<PAGE>
As filed with the Securities and Exchange Commission on December 21, 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 of Industrial Identification Number)
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. JOHN R. HOUSTON, ESQ.
Gunderson Dettmer Stough Villeneuve Robins, Kaplan, Miller & Ciresi L.L.P.
Franklin & Hachigian, LLP 2800 LaSalle Plaza
155 Constitution Drive 800 LaSalle Avenue
Menlo Park, California 94025 Minneapolis, Minnesota 55402
(650) 321-2400 (612) 349-8500
---------------
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
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<TABLE>
<CAPTION>
Proposed
Amount of ONTRACK Proposed Maximum
Title of each Class of Data International, Maximum Aggregate Amount of
Securities to be Inc. Common Stock Amount to be Offering Price Offering Registration
Registered to be Exchanged(1) Registered(2) Per Share(3) Price(3) Fee(4)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $0.0001
par value per share... 11,460,727 1,625,452 $69.40625 112,816,527.88 $29,783.57
- -----------------------------------------------------------------------------------------------------
</TABLE>
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(1) Represents the maximum number of shares of ONTRACK Data International,
Inc. common stock exchangeable in connection with the Merger.
(2) Represents the maximum number of shares of the Registrant's common stock,
$.0001 par value, issuable in connection with the Merger. The Amount to be
Registered is based on the average of the high and low sales prices of
ONTRACK Data International, Inc.'s common stock and the Registrant's
Common Stock, as applicable, on the Nasdaq National Market on December 15,
1999.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Section 6(b) under the Securities Act and
excludes cash consideration received in the merger pursuant to Rule
457(f)(3). 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 December 15, 1999.
(4) A fee of $23,511.62 was previously paid by ONTRACK Data International,
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 14, 1999. Pursuant to Rule 457(b)
under the Securities Act, such fee is being credited against the
registration fee, and accordingly, an additional $6,271.95 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>
ONTRACK Data International, Inc.
9023 Columbine Road
Eden Prairie, MN 55347
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
To Be Held On
Monday, January 31, 2000 at 10:00 a.m.
at
ONTRACK Data International, Inc.
9023 Columbine Road
Eden Prairie, MN 55347
----------------
The board of directors of ONTRACK Data International, Inc. asks you to attend
this important special meeting of shareholders to vote on the following:
1. An Agreement and Plan of Reorganization pursuant to which Ontrack
would be merged with a subsidiary of Legato Systems, Inc. In the merger,
each share of Ontrack common stock would be exchanged for 0.1491 shares of
Legato common stock and $2.00 in cash. Legato will assume all outstanding
options of Ontrack in accordance with the terms of the reorganization
agreement 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.
Only shareholders of record at the close of business on December 15, 1999
will be entitled to notice of, and to vote at, the special meeting of
shareholders or any adjournments or postponements. The merger cannot be
completed unless holders of a majority of the outstanding shares of Ontrack
common stock (as of the record date) affirmatively vote to approve the
reorganization agreement and the merger. Holders of approximately 35% of
Ontrack's common stock have signed agreements to vote in favor of 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 shareholders, you may vote your shares in person
whether or not you have mailed us a proxy.
<PAGE>
By Order of the Board of Directors
/s/ Michael W. Rogers
_____________________________________
Michael W. Rogers,
Chairman and Chief Executive Officer
Eden Prairie, Minnesota
December 27, 1999
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD
TODAY, WHETHER OR NOT YOU EXPECT TO ATTEND IN PERSON. 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 ONTRACK STOCK
CERTIFICATES IN YOUR PROXY ENVELOPE.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
PROXY STATEMENT
OF
ONTRACK DATA INTERNATIONAL, INC.
PROSPECTUS
OF
LEGATO SYSTEMS, INC.
Dated December 23, 1999
The boards of directors of ONTRACK Data International, Inc. and Legato
Systems, Inc. have approved a reorganization agreement that would merge Ontrack
with a subsidiary of Legato. Upon the completion of the merger, each Ontrack
shareholder will receive, in exchange for each share of Ontrack common stock
held by such shareholder, 0.1491 shares of Legato common stock and $2.00 in
cash.
