do, cause or permit
any of the following, or allow, cause or permit any of its subsidiaries to do,
cause or permit any of the following, without the prior written consent of
Acquiror:
(a) Charter Documents. Cause or permit any amendments to its Certificate
of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends on
or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of, or in substitution for, shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock, except from former employees, directors
and consultants in accordance with agreements providing for the repurchase
of shares in connection with any termination of service to it or its
subsidiaries; or
(c) Material Contracts. Enter into any material contract, agreement,
license or commitment, or violate, amend or otherwise modify or waive any
of the terms of any of its material contracts, agreements or licenses,
other than in the ordinary course of business and consistent with past
practice;
(d) Stock Option Plans, etc. Accelerate, amend or change the period of
exercisability or vesting of options or other rights granted under its
stock plans or authorize cash payments in exchange for any options or other
rights granted under any of such plans;
(e) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than the (i) issuance of
shares of its Common Stock pursuant to the exercise of stock options,
warrants or other rights therefor outstanding as of the date of this
Agreement, (ii) shares of its Common Stock issuable to participants in its
ESPP consistent with the terms thereof, and (iii) the granting of stock
options (and the issuance of its Common Stock upon the exercise thereof) in
the ordinary course of business consistent with past practice, in an amount
not to exceed options to purchase (and the issuance of its Common Stock
upon the exercise thereof) 200,000 shares in the aggregate, with not more
than options to purchase 15,000 shares to any one individual;
(f) Intellectual Property. Transfer to or license any person or entity or
otherwise extend, amend or modify in any material respect any rights to its
Intellectual Property, other than the grant of non-exclusive licenses in
the ordinary course of business and consistent with past practice;
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(g) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing, manufacturing or
other exclusive rights of any type or scope with respect to any of its
products or technology;
(h) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets that are material, individually or
in the aggregate, to its and its subsidiaries' business, taken as a whole,
except sales or licenses of product or inventory in the ordinary course and
consistent with past practice;
(i) Indebtedness. Incur or commit to incur any indebtedness for borrowed
money or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
(j) Leases. Enter into any operating lease requiring payments in excess
of $100,000;
(k) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $100,000 in any one case or $500,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Target Financial Statements and (ii)
banking, accounting, legal and printing fees associated with the
transactions contemplated hereby;
(l) Capital Expenditures. Incur or commit to incur any capital
expenditures in excess of $200,000 in the aggregate;
(m) Insurance. Reduce the amount of any insurance coverage provided by
existing insurance policies;
(n) Employee Benefits; Severance. Take any of the following actions: (i)
increase or agree to increase the compensation payable or to become payable
to its officers or employees, except for increases in salary or wages of
non-officer employees in the ordinary course of business and consistent
with past practice, (ii) grant any additional severance or termination pay
to, or enter into any employment or severance agreements with, any officer
or employee, except pursuant to written agreements outstanding or policies
existing on the date hereof (Target also agrees that prior to paying any
termination or severance payments to any officers, director-level employees
or technical personal, Target will first consult with Acquiror), (iii)
enter into any collective bargaining agreement, or (iv) other than offer
letters entered into in the ordinary course of business consistent with
past practice with employees who are terminable "at will," establish,
adopt, enter into or amend in any material respect any bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or
other plan, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees;
(o) Lawsuits. Commence a lawsuit or arbitration proceeding other than (i)
for the routine collection of bills, (ii) in such cases where it in good
faith determines that failure to commence suit would result in the material
impairment of a valuable asset of its business, provided that it consults
with Acquiror prior to the filing of such a suit, or (iii) for a breach of
this Agreement;
(p) Acquisitions. Acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any
other manner, any business or any
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corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets that
are material, individually or in the aggregate, to its and its
subsidiaries' business, taken as a whole;
(q) Taxes. Make any material tax election other than in the ordinary
course of business and consistent with past practice, change any material
tax election, adopt any tax accounting method other than in the ordinary
course of business and consistent with past practice, change any tax
accounting method, file any tax return (other than any estimated tax
returns, immaterial information returns, payroll tax returns or sales tax
returns) or any amendment to a tax return, enter into any closing
agreement, settle any Tax claim or assessment or consent to any Tax claim
or assessment provided that Acquiror shall not unreasonably withhold or
delay approval of any of the foregoing actions;
(r) Pooling. Take any action that could be reasonably expected to
interfere with Acquiror's ability to account for the Merger as a pooling of
interests under generally accepted accounting principles;
(s) Revaluation. Materially revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business, except
as required by generally accepted accounting principles; or
(t) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (s) above.
4.3 Conduct of Business of Acquiror. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement or as
set forth in the Acquiror Disclosure Letter, Acquiror shall not do, cause or
permit any of the following, or allow, cause or permit any of its subsidiaries
to do, cause or permit any of the following, without the prior written consent
of Target (which consent shall not be unreasonably withheld):
(a) Dividends. Declare, set aside or pay any dividends on or make any
other distributions (whether in cash, stock, equity securities or property)
in respect of any capital stock, or split, combine or reclassify any
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of, or in substitution for any capital stock, except
that Acquiror may effect a stock split (including a stock split effected in
the form of a stock dividend) if the Board of Directors of Acquiror
determines that such action is in the best interest of Acquiror;
(b) Pooling. Take any action that could reasonably be expected to
interfere with Acquiror's ability to account for the Merger as a pooling of
interests under generally accepted accounting principles.
4.4 Notices. Target shall give all notices and other information required to
be given to the employees of Target, any collective bargaining unit
representing any group of employees of Target, and any applicable government
authority under the National Labor Relations Act, the Internal Revenue Code,
the Consolidated Omnibus Budget Reconciliation Act, and other applicable law in
connection with the transactions provided for in this Agreement.
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 No Solicitation.
(a) Target shall not, directly or indirectly, through any officer, director,
employee, financial advisor, attorney, representative, subsidiary or agent of
such party (i) take any action to solicit, initiate or encourage any inquiries
or proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer) or similar transaction involving Target or
any of its subsidiaries, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being referred to in
this Agreement as an "Acquisition Proposal"), or (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal; provided, however, that Target
may make reference to and provide a copy of this Section 5.1 to any person or
entity that makes an unsolicited inquiry and provided further that nothing
contained in this Agreement shall prevent Target, or its Board of Directors, to
the extent such Board of Directors determines, in good faith, after
consultation with and not inconsistent with the advice of outside legal
counsel, that such Board of Directors' fiduciary duties under applicable law
require it to do so, from furnishing non-public information to, or entering
into discussions or negotiations with, any person or entity in connection with
an unsolicited, bona fide, written Acquisition Proposal by such person or
entity that the Board of Directors believes is reasonably likely to lead to a
Superior Proposal (as hereafter defined), if and only to the extent that, prior
to furnishing such non-public information to, or entering into discussions or
negotiations with, such person or entity, the Board of Directors receives from
such person or entity an executed confidentiality agreement with terms no more
favorable to such party than those contained in the Confidentiality Agreement
dated October 22, 1998 between Acquiror and Target (the "Confidentiality
Agreement"), such non-public information has been previously delivered to the
Board of Directors of Acquiror, and Target advises the Acquiror hereto in
writing of such disclosure or discussions or negotiations, including the party
to whom disclosed or with whom discussions or negotiations will occur. Without
limiting the foregoing, it is understood that any violations of the
restrictions set forth in this paragraph by any officer, director, employee,
financial advisor, attorney, representative, subsidiary or agent of Target,
whether or not acting on behalf of Target, shall be deemed to be a breach of
this Section 5.1 by Target.
(b) Except as permitted by this Section 5.1, neither the Board of Directors
of Target nor any committee thereof shall agree to or recommend any Acquisition
Proposal or withdraw or modify its recommendation of this Agreement or the
Merger in any manner adverse to Acquiror or Merger Sub. Notwithstanding the
foregoing, the Board of Directors of Target or any committee thereof may
recommend an unsolicited, bona fide, written Acquisition Proposal to the
stockholders of Target, or withdraw or modify its recommendation of this
Agreement and the Merger, in connection with an unsolicited, bona fide, written
Acquisition Proposal, if and only to the extent that (1) the Board of Directors
of Target believes in its good faith reasonable judgment (after consultation
with and not inconsistent with the advice of outside legal counsel and
independent financial advisors) that such Acquisition Proposal is reasonably
capable of being completed on the terms proposed and, after taking into account
the strategic benefits anticipated to be derived from the Merger and the long-
term prospects of Acquiror and Target as a combined company and other factors
deemed relevant by the
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Board of Directors of Target, would, if consummated, result in a transaction
more favorable from a financial point of view than the transaction contemplated
by this Agreement (any such more favorable Acquisition Proposal being referred
to in this Agreement as a "Superior Proposal") and the Board of Directors of
Target determines in good faith after consultation with and not inconsistent
with the advice of outside legal counsel that such action is necessary for such
Board of Directors to comply with its fiduciary duties to stockholders under
applicable law. Without limiting the foregoing, it is understood that any
violations of the restrictions set forth in this paragraph by any officer,
director, employee, financial advisor, attorney, representative, subsidiary or
agent of Target, whether or not acting on behalf of Target, shall be deemed to
be a breach of this Section 5.1 by Target.
(c) Nothing contained in this Section 5.1 or elsewhere in this Agreement
shall prohibit Target from taking and disclosing to its stockholders a position
contemplated by rules 14d-9 and 14e-2(a) promulgated under the Exchange Act;
provided that neither Target nor its Board of Directors nor any committee
thereof shall, except in accordance with the provisions of Section 5.1(b),
withdraw or modify its position with respect to this Agreement or the Merger or
recommend a Superior Proposal.
(d) Target shall notify Acquiror immediately after receipt by Target (or its
advisors) of any Acquisition Proposal or any request for non-public information
in connection with an Acquisition Proposal or for access to the properties,
books or records of such party or any of its subsidiaries by any person or
entity that informs such party that it is considering making, or has made, an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. Target shall continue to keep
Acquiror informed, on a current basis, of the status of any such discussions or
negotiations and the terms being discussed or negotiated.
5.2 Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, Target and Acquiror shall
prepare proxy materials relating to the approval of the Merger and the
transactions contemplated hereby by the stockholders of Target and, as promptly
as practicable, Acquiror shall file with the SEC a Registration Statement on
Form S-4 (or such other or successor form as shall be appropriate), which
complies in form and substance with applicable SEC requirements (and, if
necessary, will file an amendment or amendments to such filing to comply with
applicable SEC requirements, provided that neither Target nor its Board of
Directors nor any committee thereof shall, except in accordance with the
provisions of Section 5.1(b), withdraw or modify its position with respect to
this Agreement or the Merger or recommend a Superior Proposal) and shall use
all reasonable efforts to cause the Registration Statement to become effective
as soon thereafter as practicable; provided, however, that Acquiror shall have
no obligation to agree to account for the Merger as a "purchase" in order to
cause the Registration Statement to become effective. The Proxy Statement shall
include the unanimous recommendation of the Board of Directors of Target in
favor of the Merger (except that Louis Cole, a director of Target, shall have
abstained from voting on such matter); except to the extent that the board of
Directors of Target shall have modified or withdrawn its recommendation with
respect to this Agreement or the Merger in accordance with Section 5.1(b).