Legato common stock trades on the Nasdaq National Market under the symbol
LGTO. Ontrack common stock trades on the Nasdaq National Market under the
symbol ONDI.
The Ontrack board of directors has called a special meeting for its
shareholders to vote on matters relating to the merger.
You may vote at the Ontrack special meeting if you own shares of Ontrack
common stock as of the close of business on December 15, 1999. The date, time
and place of this special meeting is as follows:
Monday, January 31, 2000
10:00 a.m. local time
At: ONTRACK Data International, Inc.
9023 Columbine Road
Eden Prairie, MN 55347
We strongly urge you to read and consider carefully this joint proxy
statement/prospectus, including the "Risk Factors" section beginning on page
13. The "Risk Factors" section describes certain risks that you should consider
in determining whether to approve the proposal at the Ontrack 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 December 23, 1999 and is
expected to be first sent to shareholders on December 27, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION....................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
TRADEMARKS................................................................ 4
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE........................... 4
SUMMARY................................................................... 5
The Companies........................................................... 5
The Merger ............................................................. 6
What Ontrack Shareholders Will Receive in the Merger.................... 6
Voting Procedures to Approve the Merger................................. 7
Evaluating the Merits of the Merger..................................... 8
Events Which May Delay or Prevent the Merger............................ 9
Tax Consequences and Other Matters...................................... 11
Forward-Looking Statements May Prove Inaccurate......................... 11
Who Can Help Answer Your Questions...................................... 12
RISK FACTORS.............................................................. 13
MARKET PRICE AND DIVIDEND INFORMATION..................................... 28
Legato Market Price Data................................................ 28
Ontrack Market Price Data............................................... 28
Dividend Information.................................................... 29
Recent Closing Prices................................................... 29
Number of Shareholders.................................................. 29
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION................... 30
COMPARATIVE PER SHARE DATA................................................ 34
THE SPECIAL MEETING OF ONTRACK SHAREHOLDERS............................... 35
Date, Time and Place of the Ontrack Shareholder Meeting................. 35
Record Date and Shares Entitled to Vote................................. 35
Voting of Proxies....................................................... 35
Vote Required .......................................................... 35
Quorum; Abstentions and Broker Non-Votes................................ 36
Procedure for Casting Your Vote if Your Shares are Held by Your Broker
in Street Name......................................................... 36
Solicitation of Proxies and Expenses.................................... 36
Ontrack Board Recommendation............................................ 37
THE MERGER AND RELATED TRANSACTIONS....................................... 38
General................................................................. 38
Conversion of Shares.................................................... 38
Conversion of Options................................................... 38
Exchange of Certificates................................................ 39
Background of the Merger................................................ 40
Reasons for the Merger.................................................. 43
Operations Following the Merger......................................... 47
Opinion of Financial Advisor............................................ 47
The Agreement and Plan of Reorganization................................ 55
Related Agreements...................................................... 63
Regulatory Matters...................................................... 64
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Federal Income Tax Considerations.............................. 64
Accounting Treatment................................................... 68
Dissenters' Appraisal Rights........................................... 68
Resale of Legato Common Stock.......................................... 70
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. 71
BUSINESS OF ONTRACK...................................................... 81
Overview of Business................................................... 81
Background of Data Recovery Business................................... 82
Data Recovery Services and Products.................................... 83
Commercial Software Products........................................... 83
Research and Development............................................... 84
Sales and Marketing.................................................... 84
Customers.............................................................. 85
Competition............................................................ 85
Proprietary Technology................................................. 86
Company Offices........................................................ 86
Employees.............................................................. 86
Properties............................................................. 87
Legal Proceedings...................................................... 87
ONTRACK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 88
Overview............................................................... 88
Results of Operations.................................................. 88
Comparison of Nine Months Ended September 30, 1999 and 1998............ 89
Comparison of Years Ended December 31, 1998 and 1997................... 91
Comparison of Years Ended December 31, 1997 and 1996................... 93
Liquidity and Capital Resources........................................ 95
Year 2000 Compliance................................................... 95
Quantitative and Qualitative Disclosures About Market Risk............. 96
Forward-Looking Statements............................................. 96
ONTRACK MANAGEMENT....................................................... 98
Other Information Regarding the Board.................................. 99
Compensation Committee Interlocks and Insider Participation............ 100
Section 16(a) Beneficial Ownership Reporting Compliance ............... 100
Executive Compensation................................................. 101
Employment Agreements.................................................. 102
Limitations on Liability and Indemnification........................... 103
Stock Plans............................................................ 103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 105
COMPARISON OF CAPITAL STOCK.............................................. 106
Description of Legato Capital Stock.................................... 106
Description of Ontrack Capital Stock................................... 107
COMPARISON OF RIGHTS OF STOCKHOLDERS OF LEGATO AND SHAREHOLDERS OF MERGER
SUB AND ONTRACK......................................................... 109
Nominations for Board of Directors and Advance Notice of Stockholder
Nominees.............................................................. 109
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Amendment To Governing Documents....................................... 109
Stockholder Consent in Lieu of Meeting................................. 110
Anti-Takeover Provisions............................................... 111
Cumulative Voting...................................................... 112
EXPERTS.................................................................. 112
LEGAL MATTERS............................................................ 113
FUTURE STOCKHOLDER PROPOSALS............................................. 113
INDEX TO ONTRACK DATA INTERNATIONAL, INC. CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. F-1
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION......................... A-1
APPENDIX B--OPINION OF U.S. BANCORP PIPER JAFFRAY........................ B-1
APPENDIX C--MINNESOTA DISSENTERS' RIGHTS STATUTES........................ C-1
</TABLE>
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Ontrack 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 Ontrack
shareholders 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 Ontrack for a special meeting of Ontrack
shareholders to be held on January 31, 2000, 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 Ontrack special meeting of shareholders.
Legato has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to Legato, and Ontrack has supplied
all such information contained in this proxy statement/prospectus relating to
Ontrack.
1
<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, as amended for the fiscal year
ended December 31 1998.
2. Legato's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1999.
3. Legato's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1999.
4. Legato's Quarterly Report on Form 10-Q, as amended for the fiscal
quarter ended March 31, 1999.
5. 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.
6. 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.
7. 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 April 8, 1999. 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.
8. Information regarding executive compensation from the section
entitled "Executive Compensation" of Legato's proxy statement.
9. 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.
10. Information regarding certain relationships and related
transactions from the section entitled "Certain Relationships and Related
Transactions" of Legato's proxy statement.
11. Legato's Current Report on Form 8-K, as amended, filed June 1,
1999.
12. Legato's Current Report on Form 8-K, as amended, filed October 12,
1999.
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 Ontrack shareholders 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
2
<PAGE>
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 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 January 24,
2000.
No documents relating to Ontrack are incorporated by reference.
3
<PAGE>
TRADEMARKS
This proxy statement/prospectus contains trademarks and trade names of
Legato, Ontrack and other companies, which are the property of their respective
owners. Legato's trademarks include Legato, Legato NetWorker and the Legato
logo. Ontrack's trademarks include Ontrack, Ontrack Data International, RDR,
Remote Data Recovery, Tiramisu, EasyRecovery and Disk Manager.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document, the documents of Legato incorporated by reference herein, and
other communications to stockholders of Legato and Ontrack 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, Ontrack 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 Ontrack. These factors may
cause the actual results of Legato, Ontrack and the combined company to differ
materially from any forward-looking statements.
Although Legato and Ontrack 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, Ontrack
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 Ontrack 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
Ontrack'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 13, and "Ontrack
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 88.
4
<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 1.
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
enterprise 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 data availability products,
primarily HA+, Octopus, Replication and Cluster products, 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's products enable information continuance, a seamless approach to the
movement, management and protection of data throughout an enterprise. 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.
ONTRACK Data International, Inc.