5.3 Stockholders Meeting. Promptly after the date hereof, Target will take
all action necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to convene a meeting of the stockholders of Target to
be held as promptly as practicable, and in any
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event (to the extent permissible under applicable law) within 45 days after the
declaration of effectiveness of the Registration Statement, for the purpose of
voting upon this Agreement and the Merger. Subject to Section 5.1(b), Target
will, through its Board of Directors, unanimously recommend to its stockholders
approval of such matters (except that Louis Cole, a director of Target, shall
have abstained from voting on such matters). Target shall use all reasonable
efforts to solicit from its stockholders proxies with respect to such matters
(whether or not the Board of Directors of Target shall have withdrawn or
modified its unanimous recommendation of this Agreement or the Merger).
5.4 Access to Information.
(a) Target shall afford Acquiror and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Target's and its subsidiaries'
properties, books, contracts, commitments and records, and (ii) all other
information concerning the business, properties and personnel of Target and its
subsidiaries as Acquiror may reasonably request. Target agrees to provide to
Acquiror and its accountants, counsel and other representatives copies of
internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until the
Effective Time, each of Acquiror and Target shall confer on a regular and
frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing
operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.4 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
5.5 Confidentiality. The parties acknowledge that Acquiror and Target have
previously executed a Confidentiality Agreement, which shall continue in full
force and effect in accordance with its terms.
5.6 Public Disclosure. Unless otherwise permitted by this Agreement, Acquiror
and Target shall consult with each other before issuing any press release or
otherwise making any public statement or making any other public (or non-
confidential) disclosure (whether or not in response to an inquiry) regarding
the terms of this Agreement and the transactions contemplated hereby, and
neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law or to comply with the
rules and regulations of the SEC or any obligations pursuant to any listing
agreement with any national securities exchange or with the NASD.
5.7 Consents; Cooperation.
(a) Each of Acquiror and Target shall promptly apply for or otherwise seek,
and use reasonable efforts to obtain, all consents and approvals required to be
obtained by it for the consummation of the Merger, including those required
under HSR, and shall use reasonable efforts to obtain all necessary consents,
waivers and approvals under, or to deliver notice of the Merger as required by,
any of its material contracts in connection with the Merger for the assignment
thereof or otherwise. The parties
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hereto will consult and cooperate with one another, and consider in good faith
the views of one another, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with proceedings
under or relating to HSR or any other federal or state antitrust or fair trade
law.
(b) Each of Acquiror and Target shall use all reasonable efforts to resolve
such objections, if any, as may be asserted by any Governmental Entity with
respect to the transactions contemplated by this Agreement under HSR, the
Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other Federal, state or foreign statutes,
rules, regulations, orders or decrees that are designed to prohibit, restrict
or regulate actions having the purpose or effect of monopolization or restraint
of trade (collectively, "Antitrust Laws"). In connection therewith, if any
administrative or judicial action or proceeding is instituted (or threatened to
be instituted) challenging any transaction contemplated by this Agreement as
violative of any Antitrust Law, each of Acquiror and Target shall cooperate and
use all reasonable efforts vigorously to contest and resist any such action or
proceeding and to have vacated, lifted, reversed, or overturned any decree,
judgment, injunction or other order, whether temporary, preliminary or
permanent (each an "Order"), that is in effect and that prohibits, prevents, or
restricts consummation of the Merger or any such other transactions, unless by
mutual agreement Acquiror and Target decide that litigation is not in their
respective best interests. Notwithstanding the provisions of the immediately
preceding sentence, it is expressly understood and agreed that Acquiror shall
have no obligation to litigate or contest any administrative or judicial action
or proceeding or any Order beyond the earlier of (i) March 31, 1998, or (ii)
the date of a ruling preliminarily enjoining the Merger issued by a court of
competent jurisdiction. Each of Acquiror and Target shall use all reasonable
efforts to take such action as may be required to cause the expiration of the
notice periods under the HSR or other Antitrust Laws with respect to such
transactions as promptly as possible after the execution of this Agreement.
(c) Notwithstanding the foregoing, neither Acquiror nor Target shall be
required to agree to divest itself of or hold separate any subsidiary, division
or business unit that is material to the business of such party and its
subsidiaries, taken as a whole, or the divestiture or holding separate of which
would be reasonably likely to have a Material Adverse Effect on (A) the
business, properties, assets, liabilities, financial condition or results of
operations of such party and its subsidiaries, taken as a whole or (B) the
benefits intended to be derived as a result of the Merger.
5.8 Pooling Accounting. Acquiror and Target shall each use its best efforts
to cause the business combination to be effected by the Merger to be accounted
for as a pooling of interests and to take such action as may be reasonably
necessary to permit such treatment. Each of Acquiror and Target shall use its
best efforts (i) to cause its respective "Affiliates" (as defined in Section
5.10) not to take any action that would adversely affect the ability of
Acquiror to account for the business combination to be effected by the Merger
as a pooling of interests and (ii) to cause Deloitte & Touche LLP and
PricewaterhouseCoopers LLP to deliver the letters referred to in Sections
6.1(g) and 6.1(h) of this Agreement.
5.9 Update Disclosure; Breaches. From and after the date of this Agreement
until the Effective Time, each party hereto shall promptly notify the other
party, by written update to its Disclosure Letter, of (i) the occurrence or
non-occurrence of any event that would be likely to cause
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any condition to the obligations of any party to effect the Merger and the
other transactions contemplated by this Agreement not to be satisfied, or (ii)
the failure of Target or Acquiror, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it pursuant to this Agreement that would be likely to result in any
condition to the obligations of any party to effect the Merger and the other
transactions contemplated by this Agreement not to be satisfied. The delivery
of any notice pursuant to this Section 5.9 shall not cure any breach of any
representation or warranty requiring disclosure of such matter prior to the
date of this Agreement or otherwise limit or affect the remedies available
hereunder to the party receiving such notice.
5.10 Stockholder Agreements. Upon the execution of this Agreement, Acquiror
and Target will provide each other with a list of those persons who are, in
Acquiror's or Target's respective reasonable judgment, "affiliates" of Acquiror
or Target, respectively, within the meaning of Rule 145 under the Securities
Act ("Rule 145"). Each such person who is an "affiliate" of Acquiror or Target
within the meaning of Rule 145 is referred to herein as an "Affiliate."
Acquiror and Target shall provide each other such information and documents as
Target or Acquiror shall reasonably request for purposes of reviewing such list
and shall notify the other party in writing regarding any change in the
identity of its Affiliates prior to the Closing Date. Target shall use its best
efforts to deliver to Acquiror by the date of execution of this Agreement (and
in each case by the Effective Time), from each of the Affiliates of Target, an
executed agreement, in the form attached hereto as Exhibit D-1 ("Target
Affiliate Agreement"). Acquiror shall use its best efforts to deliver to Target
by the date of execution of this Agreement (and in each case by the Effective
Time), from each of the Affiliates of Acquiror, an executed agreement, in the
form attached hereto as Exhibit D-2 ("Acquiror Affiliate Agreement"). Acquiror
shall be entitled to place appropriate legends on the certificates evidencing
any Acquiror Common Stock to be received by Affiliates of Target pursuant to
the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Acquiror Common Stock, consistent
with the terms of the Target Affiliate Agreement.
5.11 Indemnification.
(a) From and after the Effective Time, Acquiror and the Surviving Corporation
jointly and severally shall indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director or employee of Target
or any of its subsidiaries (the "Indemnified Parties") in respect of acts or
omissions occurring on or prior to the Effective Time to the extent provided
under Target's Certificate of Incorporation, Bylaws (as in effect on the date
hereof) and indemnification agreements in effect as of the Effective Time
(provided, however, that Target covenants that it will not enter into
indemnification agreements or modify existing indemnification agreements
between the date of this Agreement and the Effective Time, except as required
by law and except that officers and directors of Target may execute a form of
indemnification agreement in the form previously provided to Acquiror or its
counsel); provided that such indemnification shall be subject to any limitation
imposed from time to time under applicable law.
(b) For a period of six years after the Effective Time, Acquiror will cause
the Surviving Corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by Target's
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directors' and officers' liability insurance policy on terms substantially
similar to those applicable to the current directors and officers of Target;
provided, however, that in no event will Acquiror or the Surviving Corporation
be required to expend in excess of $180,000 in the aggregate (i.e., for six
years coverage) for such coverage (or such coverage as is available for such
$180,000).
5.12 Irrevocable Proxies. Target shall use its best efforts, on behalf of
Acquiror and pursuant to the request of Acquiror, to cause affiliates of Target
who are officers and directors to execute and deliver to Acquiror, a Voting and
Proxy Agreement in the form of Exhibit C attached hereto concurrently with the
execution of this Agreement.
5.13 Legal Requirements. Each of Acquiror, Merger Sub and Target will, and
will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements that may be imposed on
them with respect to the consummation of the transactions contemplated by this
Agreement and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed upon such
other party in connection with the consummation of the transactions
contemplated by this Agreement and will take all reasonable actions necessary
to obtain (and will cooperate with the other parties hereto in obtaining) any
consent, approval, order or authorization of, or any registration, declaration
or filing with, any Governmental Entity or other person, required to be
obtained or made in connection with the taking of any action contemplated by
this Agreement.
5.14 Tax-Free Reorganization. Neither Target, Acquiror nor Merger Sub will,
either before or after consummation of the Merger, take any action that, to the
knowledge of such party, would cause the Merger to fail to constitute a
"reorganization" within the meaning of Code Section 368.
5.15 Stock Options.
(a) At the Effective Time, the Target Stock Option Plans and each outstanding
option to purchase shares of Target Common Stock under the Target Stock Option
Plans, whether vested or unvested, shall be assumed by Acquiror, and Target
Company's repurchase right with respect to any unvested option shares granted
under the Target Stock Option Plans shall be assigned to Acquiror. Target has
delivered to Acquiror a schedule (the "Option Schedule") that sets forth a true
and complete list as of the date hereof of all holders of outstanding options
under the Target Stock Option Plans, including the number of shares of Target
Capital Stock subject to each such option, the exercise or vesting schedule,
the exercise price per share and the term of each such option. On the Closing
Date, Target shall deliver to Acquiror an updated Option Schedule current as of
such date. Each such option so assumed by Acquiror under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Target Stock Option Plans immediately prior to the Effective Time, except
that (i) such option shall be exercisable for that number of whole shares of
Acquiror Common Stock equal to the product of the number of shares of Target
Common Stock that were issuable upon exercise of such option immediately prior
to the Effective Time multiplied by the Exchange Ratio, and rounded down to the
nearest whole number of shares of Acquiror Common Stock, and (ii) the per share
exercise price for the shares of Acquiror Common Stock issuable upon exercise
of such assumed option shall be equal to the quotient determined by dividing
the exercise price per share of Target Common Stock at which such option was
exercisable immediately prior to the Effective Time, by the Exchange Ratio,
rounded up to the nearest whole
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cent. The options so assumed by Acquiror shall qualify following the Effective
Time as incentive stock options as defined in Section 422 of the Code to the
extent such options qualified as incentive stock options prior to the Effective
Time. Within ten (10) business days after the Effective Time, Acquiror will
issue to each person who, immediately prior to the Effective Time was a holder
of an outstanding option under the Target Stock Option Plans, a document in
form and substance satisfactory to Target evidencing the foregoing assumption
of such option by Acquiror.