9023 Columbine Road
Eden Prairie, Minnesota 55347
Toll Free: 1-800-872-2599
Phone: 1-612-937-5161
Ontrack, a leading provider of data availability software and service
solutions, helps customers protect, back up and recover their valuable data.
Using its thousands of proprietary tools and techniques, Ontrack is able to
recover lost or corrupted data from most operating systems and types of storage
devices through its do-it-yourself, remote and in-lab capabilities. Ontrack
also offers a line of award-winning software tools to help prevent critical
data loss through a broad line of problem-solving, file management and
productivity utilities. In addition to its Minneapolis headquarters, Ontrack
operates other locations in Los Angeles, California, Boulder, Colorado,
Washington D.C., New York, New York, Tokyo, London, Paris and Stuttgart.
5
<PAGE>
The Merger
Legato and Ontrack 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
shareholder 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 Ontrack Shareholders Will Receive in the Merger (page 38)
Shares of Ontrack common stock will be exchanged for Legato common stock and
cash in connection with the merger. At the time the merger is completed, each
outstanding share of Ontrack common stock will be converted into the right to
receive 0.1491 of a share of Legato common stock and two dollars ($2.00) in
cash.
The following table illustrates possible values for the Legato shares that
you would receive upon completion of the merger for each Ontrack share you own
at the share exchange ratio of 0.1491 shares of Legato common stock and $2.00
in cash for each Ontrack share:
<TABLE>
<CAPTION>
Legato
Common Ontrack
Stock Equivalent
Price Per Share Price
------ ---------------
<S> <C>
$40.00 $ 7.96
45.00 8.71
50.00 9.46
55.00 10.20
60.00 10.95
65.00 11.69
70.00 12.44
75.00 13.18
80.00 13.93
85.00 14.67
90.00 15.42
</TABLE>
As of December 6, 1999, the Legato common stock per share market price was
$75.125. The corresponding Ontrack equivalent per share price was $13.20.
Legato's and Ontrack's respective stock prices are volatile and are likely to
change. See "Risk Factors" beginning on page 13.
Ontrack shareholders 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 Ontrack 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 Ontrack anticipate that
the merger will become effective approximately one day after the Ontrack
shareholders vote to approve the merger.
6
<PAGE>
Do not send in your stock certificates now. When the merger is completed,
Legato will send you written instructions for exchanging your Ontrack stock
certificates.
Voting Procedures to Approve the Merger
A. The Special Meeting of Ontrack Shareholders (page 35)
Ontrack will hold a special meeting of shareholders on January 31, 2000 at
10:00 a.m. at the offices of ONTRACK Data International, Inc. located at 9023
Columbine Road, Eden Prairie, MN 55347. At the special meeting of shareholders,
Ontrack shareholders will be asked to approve the reorganization agreement and
the merger.
B. Record Date for Voting on the Reorganization Agreement and the Merger
(page 35)
You are entitled to vote at the special meeting of shareholders if you owned
shares of Ontrack common stock as of the close of business on the record date,
which has been set at December 15, 1999. On the record date, there were
10,004,944 shares of Ontrack common stock outstanding. Ontrack shareholders
will have one vote at the special meeting for each share of Ontrack 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 36)
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. Ontrack Shareholder Vote Required to Approve the Reorganization Agreement
and the Merger (page 36)
The affirmative vote of the holders of a majority of the outstanding shares
of Ontrack 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 36)
As of December 1, 1999, the directors and executive officers of Ontrack owned
5,224,523 shares of Ontrack common stock. These shares represented
approximately 52.2% of the outstanding shares of Ontrack common stock on
December 1, 1999. The directors and officers of Ontrack also held 385,000
shares subject to stock options exercisable within 60 days of December 1, 1999.
Michael W. Rogers and Gary S. Stevens have each entered into a voting agreement
granting Legato a proxy to vote all of their shares of Ontrack common stock for
the approval of the reorganization agreement and the merger. As of December 1,
1999, Messrs. Rogers and Stevens owned approximately 35% of the outstanding
shares of Ontrack common stock.
7
<PAGE>
F. Dissenters' Appraisal Rights (page 68 and Appendix C)
Under Minnesota law, Ontrack shareholders have the right to dissent from the
merger and, subject to certain conditions provided for under Minnesota law,
receive cash for their Ontrack shares. Any Ontrack shareholder contemplating
exercising their dissenters' rights must follow certain procedures, including
filing certain notices and not voting their shares in favor of the merger. A
dissenting Ontrack shareholder will not receive any shares of Legato common
stock in the merger. The procedures that must be followed in exercising
dissenters' rights are set forth under the heading "The Merger and Related
Transactions--Dissenters' Appraisal Rights" and in the Minnesota Dissenters'
Rights Statutes attached as Appendix C at the back of this document.
Evaluating the Merits of the Merger
A. Reasons for the Merger and Recommendation to Ontrack Shareholders (page
43)
The Ontrack board of directors has determined that the terms of the
reorganization agreement and the merger are in the best interests of Ontrack
and its shareholders. In reaching its decision, the Ontrack board of directors
identified several potential benefits of the merger. Ontrack 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 Ontrack board of directors also considered that Ontrack
shareholders would have the opportunity to participate in the potential growth
of the combined company following the merger. However, the Ontrack 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" beginning on page 13.
The Ontrack board of directors recommends that you vote FOR the approval of
the reorganization agreement and the merger.
B. Risks of the Merger (page 13)
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 Ontrack'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 13.
C. Opinion of Financial Advisor (page 47 and Appendix B)
In deciding to approve the merger, the Ontrack board of directors considered
an opinion dated November 18, 1999 from its financial advisor, U.S. Bancorp
Piper Jaffray Inc. The U.S. Bancorp Piper Jaffray opinion stated that the
consideration was fair on that date, from a financial point of view, to
Ontrack's shareholders. This opinion is attached as Appendix B to this
document. You are urged to read the entire U.S. Bancorp Piper Jaffray opinion
carefully.
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D. Other Interests of Ontrack Officers and Directors in the Merger (page 62)
In considering the Ontrack board of directors' recommendation that you vote
to approve the reorganization agreement and the merger, you should note that
certain Ontrack officers and directors have interests in the merger that are
different from, or in addition to, your interests. Specifically, in connection
with the merger:
. Michael W. Rogers and Gary S. Stevens, Ontrack executive officers, have
signed new employment agreements with Legato which become effective upon
completion of the merger;
. Certain Ontrack executive officers and directors will be entitled to
accelerated vesting pursuant to the terms of their respective stock
option and employment agreements in connection with the merger; and
. The Ontrack directors and officers will receive continuing
indemnification against liabilities.
As a result, Ontrack's directors and officers might be more likely to vote to
approve the reorganization agreement and the merger than you and the other
Ontrack shareholders generally. In addition, one key employee of Mijenix has
executed an employment agreement with Legato.
Events Which May Delay or Prevent the Merger
A. Conditions to the Merger (page 58)
The merger will not be completed unless the conditions contained in the
reorganization agreement are met, including the adoption of the reorganization
agreement by Ontrack shareholders. Some of these conditions may be waived by
the company entitled to assert the condition.
B. No Solicitation (page 57)
Ontrack 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, Ontrack may furnish non-public information, or
enter into discussions or negotiations with respect to a written unsolicited
acquisition proposal, so long as:
. the Ontrack 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 Ontrack signed.
C. Termination of the Reorganization Agreement (page 60)
The reorganization agreement may be terminated under the circumstances
described below at any time before completion of the merger. This may occur
whether or not Ontrack shareholders have
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approved the reorganization agreement and the merger. The reorganization
agreement may be terminated by Legato or Ontrack if:
. the merger is not completed on or before June 30, 2000; 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
. at the Ontrack shareholder meeting, the shareholders of Ontrack 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 Ontrack 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 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;
. Recommends to the Ontrack shareholders any transaction which could
result in a party other than Legato acquiring 15% or more of the equity
or assets of Ontrack;
. 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 Ontrack common stock, and the Ontrack 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
Ontrack recommends rejection of the tender or exchange offer; or
. Fails to call and hold the meeting of its shareholders to approve the
merger within forty-five days after Legato's Registration Statement on
Form S-4 is declared effective and such declaration occurs on or before
June 30, 2000.