(b) Acquiror shall take all corporate action necessary to reserve and make
available for issuance a sufficient number of shares of Acquiror Common Stock
for delivery under Target Stock Options assumed in accordance with this Section
5.15. Within five business days after the Effective Time, Acquiror shall file a
registration statement on Form S-8 (or any successor or other appropriate
forms) with respect to the shares of Acquiror Common Stock subject to such
options and shall use its reasonable efforts to maintain the effectiveness of
such registration statement or registration statements (and maintain the
current status of the prospectus or prospectuses contained therein) for so long
as such options remain outstanding.
(c) Outstanding purchase rights under the Target ESPP shall be exercised upon
the earlier of (i) the next scheduled purchase date under the Target ESPP or
(ii) immediately prior to the Effective Time, and each participant in the
Target ESPP shall accordingly be issued shares of Target Common Stock according
to the terms of the Target ESPP at that time which shall be converted into
shares of Acquiror Common Stock in the Merger. The Target ESPP shall terminate
with such exercise date, and no purchase rights shall be subsequently granted
or exercised under the Target ESPP. Target employees who meet the eligibility
requirements for participation in the Aquiror Employee Stock Purchase Plan
shall begin payroll deductions under that plan as of the first date on which
the terms of the Acquiror ESPP allows such individuals to commence
participation.
5.16 Listing of Additional Shares. Prior to the Effective Time, Acquiror
shall file with Nasdaq a Notification Form for Listing of Additional Shares
with respect to the shares referred to in Section 6.1(e) below.
5.17 Additional Agreements; Reasonable Efforts. Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties agrees to use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to the appropriate vote of stockholders
of Target described in Section 5.3, including cooperating fully with the other
party, including by provision of information. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and franchises of
either of the constituent corporations, the proper officers and directors of
each party to this Agreement shall take all such necessary action.
5.18 Employee Benefits. Acquiror shall take such reasonable actions, to the
extent permitted by Acquiror's benefits program, as are necessary to allow
eligible employees of Target to participate in the benefit programs of
Acquiror, or alternative benefits programs in the aggregate substantially
comparable to those applicable to employees of Acquiror on similar terms, as
soon as practicable
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after the Effective Time of the Merger. To the extent permitted by Acquiror's
benefit plans, from and after the Effective Time, Acquiror shall grant all
employees of Target credit for all service (to the same extent as service with
Acquiror is taken into account with respect to similarly situated employees of
Acquiror) with Target prior to the Effective Time for (i) eligibility and
vesting purposes and (ii) for purposes of vacation accrual after the Effective
Time as if such service with Target was service with Acquiror. Acquiror and
Target agree that where applicable with respect to any medical or dental
benefit plan of Acquiror, Acquiror shall, to the extent permitted under its
plans, waive any pre-existing condition exclusion and actively-at-work
requirements (provided, however, that no such waiver shall apply to a pre-
existing condition of any employee of Target who was, as of the Effective Time,
excluded from participation in a plan by virtue of such pre-existing
condition).
5.19 Pooling Letters.
(a) Target shall use all reasonable effects to cause to be delivered to
Acquiror a letter of Deloitte & Touche LLP, Target's independent auditors,
dated a date within two business days before the date of this Agreement to the
effect that the Merger qualifies for pooling of interest accounting treatment
if consummated in accordance with this Agreement and in a form reasonably
satisfactory to Acquiror and customary in scope and substance for letters
delivered by independent public accountants in connection with transactions of
this type.
(b) Acquiror shall use all reasonable effects to cause to be delivered to
Target a letter of PricewaterhouseCoopers LLP, Acquiror's independent auditors,
dated a date within two business days before the date of this Agreement to the
effect that the Merger qualifies for pooling of interest accounting treatment
if consummated in accordance with this Agreement and in a form reasonably
satisfactory to Target and customary in scope and substance for letters
delivered by independent public accountants in connection with transactions of
this type.
5.20 No Rights Plan Amendment. Except as required by Section 6.3(i), prior to
the Closing, Target shall not amend or modify the Target Rights Plan in any
manner or take another action so as to (i) render the Target Rights Plan
inapplicable to any transaction(s) other than the Merger and other transactions
contemplated by this Agreement, the Stock Option Agreement, the Target
Affiliate Agreements and the Voting Agreements, or (ii) permit any person or
group who would otherwise be an Acquiring Person (as defined in the Target
Rights Plan) not to be an Acquiring Person, or (iii) provide that a
Distribution Date, a Section 11(a)(ii) Trigger Date or a Shares Acquisition
Date (as such terms are defined in the Target Rights Plan) or similar event
does not occur by reason of the execution of any agreement or transaction other
than this Agreement and the Merger and the agreements and transactions
contemplated hereby and thereby, or (iv) except as specifically contemplated by
this Agreement, otherwise affect the rights of holders of Target Rights.
Notwithstanding the foregoing, at any time after the earlier of (i) January 15,
1999, or (ii) ten days after the effective date of the Registration Statement,
in connection with a Qualified Tender Offer (as hereafter defined) Target shall
be entitled to take any action under the Targets' Rights Plan it so determines
to permit a Qualified Tender Offer (including a delay of any Distribution
Date), provided that no such action shall violate the Merger Permissive
Amendment (as defined in Section 2.25). A "Qualified Tender Offer" shall be an
all cash tender offer for all outstanding shares of Target Common Stock, which
tender offer qualifies as a Superior Proposal, is fully financed (or in the
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reasonable determination of Target's Board of Directors and financial advisors
is capable of being financed), is not otherwise subject to non-customary,
material conditions and would not close prior to the earlier of a negative
Target stockholders' vote on the Merger or the termination of this Agreement.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the holders of at least a majority of the shares of
Target Common Stock outstanding as of the record date set for the Target
Stockholders Meeting.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor shall any proceeding brought by an administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal. In the event an injunction or other order shall have been
issued, each party agrees to use its reasonable efforts to have such
injunction or other order lifted.
(c) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement/Prospectus, shall have been initiated or
threatened in writing by the SEC.
(d) Governmental Approval. Acquiror and Target and their respective
subsidiaries shall have timely obtained from each Governmental Entity all
approvals, waivers and consents, if any, necessary for consummation of or
in connection with the Merger and the several transactions contemplated
hereby, including such approvals, waivers and consents as may be required
under the Securities Act, under state Blue Sky laws, and under HSR.
(e) Tax Opinion. Each of Target and Acquiror shall have received a
written opinion from their respective counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368 of the
Code, which opinions shall be substantially identical in substance. In
preparing the Target and the Acquiror tax opinions, counsel may rely on
reasonable assumptions and may also rely on (and to the extent reasonably
required, the parties and Target's stockholders shall make) reasonable
representations related thereto.
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(f) Listing of Additional Shares. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares with respect
to the shares of Acquiror Common Stock issuable upon conversion of the
Target Common Stock in the Merger and upon exercise of the options under
the Target Stock Option Plans assumed by Acquiror shall have been made.
(g) Pooling Letter from Target's Accountants. Acquiror shall have
received a letter from Deloitte & Touche LLP, dated as of the Closing Date
and addressed to Acquiror, Target and PricewaterhouseCoopers LLP,
reasonably satisfactory in form and substance to Acquiror and
PricewaterhouseCoopers LLP, to the effect that, after reasonable
investigation, Deloitte & Touche LLP are not aware of any fact concerning
Target or any of Target's stockholders or Affiliates that could preclude
Acquiror from accounting for the Merger as a "pooling of interests" in
accordance with generally accepted accounting principles, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC.
(h) Pooling Letter from Acquiror's Accountants. Acquiror shall have
received a letter from PricewaterhouseCoopers LLP, dated as of the Closing
Date, reasonably satisfactory in form and substance to Acquiror, to the
effect that Acquiror may account for the Merger as a "pooling of interests"
in accordance with generally accepted accounting principles, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC.
6.2 Additional Conditions to Obligations of Target. The obligations of Target
to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time
of each of the following conditions, any of which may be waived, in writing, by
Target:
(a) Representations and Warranties. Each representation and warranty of
Acquiror and Merger Sub contained in this Agreement (i) shall have been
true and correct as of the date of this Agreement and (ii) shall be true
and correct on and as of the Closing Date with the same force and effect as
if made on the Closing Date except, (A) in each case, or in the aggregate,
as does not constitute a Material Adverse Effect on Acquiror and Merger
Sub, taken as a whole, (B) for changes contemplated by this Agreement and
(C) for those representations and warranties that address matters only as
of a particular date (which representations shall have been true and
correct except as does not constitute a Material Adverse Effect on Acquiror
and Merger Sub, taken as a whole, as of such particular date) (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect"
qualifications and other qualifications based on the word "material" or
similar phrases contained in such representations and warranties shall be
disregarded and (ii) any update of or modification to the Acquiror
Disclosure Letter made or purported to have been made after the date of
this Agreement shall be disregarded). Target shall have received a
certificate with respect to the foregoing signed on behalf of Acquiror by
an authorized officer of Acquiror.
(b) Agreements and Covenants. Acquiror and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Closing Date, and Target shall have received a
certificate to such effect signed on behalf of Acquiror by an authorized
officer of Acquiror.
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(c) No Material Adverse Changes. There shall not have occurred any
Material Adverse Effect on Acquiror since the date of this Agreement.
(d) Affiliate Agreements. Target shall have received from the Affiliates
of Acquiror an executed Affiliate Agreement in substantially the form
attached hereto as Exhibit D-2.
6.3 Additional Conditions to the Obligations of Acquiror. The obligations of
Acquiror and Merger Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Acquiror:
(a) Representations and Warranties. Each representation and warranty of
Target contained in this Agreement (i) shall have been true and correct as
of the date of this Agreement and (ii) shall be true and correct on and as
of the Closing Date with the same force and effect as if made on and as of
the Closing Date except (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on Target, (B) for changes
contemplated by this Agreement and (C) for those representations and
warranties that address matters only as of a particular date (which
representations shall have been true and correct except as does not
constitute a Material Adverse Effect on Target as of such particular date)
(it being understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect"
qualifications and other qualifications based on the word "material" or
similar phrases contained in such representations and warranties shall be
disregarded and (ii) any update of or modification to the Target Disclosure
Letter made or purported to have been made after the date of this Agreement
shall be disregarded). Acquiror shall have received a certificate with
respect to the foregoing signed on behalf of Target by an authorized
officer of Target.
(b) Agreements and Covenants. Target shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date, and Acquiror shall have received a certificate to such effect signed
on behalf of Target by the Chief Executive Officer and the Chief Financial
Officer of Target.
(c) Third Party Consents. Acquiror shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under the contracts of Target set forth on Schedule 6.3(c) hereto.
(d) No Material Adverse Changes. There shall not have occurred any
Material Adverse Effect on Target since the date of this Agreement.
(e) Affiliate Agreements. Acquiror shall have received from the
Affiliates of Target an executed Affiliate Agreement in substantially the
form attached hereto as Exhibit D-1.
(f) Employment Agreements. Each of the employees of Target set forth on
Schedule 6.3(f) shall have entered into an Employment Agreement in the form
attached hereto as Exhibit E.
(g) Separation Agreements. Each of the employees of Target set forth on
Schedule 6.3(g) shall have entered into a Separation Agreement in the form
attached hereto as Exhibit F.