D. Break-up Fee (page 61)
Ontrack is obligated to pay Legato a break-up fee of $5,000,000 if Legato
terminates the reorganization agreement because the Ontrack board of directors
takes any actions described in the last paragraph of "Termination of the
Reorganization Agreement" above.
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E. Regulatory Approvals (page 64)
The Hart-Scott-Rodino Antitrust Improvements Act prohibits Ontrack and Legato
from completing the merger until after:
. Ontrack 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 Ontrack and Legato have furnished the required information and expect
the waiting period to terminate in early January 2000.
Tax Consequences and Other Matters
A. Important Federal Income Tax Consequences (page 64)
Ontrack and Legato intend the exchange of Ontrack common stock for Legato
common stock to be tax-free to Ontrack shareholders for federal income tax
purposes. However, Ontrack and Legato expect that the cash consideration paid
to Ontrack shareholders and cash paid to you and the other Ontrack shareholders
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 68)
Ontrack and Legato intend the merger to be accounted for as a purchase
business combination.
C. Comparative Per Share Market Price Information (page 28)
Shares of Legato common stock and Ontrack common stock are both quoted on the
Nasdaq National Market. On November 18, 1999, the last trading day before the
announcement of the proposed merger, Ontrack common stock closed at $9.125 per
share and Legato common stock closed at $75.9375 per share. On December 6,
1999, Ontrack common stock closed at $11.75 per share and Legato common stock
closed at $75.125 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 4)
Both Ontrack 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
similar
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expressions, we are making forward-looking statements. For more information
regarding factors that could cause actual results to differ from Ontrack's or
Legato's expectations, you should refer to "Risk Factors" beginning on page 13.
Who Can Help Answer Your Questions
If you have questions about the Merger you should contact:
ONTRACK Data International, Inc.
9023 Columbine Road
Eden Prairie, Minnesota 55347
Toll Free: 1-800-872-2599
Phone: 1-612-937-5161
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 Ontrack and Legato. Additional risks and
uncertainties not presently known to us could seriously harm the business of
Legato and Ontrack.
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 Ontrack 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 Ontrack Do Not Integrate Their Operations 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 Ontrack's business. If Legato and Ontrack do not
integrate their operations smoothly, serious harm to the combined company's
business, financial condition and prospects may result. Integrating the two
businesses will entail diversion of management's time and attention. We may not
be able to integrate our operations smoothly. In order to obtain the benefits
of the merger, the companies must make Ontrack's products and services operate
together with Legato's products and services. This integration will require
additional planning and training. For example, Legato and Ontrack will need to
expend time and resources to train the respective sales and support personnel
on understanding the expanded scope of products and services that the combined
company will be able to provide customers. 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 Ontrack 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 Ontrack personnel. Despite Legato's efforts
to hire and retain quality employees, Legato might lose some of Ontrack's key
employees following the merger. Legato and Ontrack have different corporate
cultures and Ontrack employees may be unwilling to work for a larger company.
In addition, competitors may recruit Ontrack employees prior to the merger and
during integration, as is common in high technology mergers. Moreover, few of
Legato's and few of Ontrack's key technical or senior management personnel are
bound by employment agreements. As a result, employees of Ontrack 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. Competition for qualified
management, engineering, technical, sales and marketing employees in the
computer industry is intense. Therefore, Legato and Ontrack cannot assure you
that the combined
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company will be able to attract, retain and integrate employees to develop and
use the Ontrack technology following the merger.
The Merger May Result in Loss of Ontrack Customers Which Would Harm the
Combined Company.
As a result of the merger, some Ontrack customers may not continue to do
business with the combined company. For example, Ontrack's customers might
cancel product or service orders or delay purchases as they evaluate, among
other things, the merger, or if they are uncertain about Legato's commitment to
support Ontrack products and provide Ontrack services. Some of Ontrack's
customers who cancel product or service orders or delay purchases may purchase
products or services from Ontrack's competitors. Cancellations or delays in
orders for Ontrack's products or services 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.
Legato and Ontrack Will Incur Costs Associated with the Merger for Which
Legato and Ontrack Will Receive No Benefit if the Merger Does Not Close.
The merger will result in total transaction costs of approximately $2.1
million to Legato and $2.0 million to Ontrack. These are estimates and the
actual transaction costs may be much larger. In addition to these transaction
costs, Legato and Ontrack 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 Ontrack 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 Plus
Cash Which Will Not Change as a Result of Market Volatility.
The exchange rate of Ontrack common stock into Legato common stock will be
0.1491 shares of Legato common stock plus $2.00 per share in cash for each
share of Ontrack common stock. The exchange rate will not increase or decrease
if the market price of either Legato common stock or Ontrack common stock
increases or decreases. In addition, Legato will assume all outstanding options
of Ontrack at the time the merger is completed. See "The Merger and Related
Transactions--Conversion of Shares" on page 38.
As the exchange rate will not increase or decrease based on market price
fluctuations, Ontrack's shareholders will not be compensated if the market
price of Legato common stock decreases 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 Ontrack's shareholders would
decrease. The closing price for Legato common stock on November 18, 1999, the
last trading day prior to the public announcement of the merger, was $75.9375.
On December 20, 1999, the latest trading day before the printing of this proxy
statement/prospectus, the closing price for Legato common stock was $73.4375.
You should obtain recent market quotations for Legato common stock and Ontrack
common stock because these stocks have historically been subject to substantial
volatility.
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The market price of Legato common stock and Ontrack 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 December 20,
1999, the market price per Legato share has ranged between a high of $76.0312
per share and a low of $64.00 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 Ontrack 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 Ontrack common stock;
. Each representation and warranty made by Legato and Ontrack in the
reorganization agreement must be materially accurate;
. The events specified in the reorganization agreement must occur, or not
occur; and
. Legato and Ontrack 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, Ontrack Could Be Harmed.
If the merger does not close, it could seriously harm Ontrack's business
because the announcement of the merger and Ontrack's efforts to close the
merger may:
. Disrupt its sales and marketing efforts;
. Increase employee turnover; and
. Diminish Ontrack's ability to successfully locate an alternative
strategic partner.
In addition, depending on the circumstances, Ontrack may be required to pay a
$5 million "break-up" fee to Legato.
Risks Related to Legato and Ontrack
Legato's and Ontrack's Quarterly Operating Results Are Volatile and Uncertain.
Legato's or Ontrack's Failure to Meet Public Market Analysts' Expectations
Would Harm the Market Price of the Combined Company's Common Stock.
Legato's and Ontrack'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 Ontrack'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 Ontrack's common stock prices have on occasion declined
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following earnings announcements. Legato's or Ontrack's failure to meet analyst
or investor expectations would likely seriously harm the respective market
price of Legato's or Ontrack's common stock.
The quarterly operating results of Legato and Outrack have varied in the past
and may vary in the future. Each company's quarterly operating results may vary
depending on a number of factors, many of which are outside of the respective
company's control, including:
. The size and timing of orders;
. Increased competition;
. Market acceptance of each company's new products, applications and
services and product enhancements of either company's competitors;
. Changes in pricing policies or those of either company's competitors;
. Each company's ability to develop, introduce and market new products,
applications and product enhancements;
. Ability to integrate acquired businesses;
. Each company's ability to control costs;
. Quality control of products sold;
. Lengthy sales cycles, particularly for Legato relating to enterprise
license transactions;
. Success in expanding sales and marketing programs;
. Technological changes in either company's markets;
. The mix of sales among each company's channels;
. Deferrals of customer orders in anticipation of new products,
applications or product enhancements;
. Market readiness to deploy either company's products for distributed
computing environments;
. Changes in either company's strategy or that of either company's
competitors;
. Customer budget cycles and changes in these budget cycles;
. Foreign currency and exchange rates;
. Acquisition costs or other non-recurring charges in connection with the
acquisition of companies, products or technologies;
. Personnel changes; and
. General economic factors.