(h) Termination of Target 401(k) Plan. If requested by Acquiror, Target
shall have terminated its 401(k) Plan.
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(i) Target Rights Plan. All actions necessary to extinguish and cancel
all outstanding Rights under the Target Rights Plan or render such rights
inapplicable to the Merger shall have been taken.
ARTICLE VII
TERMINATION, EXPENSES, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time (with respect to Sections 7.1(b) through 7.1(f), by written
notice by the terminating party to the other party), whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of Target:
(a) by mutual written consent of Target and Acquiror; or
(b) by either Target or Acquiror if the Merger shall not have been
consummated by March 31, 1999 (the "Outside Date") (provided that the right
to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been a significant cause of or resulted in the failure of the
Merger to occur on or before such date); or
(c) by either Target or Acquiror if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger; or
(d) by either Acquiror or Target, if at the Target Stockholders' Meeting
(including any adjournment or postponement thereof), the requisite vote of
the stockholders of Target in favor of this Agreement and the Merger shall
not have been obtained (provided that the right to terminate this Agreement
under this Section 7.1(d) shall not be available to Target where the
failure to obtain Target Stockholder Approval shall have been caused by the
action or failure to act of Target and such action or failure to act
constitutes a material breach by Target of this Agreement). A material
breach by a party of Sections 5.2 or 5.3 hereof will constitute a material
breach hereunder; or
(e) by Acquiror, if (i) the Board of Directors of Target shall have
withdrawn or modified its unanimous recommendation of this Agreement or the
Merger (it being understood that Louis Cole, a director of Target, shall
have abstained from voting on such matter); (ii) the Board of Directors of
Target fails to reaffirm its unanimous recommendation of this Agreement or
the Merger (except that Louis Cole, a director of Target, shall have
abstained from voting on such matters) within ten (10) business days after
Acquiror requests in writing that such unanimous recommendation be
reaffirmed at any time following the public announcement of an Acquisition
Proposal; (iii) the Board of Directors of Target shall have recommended to
the stockholders of Target an Alternative Transaction; (iv) a tender offer
or exchange offer for 15% or more of the outstanding shares of Target
Common Stock is commenced (other than by Acquiror or an Affiliate of
Acquiror) and the Board of Directors of Target shall not have sent to its
security holders pursuant to Rule 14e-2 within ten (10) business days after
such tender or exchange offer is first published, sent or given, a
statement disclosing that Target recommends rejection of such
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tender or exchange offer; or (v) Target fails to call and hold the Target
Stockholders' Meeting by the date immediately preceding the Outside Date
and such failure constitutes a material breach by Target of Section 5.2 or
5.3 hereof.
(f) by Target or Acquiror, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in this Agreement, which breach (i) causes the conditions
set forth in Section 6.3(a) or (b) (in the case of termination by Acquiror)
or 6.2(a) or (b) (in the case of termination by Target) not to be
satisfied, and (ii) shall not have been cured within twenty (20) business
days (or prior to the Outside Date, if earlier) following receipt by the
breaching party of written notice of such breach from the other party.
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Acquiror or Target or their
respective officers, directors, stockholders or affiliates, except as otherwise
set forth in Section 7.3 and except to the extent that such termination results
from the breach by a party hereto of any of its representations, warranties or
covenants set forth in this Agreement; provided that, the provisions of Section
5.5 (Confidentiality), Section 7.3 (Expenses and Termination Fees) and this
Section 7.2 shall remain in full force and effect and survive any termination
of this Agreement.
7.3 Expenses and Termination Fees.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expenses, whether or not the Merger
is consummated; provided, however, that Acquiror and Target shall share equally
all fees and expenses, other than attorneys' fees, incurred in relation to the
printing and filing of the Proxy Statement (including any related preliminary
materials) and the Registration Statement (including financial statements and
exhibits) and any amendments or supplements.
(b) Target shall pay Acquiror a termination fee of $2,000,000 in immediately
available funds within one business day after the termination of this Agreement
by Acquiror pursuant to Section 7.1(e).
(c) As used in this Agreement, "Alternative Transaction" means either (i) a
transaction pursuant to which any person (or group of persons) other than
Acquiror or its respective affiliates (a "Third Party"), acquires more than 15%
of the outstanding shares of Target Common Stock, as the case may be, pursuant
to a tender offer or exchange offer or otherwise, (ii) a merger or other
business combination involving Target pursuant to which any Third Party
acquires more than 15% of the outstanding equity securities of Target or the
entity surviving such merger or business combination, (iii) any other
transaction pursuant to which any Third Party acquires control of assets
(including for this purpose the outstanding equity securities of subsidiaries
of Target, and the entity surviving any merger or business combination
including any of them) of Target having a fair market value (as determined by
the Board of Directors of Target or Acquiror, as the case may be, in good
faith) equal to more than 15% of the fair market value of all the assets of
Target and its subsidiaries, taken as a whole, immediately prior to such
transaction, or (iv) any public announcement by a Third Party of a proposal,
plan or intention to do any of the foregoing or any agreement to engage in any
of the foregoing.
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7.4 Amendment. The boards of directors of the parties hereto may cause this
Agreement to be amended at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto; provided that an amendment made
subsequent to adoption of the Agreement by the stockholders of Target shall not
(i) alter or change the amount or kind of consideration to be received on
conversion of the Target Capital Stock, (ii) alter or change any term of the
Certificate of Incorporation of the Surviving Corporation to be effected by the
Merger, or (iii) alter or change any of the terms and conditions of the
Agreement if such alteration or change would adversely affect the holders of
Target Capital Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a)if to Acquiror or Merger Sub, to:
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, CA 94304
Attention: Louis C. Cole
Facsimile No.: (650) 812-6032
Telephone No.: (650) 812-6000
with a copy to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Robert V. Gunderson, Jr.
Facsimile No.: (650) 321-2800
Telephone No.: (650) 463-5200
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(b)if to Target, to:
Qualix Group, Inc.
177 Bovet Road, Second Floor
San Mateo Road, CA 94402
Attention: Richard G. Thau
Facsimile No.: (650) 572-0200
Telephone No.: (650) 572-1300
with a copy to:
Wilson Sonsini Goodrich & Rosati. P.C.
650 Page Mill Road
Palo Alto, CA 94303
Attention: Jeffrey D. Saper
Facsimile No.: (650) 493-6811
Telephone No.: (650) 493-9300
8.2 Interpretation. When a reference is made in this Agreement to Exhibits,
such reference shall be to an Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations or results of operations of such entity or group of
entities. In this Agreement, any reference to a "Material Adverse Effect" with
respect to any entity or group of entities means any event, change, condition
or effect that is materially adverse to the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of such entity and its subsidiaries, taken
as a whole; provided, however, that the following shall not be considered a
"Material Adverse Effect": (i) changes, events, violations, inaccuracies,
circumstances and effects that are caused by conditions affecting the United
States economy as a whole or affecting the industry in which such entity
completes as a whole, which conditions do not affect such entity in a
disproportionate manner, (ii) a shortfall in revenues of such entity as a
result of delays or cancellations in customer orders (including any effects on
such entity's operating income which result directly from such revenue
shortfall), which delays or cancellations result from the announcement and
pendency of the Merger, or (iii) the loss of employees resulting from the
announcement and pendency of the Merger. In this Agreement, any reference to a
party's "knowledge" means such party's actual knowledge after due and diligent
inquiry of senior officers and directors of such party and its subsidiaries
reasonably believed by Target or Acquiror, as applicable, to have knowledge of
such matters. The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement", "the date hereof", and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to October 25, 1998. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
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8.3 Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart.
8.4 Entire Agreement; No Third Party Beneficiaries. This Agreement, the other
Transaction Documents and the documents and instruments and other agreements
specifically referred to herein or delivered pursuant hereto, including the
Exhibits, the Schedules, including the Target Disclosure Letter and the
Acquiror Disclosure Letter (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, except for the Confidentiality Agreement,
which shall continue in full force and effect, and shall survive any
termination of this Agreement or the Closing, in accordance with its terms; (b)
are not intended to confer upon any other person any rights or remedies
hereunder, except for the rights of the Target Stockholders and optionholders
to receive the consideration set forth in Article I of this Agreement and the
provisions of Sections 5.11, 5.15 and 5.18.
8.5 Severability. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.6 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not
preclude the exercise of any other remedy.
8.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to applicable
principles of conflicts of law. Each of the parties hereto irrevocably consents
to the exclusive jurisdiction of any court located within the State of
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection that
they might otherwise have to such jurisdiction and such process.
8.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the
other parties. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by the parties and
their respective successors and permitted assigns.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of
this Agreement and, therefore, waive the
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application of any law, regulation, holding or rule of construction providing
that ambiguities in an agreement or other document will be construed against
the party drafting such agreement or document.
IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
QUALIX GROUP, INC.
/s/ Richard G. Thau
By: _________________________________
Richard G. Thau
President and Chief Executive
Officer
LEGATO SYSTEMS, INC.
/s/ Louis C. Cole
By: _________________________________
Louis C. Cole
President and Chief Executive
Officer
HAT ACQUISITION CORP.
/s/ Louis C. Cole
By: _________________________________
Louis C. Cole
President and Chief Executive
Officer
SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION
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AMENDMENT NO. 1
AGREEMENT AND PLAN OF REORGANIZATION
This AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF REORGANIZATION (the
"Amendment") is made and entered into as of February 9, 1999, by and among
Legato Systems, Inc., a Delaware corporation ("Acquiror"), Hat Acquisition
Corp., a Delaware corporation ("Merger Sub") and Qualix Group, Inc., a Delaware
corporation ("Target"). Capitalized terms not otherwise defined in this
Amendment have the meaning given them in that certain Agreement and Plan of
Reorganization by and among Acquiror, Merger Sub and Target dated as of October
25, 1998 (the "Agreement").
WHEREAS, pursuant to Section 7.4 of the Agreement, the Agreement may be
amended only with the written consent of the boards of directors of Acquiror,
Merger Sub and Target;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, Acquiror, Merger Sub and Target hereby agree as follows:
1. Section 7.1(b) of the Agreement shall be amended and restated in its
entirety to read as follows:
"by either Target or Acquiror if the Merger shall not have been consummated
by May 31, 1999 (the "Outside Date") (provided that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been a significant
cause of or resulted in the failure of the Merger to occur on or before such
date); or"
2. This Amendment shall be governed by and construed under the laws of the
State of Delaware without regard to applicable principles of conflicts of law.
3. This Amendment may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
4. This Amendment when executed by Acquiror, Merger Sub and Target as of the
date hereof shall have been effected in accordance with Section 7.4 of the
Agreement and accordingly shall be binding upon each party to the Agreement.
5. The Agreement and this Amendment and the documents referred to therein and
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter thereof and hereof.
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IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused this
Amendment to be executed and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
QUALIX GROUP, INC.
/s/ Richard G. Thau
By: _________________________________
Richard G. Thau
President and Chief Executive
Officer
LEGATO SYSTEMS, INC.
/s/ Stephen C. Wise
By: _________________________________
Stephen C. Wise
Senior Vice President and Chief
Executive Officer
HAT ACQUISITION CORP.
/s/ Stephen C. Wise
By: _________________________________
Stephen C. Wise
Senior Vice President and Chief
Executive Officer
SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION
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APPENDIX B
October 25, 1998
Confidential
The Board of Directors
FullTime Software, Inc.
177 Bovet Road, Second Floor
San Mateo, CA 94402
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of FullTime Software, Inc. ("FullTime" or the "Company") of the
Exchange Ratio (as defined below) in connection with the proposed merger of Hat
Acquisition Corp. ("Merger Sub"), a wholly owned subsidiary of Legato Systems,
Inc. ("Legato"), with and into FullTime (the "Proposed Transaction") pursuant
to the Agreement and Plan of Merger to be dated as of October 25, 1998, among
Legato, Merger Sub, and FullTime (the "Agreement").
We understand that the terms of the Agreement provide, among other things,
that each issued and outstanding share of Common Stock shall be converted into
the right to receive .1421 share of common stock of Legato (the "Exchange
Ratio"), as more fully set forth in the Agreement. For purposes of this
opinion, we have assumed that the Proposed Transaction will qualify as a tax-
free reorganization under the United States Internal Revenue Code for the
shareholders of the Company and that the Proposed Transaction will be accounted
for as a pooling of interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of FullTime in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
In the past, we have provided investment banking and other financial advisory
services to FullTime and Legato and have received fees for rendering these
services. In particular, Hambrecht & Quist acted as lead managing underwriter
in the Company's initial public offering in 1997. Additionally, Hambrecht &
Quist and its affiliates beneficially own a total of approximately 686,929
shares of FullTime Common Stock. We are also familiar with Legato, having acted
as a managing underwriter in connection with Legato's initial public offering
in 1995. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded securities of FullTime and Legato and
receives customary compensation in connection therewith, and also provides
research coverage for FullTime and Legato. In the ordinary course of business,
Hambrecht & Quist actively trades in the equity and derivative securities of
FullTime and Legato for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short
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position in such securities. Hambrecht & Quist may in the future provide
additional investment banking or other financial advisory services to FullTime
and Legato.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Legato for recent years and interim periods to date and certain other
relevant financial and operating data of Legato made available to us from
published sources;
(ii) reviewed certain publicly available financial and operating
information, including certain projections, relating to Legato;
(iii) discussed the business, financial condition and prospects of Legato
with certain of its officers;
(iv) reviewed the publicly available consolidated financial statements of
FullTime for recent years and interim periods to date and certain other
relevant financial and operating data of FullTime made available to us from
published sources and from the internal records of FullTime;
(v) discussed the business, financial condition and prospects of FullTime
with certain of its officers;
(vi) reviewed the recent reported prices and trading activity for the
common stocks of FullTime and Legato and compared such information and
certain financial information for FullTime and Legato with similar
information for certain other companies engaged in businesses we consider
comparable;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(viii) reviewed the Agreement;
(ix) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning FullTime or Legato considered
in connection with our review of the Proposed Transaction, and we have not
assumed any responsibility for independent verification of such information. We
have not prepared any independent valuation or appraisal of any of the assets
or liabilities of FullTime or Legato, nor have we conducted a physical
inspection of the properties and facilities of either company. With respect to
the financial forecasts and projections used by us in our analysis, we have
assumed that they reflect the best currently available estimates and judgments
of the expected future financial performance of FullTime and Legato. For
purposes of this opinion, we have assumed that neither FullTime nor Legato is a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Proposed
Transaction and those activities undertaken in the ordinary course of
conducting their respective businesses. Our opinion is necessarily based upon
market, economic, financial and other conditions as they exist and can be
evaluated as of the date of this letter and any change in such conditions
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would require a reevaluation of this opinion. We express no opinion as to the
price at which Legato common stock will trade subsequent to the Effective Time
(as defined in the Agreement). We were not requested to, and did not, solicit
indications of interest from any other parties in connection with a possible
acquisition of, or business combination with, FullTime.
It is understood that this letter is for the information of the Board of
Directors only in connection with their evaluation of the Proposed Transaction
and may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in any proxy
statement relating to the Proposed Transaction. This letter does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the Exchange Ratio is fair to the holders of FullTime Common Stock from a
financial point of view. We express no opinion, however, as to the adequacy of
any consideration received in the Proposed Transaction by Legato or any of its
affiliates.
Very truly yours,
Hambrecht & Quist llc
/s/ David G. Golden
By __________________________________
David G. Golden
Managing Director
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APPENDIX C
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of October 25, 1998 (the "Agreement") is
entered into by and between Qualix Group, Inc., a Delaware corporation
("Target") and Legato Systems, Inc., a Delaware corporation ("ACQUIROR").
Capitalized terms used in this Agreement but not defined herein shall have the
meanings ascribed thereto in the Merger Agreement (as defined below).
Recitals
A. Concurrently with the execution and delivery of this Agreement, Target,
ACQUIROR and Hat Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of ACQUIROR ("Sub"), are entering into an Agreement and Plan of
Reorganization (the "Merger Agreement"), which provides that, among other
things, upon the terms and subject to the conditions thereof, Target and
ACQUIROR will enter into a business combination transaction (the "Merger").
B. As a condition to ACQUIROR's willingness to enter into the Merger
Agreement, ACQUIROR has requested that Target agree, and Target has so agreed,
to grant to ACQUIROR an option to acquire shares of Target's Common Stock,
$0.001 par value, upon the terms and subject to the conditions set forth
herein.
Agreement
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements set forth herein and in the Merger Agreement and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Option.
Target hereby grants to ACQUIROR an irrevocable option (the "Option") to
acquire up to a number of shares of the Common Stock, $0.001 par value, of
Target ("Target Shares"), including the associated rights (the "Rights") to
purchase shares of Target Preferred Stock pursuant to the Rights Agreement,
dated as of July 31, 1997, between Target and ChaseMellon Shareholders
Services, L.L.C., as Rights Agent (the "Rights Agreement"), equal to 19.9% of
the issued and outstanding shares of capital stock of Target as of the first
date, if any, upon which an Exercise Event (as defined in Section 2(a) below)
shall occur (the "Option Shares"), in the manner set forth below by paying cash
at a price of $5.73 per share (the "Exercise Price"). All references in this
Agreement to Target Shares issued to ACQUIROR hereunder shall be deemed to
include the Rights (subject to the terms of the Rights Agreement).
2. Exercise of Option; Maximum Proceeds.
(a) For all purposes of this Agreement, an "Exercise Event" shall have
occurred upon termination of the Merger Agreement pursuant to Section 7.1(e)
thereof.
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(b) ACQUIROR may deliver to Target a written notice (an "Exercise Notice")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire (i) upon public disclosure of an Acquisition
Proposal for an Alternative Transaction with respect to Target, with any party
other than ACQUIROR (or an affiliate of ACQUIROR), (ii) upon the commencement
of an election contest within the meaning of Rule 14a-11 of the Exchange Act
with the purpose of seeking to effect a Change of Control of the Target Board
of Directors, or (iii) upon termination of the Merger Agreement pursuant to
Section 7.1(e) thereof (the events specified in clauses (i), (ii) or (iii) of
this sentence being referred to herein as "Conditional Exercise Events"). For
purposes of this Agreement, a "Change of Control" of the Target Board of
Directors shall mean a change in the composition of such Board as a result of
which fewer than a majority of the incumbent directors are directors who either
(A) had been directors of Target at least eighteen (18) months prior to such
change or (B) were elected or nominated for election to the Target Board with
the affirmative votes of at least a majority of the directors who had been
directors of Target at least eighteen (18) months prior to such change and who
were still serving as directors at the time of the election or nomination. At
any time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by ACQUIROR, the closing of a purchase of Option Shares (a "Closing")
specified in such Exercise Notice shall take place at the principal offices of
Target upon the occurrence of an Exercise Event or at such later date prior to
the termination of the Option as may be designated by ACQUIROR in writing. In
the event that no Exercise Event shall occur prior to termination of the
Option, such Exercise Notice shall be void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Section 7.1(e) thereof, or (iii) upon termination of the Merger Agreement for
any reason other than pursuant to Section 7.1(e) thereof; provided, however,
that if the Option is exercisable but cannot be exercised by reason of any
applicable government order or because the waiting period related to the
issuance of the Option Shares under the HSR Act shall not have expired or been
terminated, or because any other condition to closing has not been satisfied,
then the Option shall not terminate until the tenth business day after such
impediment to exercise shall have been removed or shall have become final and
not subject to appeal.
(d) If ACQUIROR receives proceeds in connection with any sales or other
dispositions of this Option (or any rights hereunder) or Option Shares, plus
any dividends received by ACQUIROR declared on Option Shares (including by
exercising the ACQUIROR Put described in Section 6(a) hereof), of more than the
sum of (x) $1,500,000 plus (y) the Exercise Price multiplied by the number of
Target Shares purchased by ACQUIROR pursuant to the Option, then all proceeds
to ACQUIROR in excess of such sum shall be remitted by ACQUIROR to Target.
3. Conditions to Closing.
The obligation of Target to issue Option Shares to ACQUIROR hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired or
been terminated; (b) all material consents, approvals, orders or authorizations
of, or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal state or local
governmental authority or
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instrumentality, if any, required in connection with the issuance of the Option
Shares hereunder shall have been obtained or made, as the case may be; and (c)
no preliminary or permanent injunction or other order by any court of competent
jurisdiction prohibiting or otherwise restraining such issuance shall be in
effect. It is understood and agreed that at any time during which ACQUIROR
shall be entitled to deliver to Target an Exercise Notice, the parties will use
their respective best efforts to satisfy all conditions to Closing, so that a
Closing may take place as promptly as practicable, and in any event, upon the
occurrence of an Exercise Event.
4. Closing.
At any Closing, (a) Target shall deliver to ACQUIROR a single certificate in
definitive form representing the number of Target Shares designated by ACQUIROR
in its Exercise Notice consistent with this Agreement, such certificate to be
registered in the name of ACQUIROR and to bear the legend set forth in Section
10 hereof, against delivery of (b) payment by ACQUIROR to Target of the
aggregate purchase price for the Target Shares so designated and being
purchased by delivery of a certified check or bank check in immediately
available funds.
5. Representations and Warranties of Target.
Target represents and warrants to ACQUIROR that (a) Target is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by Target and consummation by Target of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target and no other corporate proceedings on
the part of Target are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed and
delivered by Target and constitutes a legal, valid and binding obligation of
Target and, assuming this Agreement constitutes a legal, valid and binding
obligation of ACQUIROR, is enforceable against Target in accordance with its
terms; (d) except for any filings required under the HSR Act, Target has taken
all necessary corporate and other action to authorize and reserve for issuance
and to permit it to issue upon exercise of the Option, and at all times from
the date hereof until the termination of the Option will have reserved for
issuance, a sufficient number of unissued Target Shares for ACQUIROR to
exercise the Option in full and will take all necessary corporate or other
action to authorize and reserve for issuance all additional Target Shares or
other securities which may be issuable pursuant to Section 8(a) upon exercise
of the Option, all of which, upon their issuance and delivery in accordance
with the terms of this Agreement, will be validly issued, fully paid and
nonassessable; (e) upon delivery of the Target Shares and any other securities
to ACQUIROR upon exercise of the Option, ACQUIROR will acquire such Target
Shares or other securities free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by ACQUIROR; (f) the execution and delivery of this
Agreement by Target do not, and the performance of this Agreement by Target
will not, (i) violate the Certificate of Incorporation or Bylaws of Target,
(ii) conflict with or violate any order applicable to Target or any of its
subsidiaries or by which they or any of their property is bound or affected or
(iii) result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give rise to
any right of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance on any
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property or assets of Target or any of its subsidiaries pursuant to, any
contract or agreement to which Target or any of its subsidiaries is a party or
by which Target or any of its subsidiaries or any of their property is bound or
affected, except, in the case of clauses (ii) and (iii) above, for violations,
conflicts, breaches, defaults, rights of termination, amendment, acceleration
or cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on Target; and (g) the execution and
delivery of this Agreement by Target does not, and the performance of this
Agreement by Target will not, require any consent, approval, authorization or
permit of, or filing with, or notification to, any Governmental Entity except
pursuant to the HSR Act.
6. Certain Rights
(a) ACQUIROR Put. ACQUIROR may deliver to Target a written notice (a "Put
Notice") at any time during which ACQUIROR may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by ACQUIROR
pursuant thereto, at the price set forth in subparagraph (ii) below (as limited
by subparagraph (iii) below) (the "Put"). At any time after delivery of a Put
Notice, unless such Put Notice is withdrawn by ACQUIROR, the closing of the Put
(the "Put Closing") shall take place at the principal offices of Target upon
the occurrence of an Exercise Event or at such later date prior to the
termination of the Option as may be designated by ACQUIROR in writing. In the
event that no Exercise Event shall occur prior to termination of the Option,
such Put Notice shall be void and of no further force and effect.:
(i) The difference between the "Market/Tender Offer Price" for Target
Shares as of the date ACQUIROR gives notice of its intent to exercise its
rights under this Section 6(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Alternative
Transaction which was made prior to such date and not terminated or
withdrawn as of such date and (B) the highest closing sale price of Target
Shares on the Nasdaq National Market during the twenty (20) trading days
ending on the trading day immediately preceding such date) and the Exercise
Price, multiplied by the number of Target Shares purchasable pursuant to
the Option, but only if the Market/Tender Offer Price is greater than the
Exercise Price. For purposes of determining the highest price offered
pursuant to any Alternative Transaction which involves consideration other
than cash, the value of such consideration shall be equal to the higher of
(x) if securities of the same class of the proponent as such consideration
are traded on any national securities exchange or by any registered
securities association, a value based on the closing sale price or asked
price for such securities on their principal trading market on such date
and (y) the value ascribed to such consideration by the proponent of such
Alternative Transaction, or if no such value is ascribed, a value
determined in good faith by the Board of Directors of Target.
(ii) The Exercise Price paid by ACQUIROR for Target Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of Target Shares
so purchased.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 6 Target shall not be required to pay ACQUIROR in excess of an
aggregate of (A) (x) $1,500,000 plus
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(y) the Exercise Price paid by ACQUIROR for Target Shares acquired pursuant
to the Option and put to Target pursuant to Section 6 minus (B) the gain
received by ACQUIROR on sale(s) of this Option (or any rights hereunder) or
Option Shares to third parties. The parties intend ACQUIROR profit received
pursuant to this Option and the Option Shares not to exceed $1,500,000 in
the aggregate and Section 3(d) and Section 6(a)(iii) shall be read
collectively to achieve such purpose.
(b) Payment and Redelivery of Option or Shares. At the Put Closing, Target
shall pay the required amount to ACQUIROR in immediately available funds and
ACQUIROR shall surrender to Target the Option and the certificates evidencing
the Target Shares purchased by ACQUIROR pursuant thereto.
7. Registration Rights
(a) Following the termination of the Merger Agreement, ACQUIROR (sometimes
referred to herein as a "Holder") may by written notice (sometimes referred to
herein as the "Registration Notice") to Target (the "Registrant") request the
Registrant to register under the Securities Act all or any part of the shares
acquired by such Holder pursuant to this Agreement (the "Registrable
Securities") in order to permit the sale or other disposition of such shares
pursuant to a bona fide firm commitment underwritten public offering in which
the Holder and the underwriters shall effect as wide a distribution of such
Registrable Securities as is reasonably practicable and shall use reasonable
efforts to prevent any person or group from purchasing through such offering
shares representing more than 1% of the outstanding shares of Common Stock of
the Registrant on a fully diluted basis (a "Permitted Offering"); provided,
however, that any such Registration Notice must relate to a number of shares
equal to at least 2% of the outstanding shares of Common Stock of the
Registrant on a fully diluted basis and that any rights to require registration
hereunder shall terminate with respect to any shares that may be sold pursuant
to Rule 144(k) under the Securities Act. The Registration Notice shall include
a certificate executed by the Holder and its proposed managing underwriter,
which underwriter shall be an investment banking firm of internationally
recognized standing reasonably acceptable to the Company (the "Manager"),
stating that (i) the Holder and the Manager have a good faith intention to
commence a Permitted Offering and (ii) the Manager in good faith believes that,
based on the then prevailing market conditions, it will be able to sell the
Registrable Securities at a per share price equal to at least 80% of the per
share average of the closing sale prices of the Registrant's Common Stock on
the Nasdaq National Market for the twenty trading days immediately preceding
the date of the Registration Notice. The Registrant shall thereupon have the
option exercisable by written notice delivered to the Holder within ten
business days after the receipt of the Registration Notice, irrevocably to
agree to purchase all or any part of the Registrable Securities for cash at a
price (the "Option Price") equal to the product of (i) the number of
Registrable Securities so purchased and (ii) the per share average of the
closing sale prices of the Registrant's Common Stock on the Nasdaq National
Market for the twenty trading days immediately preceding the date of the
Registration Notice. Any such purchase of Registrable Securities by the
Registrant hereunder shall take place at a closing to be held at the principal
executive offices of the Registrant or its counsel at any reasonable date and
time designated by the Registrant in such notice within 10 business days after
delivery of such notice. The payment for the shares to be purchased shall be
made by delivery at the time of such closing of the Option Price in immediately
available funds.
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(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 7(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) the Holder shall not be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion of counsel to such
Registrant, such information would have to be disclosed if a registration
statement were filed at that time; (B) such Registrant is required under the
Securities Act to include audited financial statements for any period in such
registration statement and such financial statements are not yet available for
inclusion in such registration statement; or (C) such Registrant determines, in
its reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving the Registrant.
If consummation of the sale of any Registrable Securities pursuant to a
registration hereunder does not occur within 180 days after the filing with the
SEC of the initial registration statement therefor, the provisions of this
Section 7 shall again be applicable to any proposed registration, it being
understood that neither party shall be entitled to more than an aggregate of
two effective registration statements hereunder. The Registrant shall use all
reasonable efforts to cause any Registrable Securities registered pursuant to
this Section 7 to be qualified for sale under the securities or blue sky laws
of such jurisdictions as the Holder may reasonably request and shall continue
such registration or qualification in effect in such jurisdictions; provided,
however, that the Registrant shall not be required to qualify to do business
in, or consent to general service of process in, any jurisdiction by reason of
this provision.
(c) The registration rights set forth in this Section 7 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to such Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required
to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 7 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant shall use all
reasonable efforts to provide to the underwriters such documentation (including
certificates, opinions of counsel and "comfort" letters from auditors) as are
customary in connection with underwritten public offerings and as such
underwriters may reasonably require. In connection with any registration, the
Holder and the Registrant agree to enter into an underwriting agreement
reasonably acceptable to each such party, in form and substance customary for
transactions of this type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each
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underwriter of the Registrant's securities, with respect to any registration,
qualification or compliance which has been effected pursuant to this Agreement,
against all expenses, claims, losses, damages or liabilities (or actions in
respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading, or any violation by the Registrant of any rule or
regulation promulgated under the Securities Act applicable to the Registrant in
connection with any such registration, qualification or compliance, and the
Registrant will reimburse the Holder and, each of its directors and officers
and each person who controls the Holder within the meaning of Section 15 of the
Securities Act, and each underwriter for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Registrant
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Registrant by such
Holder or director or officer or controlling person or underwriter seeking
indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Holder of
any rule or regulation promulgated under the Securities Act applicable to the
Holder in connection with any such registration, qualification or compliance,
and will reimburse the Registrant, such directors, officers or control persons
or underwriters for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Registrant by the Holder for use therein,
provided that in no event shall any indemnity under this Section 8(e) exceed
the gross proceeds of the offering received by the Holder.
(iii) Each party entitled to indemnification under this Section 7(e) (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval
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shall not unreasonably be withheld), and the Indemnified Party may participate
in such defense at such party's expense; provided, however, that the
Indemnifying Party shall pay such expense if representation of the Indemnified
Party by counsel retained by the Indemnifying Party would be inappropriate due
to actual or potential differing interests between the Indemnified Party and
any other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 7(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. No Indemnifying Party
shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
8. Adjustment Upon Changes in Capitalization; Rights Plans
(a) In the event of any change in the Target Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option and the Exercise Price
shall be adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction so that ACQUIROR shall receive, upon
exercise of the Option, the number and class of shares or other securities or
property that ACQUIROR would have received in respect of the Target Shares if
the Option had been exercised immediately prior to such event or the record
date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time after
the Option is exercised (in whole or in part, if at all), Target shall not
amend its Rights Agreement nor adopt a new stockholders rights plan that
contains provisions for the distribution of rights thereunder solely as a
result of ACQUIROR being the beneficial owner of shares of Target by virtue of
the Option being exercisable or having been exercised (or as a result of such
other party beneficially owning shares issuable in respect of any Option
Shares).
9. Restrictive Legends
Each certificate representing Option Shares issued to ACQUIROR hereunder
shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF OCTOBER 25,
1998, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
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10. Listing and HSR Filing
Target, upon the request of ACQUIROR, shall promptly file an application to
list the Target Shares to be acquired upon exercise of the Option for quotation
on the Nasdaq National Market and shall use its reasonable efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto shall promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the Target Shares subject to the Option at the earliest possible
date.
11. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing contained
in this Agreement, express or implied, is intended to confer upon any person
other than the parties hereto and their respective successors and permitted
assigns any rights or remedies of any nature whatsoever by reason of this
Agreement. Certificates representing shares sold in a registered public
offering pursuant to Section 7 shall not be required to bear the legend set
forth in Section 9.
12. Specific Performance
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be brought
in equity to enforce the provisions of the Agreement, neither party will
allege, and each party hereby waives the defense, that there is an adequate
remedy at law.
13. Entire Agreement
This Agreement and the Merger Agreement (including the appendices and
exhibits thereto) constitute the entire agreement between the parties with
respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof.
14. Further Assurances
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
15. Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of
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this Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
16. Notices
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following addresses
or telecopy numbers (or at such other address or telecopy numbers for a party
as shall be specified by like notice):
(i) if to ACQUIROR, to:
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, CA 94304
Attention: Louis C. Cole
Facsimile No.: (650) 812-6032
Telephone No.: (650) 812-6000
with a copy to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Robert V. Gunderson, Jr.
Facsimile No.: (650) 321-2800
Telephone No.: (650) 463-5200
(ii) if to Target, to:
Qualix Group, Inc.
177 Bovet Road, Second Floor
San Mateo Road, CA 94402
Attention: Richard G. Thau
Facsimile No.: (650) 572-0200
Telephone No.: (650) 572-1300
with a copy to:
Wilson Sonsini Goodrich & Rosati. P.C.
650 Page Mill Road
Palo Alto, CA 94303
Attention: Jeffrey D. Saper
Facsimile No.: (650) 493-6811
Telephone No.: (650) 493-9300
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17. Governing Law
This Agreement shall be governed by and construed in accordance with the laws
of the State of Delaware applicable to agreements made and to be performed
entirely within such State.
18. Counterparts
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
19. Expenses
Except as otherwise expressly provided herein or in the Merger Agreement, all
costs and expenses incurred in connection with the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses.
20. Amendments; Waiver
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
21. Assignment
Target may not sell, transfer, assign or otherwise dispose of any of its
rights or obligations under this Agreement or the Option created hereunder to
any other person, without the express written consent of ACQUIROR. The rights
and obligations hereunder shall inure to the benefit of and be binding upon any
successor of a party hereto.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
QUALIX GROUP, INC.
/s/ Richard G. Thau
By: _________________________________
Richard G. Thau
President and Chief Executive
Officer
LEGATO SYSTEMS, INC.
/s/ Louis C. Cole
By: _________________________________
Louis C. Cole
President and Chief Executive
Officer
***STOCK OPTION AGREEMENT***
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the DGCL permits a corporation to include in its charter
documents, and in agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification beyond that
specially provided by the current law.
Article XI of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VII, Section 6 of the Registrant's Bylaws provides for the
indemnification of agents of the Registrant to the fullest extent authorized by
the State of Delaware.
The Registrant has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in the
Registrant's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1(3) Stock Purchase Agreement, dated as of January 5, 1996, among the
Registrant, Innovus, Inc., 815598 Ontario, Inc., the
stockholders of Innovus, Inc., and the stockholders of 815598
Ontario, Inc.
2.2(3) Stock Purchase Agreement, dated as of January 5, 1996, among the
Registrant, Innovus Technologies, Inc., and the stockholders of
Innovus Technologies, Inc.
2.3(6) Agreement and Plan of Reorganization, dated as of July 30, 1998,
by and among Legato Systems, Inc., Aspen Acquisition Corp.,
Software Moguls, Inc., Sunil Khadilkar, Louis C. Cole and the
Undersigned Stockholders.
2.4(10) Agreement and Plan of Reorganization, dated October 25, 1998, by
and among Legato Systems, Inc., Hat Acquisition Corp. and Qualix
Group, Inc.
2.5(12) Amendment No.1 to Agreement and Plan of Reorganization, dated
October 25, 1998, by and among Legato Systems, Inc., Hat
Acquisition Corp. and Qualix Group, Inc. dated February 9, 1999.
3.1(6)(9) Amended and Restated Certificate of Incorporation of the
Registrant, as amended to date.
3.2(7) Amended and Restated Bylaws of the Registrant adopted on May 23,
1997.
3.3(8) Form of Certificate of Designation filed in connection with
Rights Agreement, dated May 23, 1997.
4.7(8) Rights Agreement, dated May 23, 1997 between the Company and
Harris Trust and Savings Bank, including the Certificate of
Designation of Series A Junior Participating Preferred Stock,
Form of Right Certificate and Summary of Rights to Purchase
Preferred Shares attached thereto as Exhibit A, B and C,
respectively.
4.8(6) Registration Rights Agreement, dated July 30, 1998, by and
between Legato Systems, Inc., a Delaware corporation and the
Stockholders of Software Moguls, Inc.
4.9(6) Affiliates Agreement, dated July 30, 1998, between Legato
Systems, Inc. a Delaware corporation and the Stockholders of
Software Moguls, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
8.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP regarding certain tax aspects of the merger.
8.2 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding
certain tax aspects of the merger.
10.1(1) Form of Indemnification Agreement entered into between the
Registrant and it directors and officers.
10.3(1)(5)(9) The Registrant's 1995 Stock Option/Stock Issuance Plan, as
amended to date.
10.4(1)(5) The Registrant's Employee Stock Purchase Plan.
10.6(1) Form of United States Reseller Terms and Conditions for Purchase
of Legato Products.
10.7(1) Form of International Authorized Systems Integrator Agreement.
10.8(1) Form of Shrinkwrap License Agreement.
10.9(1)(2) Technology License and Distribution agreement, dated January 20,
1995, between the Registrant and SunSoft, Inc.
10.10(1) Master Software License and Support Agreement between the
Registrant and Open Software Foundation.
10.11(1) License Agreement, dated February 24, 1989, between the
Registrant and The Regents of the University of California.
10.12(1) Software Agreement, dated January 20, 1989, between the
Registrant and AT&T Information Systems, Inc.
10.13(4)(5) The Registrant's International Employee Stock Purchase Plan.
10.14(6) Lease agreement dated March 14, 1996 between the Registrant and
Coherent, Inc., a Delaware corporation, and Legato Systems,
Inc., a Delaware corporation, regarding the space located at
3210 Porter Drive, Palo Alto, California.
21.1(11) Subsidiaries of the Registrant.
23.1 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP (included as part of Exhibits filed as Exhibit
5.1 and Exhibit 8.1, respectively, and incorporated herein by
reference).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Deloitte & Touche LLP, Independent Auditors.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included as
part of Exhibit 8.2 and incorporated herein by reference).
27.1(11) Financial Data Schedule.
27.2(11) Financial Data Schedule.
27.3(11) Financial Data Schedule.
99.1 Form of Proxy of Qualix Group, Inc.
</TABLE>
- --------
(1) Incorporated by reference to the registrant's Registration Statement on
Form S-1, filed May 9, 1995 (File No. 33-92072).
(2) Confidential treatment requested as to certain portions of this exhibit.
(3) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated January 19, 1996.
II-2
<PAGE>
(4) Incorporated by reference to the registrant's Registration Statement on
Form S-8, filed March 14, 1996 (File No. 333-2378).
(5) Compensatory plan or arrangement.
(6) Incorporated by reference to the registrant's Registration Statement on
Form S-3, filed December 15, 1998 (File No. 333-64693).
(7) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated June 6, 1997.
(8) Incorporated by reference to the registrant's Form 8-A, dated May 30,
1997.
(9) Incorporated by reference to the registrant's Registration Statement on
Form S-8, filed November 10, 1998 (File No. 333-67031).
(10) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated October 25, 1998.
(11) Incorporated by reference to the registrant's Report on Form 10-K, dated
February 10, 1999.
(12) Incorporated by reference to the registrant's Current Report on Form 10-
K/A, dated March 3, 1999.
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements, management's discussion and analysis or notes thereto.
II-3
<PAGE>
Item 22. Undertakings
(1) The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned Registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(4) The undersigned registrant hereby undertakes to respond to request for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(5) The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the securities act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California, on the 15th day of March, 1999.
Legato Systems, Inc.
By: /s/ Louis C. Cole
----------------------
Louis C. Cole, Chairman,
President and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Louis C. Cole and Stephen C. Wise and each of
them acting individually, as such person's true and lawful attorneys-in-fact
and agents, each with full power of substitution, for such person, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file same, with all exhibits
thereto and other documents in connection therewith, with the securities and
exchange commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitutes, may do or cause to be done by virtue
thereof.
Pursuant to the requirements of the securities act of 1933, as amended, this
registration statement has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis C. Cole President, Chief Executive March 15, 1999
______________________________________ Officer (Principal
Louis C. Cole Executive Officer) and
Chairman
/s/ Stephen C. Wise Vice President, Finance March 15, 1999
______________________________________ and Administration and
Stephen C. Wise Chief Financial Officer
(Principal Financial
Officer)
/s/ Eric A. Benhamou Director March 15, 1999
______________________________________
Eric A. Benhamou
/s/ Kevin A. Fong Director March 15, 1999
______________________________________
Kevin A. Fong
/s/ David N. Strohm Director March 15, 1999
______________________________________
David N. Strohm
/s/ Philip E. White Director March 15, 1999
______________________________________
Philip E. White
Director
______________________________________
H. Raymond Bingham
</TABLE>
II-5
<PAGE>
QUALIX GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCES
(in thousands)
<TABLE>
<CAPTION>
Balance at
Beginning of Costs and Balance at
Fiscal Year Ended Period expenses Deductions(a) end of period
- ----------------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
June 30, 1998................ $386 $240 $ 89 $537
June 30, 1997................ 256 239 109 386
June 30, 1996................ 87 216 47 256
</TABLE>
- --------
(a) Amounts determined not to be collectible, net of recoveries.
S-1
<PAGE>
Exhibit 5.1
[LETTERHEAD OF GUNDERSON DETTMER]
March 15, 1999
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, California 94304
Re: Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 originally
filed by Legato Systems, Inc. (the "Company") with the Securities and Exchange
Commission (the "Commission") on March 15, 1999, as thereafter amended or
supplemented (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 1,721,000
shares of the Company's Common Stock (the "Shares"). As your counsel in
connection with this transaction, we have examined the proceedings taken and
are familiar with the proceedings proposed to be taken by you in connection
with the issuance of the Shares.
It is our opinion that, upon completion of the proceedings being
taken or contemplated by us, as your counsel, to be taken prior to the
issuance of the Shares and upon completion of the proceedings being taken in
order to permit such transactions to be carried out in accordance with the
securities laws of the various states where required, the Shares, when issued
in the manner described in the Registration Statement and in accordance with
the resolutions adopted by the Board of Directors of the Company, will be
legally and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the proxy
statement/prospectus constituting a part thereof, and in any amendment or
supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve & Hachigan, LLP
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGAN, LLP
<PAGE>
Exhibit 8.1
March __, 1999
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, CA 94304
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the
Securities and Exchange Commission Registration Statement on Form S-4 and
related Exhibits thereto (the "Registration Statement") relating to the
Agreement and Plan of Reorganization (the "Agreement") among Legato Systems,
Inc., a Delaware corporation ("Acquiror"), its wholly-owned subsidiary, Hat
Acquisition Corp., a Delaware corporation ("Merger Sub"), and Qualix Group,
Inc., a Delaware corporation ("Target"), dated October 25, 1998. Pursuant to
the Agreement, Merger Sub will merge with and into Target (the "Merger"), and
Target will become a wholly-owned subsidiary of Acquiror.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Acquiror and Merger Sub in
connection with the Merger. As such, and for the purpose of rendering this
opinion, we have examined and are relying (or will rely) upon (without any
independent investigation or review thereof) the truth and accuracy, at all
relevant times, of the statements, covenants, representations and warranties
contained in the following documents (including all schedules and exhibits
thereto):
1. The Agreement (including Exhibits);
2. Representations made to us by Acquiror and Merger Sub in a
letter of even date;
3. Representations made to us by Target in a letter of even date;
4. The Registration Statement (as defined in Section 2.23 of the
Agreement); and
<PAGE>
Legato Systems, Inc.
March __, 1999
Page 2
5. Such other instruments and documents related to the formation,
organization and operation of Acquiror, Merger Sub and Target or to the
consummation of the Merger and the transactions contemplated thereby as we
have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or
obtained representations (and are relying thereon, without any independent
investigation or review thereof) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and
there has been (or will be by the Effective Time of the Merger) due execution
and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any representation or statement made "to the best knowledge of"
or otherwise similarly qualified is correct without such qualification. As to
all matters in which a person or entity making a representation has
represented that such person or entity either is not a party to, does not
have, or is not aware of any plan, intention, understanding or agreement to
take an action, there is in fact no plan, intention, understanding or
agreement and such action will not be taken;
3. The Merger will be consummated pursuant to the Agreement and
will be effective under the laws of the state of Delaware. All covenants
contained in the Agreement (including exhibits thereto and the representation
letters) are performed without waiver or breach of any material provision
thereof;
4. After the Merger, Target will hold "substantially all" of its
and Merger Sub's properties within the meaning of Section 368(a)(2)(E)(i) of
the Code and the regulations promulgated thereunder and will continue its
historic business or use a significant portion of its historic assets in a
business;
5. To the extent any expenses relating to the Merger (or the "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with
respect to the Merger) are funded directly or indirectly by a party other than
the incurring party, such expenses will be within the guidelines established
in Revenue Ruling 73-54, 1973-1 C.B. 187; any expenses paid on behalf of
Target shareholders will not exceed one percent (1%) of the total
consideration that will be issued in the Merger to Target shareholders in
exchange for their shares of Target stock;
6. No Target shareholder has guaranteed or will guarantee any
Target indebtedness outstanding during the period immediately prior to the
Merger, and at all relevant times, (i) no outstanding indebtedness of Target,
Acquiror or Merger Sub has or will represent equity for tax purposes; (ii) no
outstanding equity of Target, Acquiror or Merger Sub has or will
<PAGE>
Legato Systems, Inc.
March __, 1999
Page 3
represent indebtedness for tax purposes; and (iii) no outstanding security,
instrument, agreement or arrangement that provides for, contains, or
represents either a right to acquire Target stock or to share in the
appreciation thereof constitutes or will constitute "stock" for purposes of
Section 368(c) of the Code; and
7. Counsel for both Acquiror and Target will, pursuant to Section
6.1(e) of the Agreement, each deliver an opinion to the effect that, for
federal income tax purposes, the merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Code.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of the opinion that, if the Merger is consummated in accordance with the
provisions of the Agreement (and without any waiver, breach or amendment of
any provisions thereof), for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service
or the courts, and there is no assurance that the Internal Revenue Service
will not successfully assert a contrary position. Furthermore, no assurance
can be given that future legislative, judicial or administrative changes, on
either a prospective or retroactive basis, would not adversely affect the
accuracy of the conclusions stated herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
2. This opinion addresses only the classification of the Merger as
a reorganization under Section 368(a) of the Code, and does not address any
other federal, state, local or foreign tax consequences that may result form
the Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
3. No opinion is expressed as to any transaction other than the
Merger as described in the Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Agreement are
not consummated in accordance with the terms of such Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied
are not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have
relied to issue this opinion is incorrect, our opinion might be adversely
affected and may not be relied upon.
<PAGE>
Legato Systems, Inc.
March __, 1999
Page 4
4. This opinion has been delivered to you solely for the purpose
of being included as an exhibit to the Registration Statement; it may not be
relied upon for any other purpose (including, without limitation, satisfying
any conditions in the Agreement) or by any other person or entity, and may not
be made available to any other person or entity without our prior written
consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the captions
"Legal Matters" and "Certain Federal Income Tax Consequences." This consent is
required to be filed with the Registration Statement under the provisions of
the Securities Act of 1933.
Very truly yours,
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
<PAGE>
Exhibit 8.2
March __, 1999
Qualix Group, Inc.
d.b.a. FullTime Software, Inc.
177 Bovet Road
Second Floor
San Mateo, CA 94402
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the
Securities and Exchange Commission Registration Statement on Form S-4 and
related Exhibits thereto (the "Registration Statement") relating to the
Agreement and Plan of Reorganization (the "Agreement") among Legato Systems,
Inc., a Delaware corporation ("Acquiror"), its wholly-owned subsidiary, Hat
Acquisition Corp., a Delaware corporation ("Merger Sub"), and Qualix Group,
Inc., a Delaware corporation ("Target"), dated October 25, 1998. Pursuant to
the Agreement, Merger Sub will merge with and into Target (the "Merger"), and
Target will become a wholly-owned subsidiary of Acquiror.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Target in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined and are relying (or will rely) upon (without any independent
investigation or review thereof) the truth and accuracy, at all relevant
times, of the statements, covenants, representations and warranties contained
in the following documents (including all schedules and exhibits thereto):
1. The Agreement (including Exhibits);
2. Representations made to us by Acquiror and Merger Sub in a
letter of even date;
3. Representations made to us by Target in a letter of even date;
<PAGE>
Qualix Group, Inc.
d.b.a. FullTime Software, Inc.
March __, 1999
Page 2
4. The Registration Statement (as defined in Section 2.23 of the
Agreement); and
5. Such other instruments and documents related to the formation,
organization and operation of Acquiror, Merger Sub and Target or to the
consummation of the Merger and the transactions contemplated thereby as we
have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or
obtained representations (and are relying thereon, without any independent
investigation or review thereof) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and
there has been (or will be by the Effective Time of the Merger) due execution
and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any representation or statement made "to the best knowledge of"
or otherwise similarly qualified is correct without such qualification. As to
all matters in which a person or entity making a representation has
represented that such person or entity either is not a party to, does not
have, or is not aware of any plan, intention, understanding or agreement to
take an action, there is in fact no plan, intention, understanding or
agreement and such action will not be taken;
3. The Merger will be consummated pursuant to the Agreement and
will be effective under the laws of the state of Delaware. All covenants
contained in the Agreement (including exhibits thereto and the representation
letters) are performed without waiver or breach of any material provision
thereof;
4. After the Merger, Target will hold "substantially all" of its
and Merger Sub's properties within the meaning of Section 368(a)(2)(E)(i) of
the Code and the regulations promulgated thereunder and will continue its
historic business or use a significant portion of its historic assets in a
business;
5. To the extent any expenses relating to the Merger (or the "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-1(c) with
respect to the Merger) are funded directly or indirectly by a party other than
the incurring party, such expenses will be within the guidelines established
in Revenue Ruling 73-54, 1973-1 C.B. 187; any expenses paid on behalf of
Target shareholders will not exceed one percent (1%) of the total
consideration that will be issued in the Merger to Target shareholders in
exchange for their shares of Target stock;
<PAGE>
Qualix Group, Inc.
d.b.a. FullTime Software, Inc.
March __, 1999
Page 3
6. No Target shareholder has guaranteed or will guarantee any
Target indebtedness outstanding during the period immediately prior to the
Merger, and at all relevant times, (i) no outstanding indebtedness of Target,
Acquiror or Merger Sub has or will represent equity for tax purposes; (ii) no
outstanding equity of Target, Acquiror or Merger Sub has or will represent
indebtedness for tax purposes; and (iii) no outstanding security, instrument,
agreement or arrangement that provides for, contains, or represents either a
right to acquire Target stock or to share in the appreciation thereof
constitutes or will constitute "stock" for purposes of Section 368(c) of the
Code; and
7. Counsel for both Acquiror and Target will, pursuant to Section
6.1(e) of the Agreement, each deliver an opinion to the effect that, for
federal income tax purposes, the merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Code.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of the opinion that, if the Merger is consummated in accordance with the
provisions of the Agreement (and without any waiver, breach or amendment of
any provisions thereof), for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service
or the courts, and there is no assurance that the Internal Revenue Service
will not successfully assert a contrary position. Furthermore, no assurance
can be given that future legislative, judicial or administrative changes, on
either a prospective or retroactive basis, would not adversely affect the
accuracy of the conclusions stated herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
2. This opinion addresses only the classification of the Merger as
a reorganization under Section 368(a) of the Code, and does not address any
other federal, state, local or foreign tax consequences that may result form
the Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
3. No opinion is expressed as to any transaction other than the
Merger as described in the Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Agreement are
not consummated in accordance with the terms of
<PAGE>
Qualix Group, Inc.
d.b.a. FullTime Software, Inc.
March __, 1999
Page 4
such Agreement and without waiver or breach of any material provision thereof
or if all of the representations, warranties, statements and assumptions upon
which we relied are not true and accurate at all relevant times. In the event
any one of the statements, representations, warranties or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
4. This opinion has been delivered to you solely for the purpose
of being included as an exhibit to the Registration Statement; it may not be
relied upon for any other purpose (including, without limitation, satisfying
any conditions in the Agreement) or by any other person or entity, and may not
be made available to any other person or entity without our prior written
consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the captions
"Legal Matters" and "Certain Federal Income Tax Consequences." This consent is
required to be filed with the Registration Statement under the provisions of
the Securities Act of 1933.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of our reports dated January 18, 1999, on our audits of the
consolidated financial statements and financial statement schedule of Legato
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998. We also consent to the
reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
March 15, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the use in this registration statement of Legato Systems, Inc.
on Form S-4 of our report dated July 23, 1998 on the consolidated financial
statements and financial statement schedule of Qualix Group, Inc. as of June
30, 1998 and 1997 and for each of the three years in the period ended June 30,
1998 and to the reference to us under the heading "Experts", appearing in the
proxy statement/prospectus, which is part of this registration statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
March 15, 1999
<PAGE>
EXHIBIT 99.1
- --------------------------------------------------------------------------------
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
QUALIX GROUP, INC.
(doing business as "FullTime Software, Inc.")
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
April 19, 1999
The undersigned stockholder of Qualix Group, Inc. (doing business as
"FullTime Software, Inc."), a Delaware corporation (the "Company"), hereby
acknowledges receipt of the Notice of Special Meeting of Stockholders and
proxy statement/prospectus for the Special Meeting of Stockholders of the
Company to be held on April 19, 1999 at 10 a.m., local time, at the offices of
Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California
94304, and hereby revokes all previous proxies and appoints Richard G. Thau
and Bruce C. Felt, or either of them, with full power of substitution, Proxies
and Attorneys-in-Fact, on behalf and in the name of the undersigned, to vote
and otherwise represent all of the shares registered in the name of the
undersigned, to vote and otherwise represent all of the shares registered in
the name of the undersigned at the Special Meeting of Stockholders, or any
adjournment or postponement thereto, with the same effect as if the
undersigned were present and voting such shares, on the following matters and
in the following manner:
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING OF STOCKHOLDERS, PLEASE
MARK, SIGN AND DATE THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE. THE
FULLTIME BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" EACH OF THE FOLLOWING
PROPOSALS.
(Continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
<PAGE>
- ------------------------------------------------------------------------------
Please mark
your votes [X]
as indicated in
this example
1. Proposal to: (a) approve and adopt the Agreement and Plan of
Reorganization, dated as of October 25, 1998 (the "reorganization
agreement"), among Legato Systems, Inc., a Delaware corporation
("Legato"), Hat Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Legato ("Merger Sub"), and the Company and (b) approve
the merger of Merger Sub with and into the Company, with the Company
continuing as the surviving corporation and becoming a wholly-owned
subsidiary of Legato (the "Merger"), pursuant to the reorganization
agreement.
FOR AGAINST ABSTAIN
[_] [_] [_]
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSAL AND FOR SUCH OTHER MATTERS AS
MAY PROPERLY COME BEFORE THE SPECIAL MEETING AS THE PROXYHOLDERS DEEM
ADVISABLE.
Signature(s) ____________________________ Date _________________________,1999
(This proxy should be marked, dated and signed by each stockholder exactly as
such stockholder's name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. A
corporation is requested to sign its name by its President or other authorized
officer, with the office held designated. If shares are held by joint tenants
or as community property, both holders should sign.)
- ------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