Legato and Ontrack 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, and on jobs ordered and performed, in that quarter,
since Legato and Ontrack operate with virtually no order or job backlog;
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. Legato does not recognize revenues on sales to domestic distributors
until the products are sold to end-users;
. The enterprise storage management market and the data availability
market are both rapidly evolving;
. Legato's and Ontrack's sales cycles vary substantially from customer to
customer;
. Legato's sales cycles vary 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 Ontrack'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 Ontrack's expectations,
the companies' respective net income (loss) will decrease (increase) because
only a small portion of Legato's and Ontrack's expenses vary with their
respective revenues.
Legato's and Ontrack's Markets Are Highly Competitive and If We Are Unable to
Compete Successfully the Combined Company's Business Will Be Harmed.
Legato operates in the enterprise storage management market and Ontrack
operates in the data 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 Ontrack expect competition
to increase as, among other things:
. Legato and Ontrack enter new markets;
. Existing competitors broaden their operating platform coverage and
product lines;
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. 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 Ontrack's products. If so, Legato's or Ontrack'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 remaining 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.
Ontrack Depends on Data Recovery Services and Products and a Decline in the
Price or Demand for These Services and Products Would Harm Ontrack's
Business.
Ontrack currently derives a significant majority of its revenues from the
sale of data recovery services and products, and expects this trend to continue
or accelerate. A decline in the price of or demand for these services and
products would harm Ontrack's business. Demand for these services and products
will depend in large part upon:
. Developments in computer technology. For example, other businesses are
making major investments in the development of automatic data backup
systems, improved data storage technology and other data protection
techniques, which may reduce the demand for Ontrack's data recovery
services and products;
. The ability of Ontrack to adapt its services and products to frequent
and competitive changes in market needs and technological innovation and
industry standards; and
. Continued market acceptance of Ontrack's data recovery services and
products.
If Legato and Ontrack Do Not Respond to Rapid Technological Changes, Their
Existing Products and Services Could Become Obsolete.
The markets for Legato's and Ontrack's products and services are
characterized by:
. Rapid technological changes;
. Changing customer needs;
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. Frequent new software product introductions; and
. Evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards could render both companies' existing products and
services obsolete and unmarketable.
To be successful, the combined company will need to develop and introduce new
software products and services (including new releases, applications and
enhancements) on a timely basis that:
. Keep pace with technological developments and emerging industry
standards; and
. Address the increasingly sophisticated needs of our customers.
In addition, Legato or Ontrack may:
. Fail to develop and market products and services 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 and services;
or
. Fail to develop products and services that adequately meet the
requirements of the marketplace or achieve market acceptance.
Legato and Ontrack currently have plans to introduce and market several
potential new products and services in the next twelve months. Some of our
competitors currently offer certain of these potential new products and
services. Such potential new products and services are subject to significant
technical risks. We may fail to introduce such potential new products and
services on a timely basis or at all. If potential new products and services
are delayed or do not achieve market acceptance, Legato's or Ontrack's
respective businesses, operating results and financial conditions would be
seriously harmed. In the past, both Legato and Ontrack 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 Ontrack have also experienced delays in purchases of its
products by customers who were anticipating new product launches by Legato or
Ontrack. Legato's or Ontrack's respective businesses, operating results and
financial conditions would be seriously harmed if customers defer material
orders in anticipation of new product introductions.
Software products as complex as those we offer may contain undetected errors
or failures when first introduced or as new versions are released. We have in
the past discovered software errors in certain of our new products after their
introduction. We experienced delays or lost revenue during the period required
to correct these shipments, despite testing by us and by our current and
potential customers. This may result in loss of or delay in market acceptance
of our products, which could seriously harm our business, operating results and
financial condition.
Legato Relies 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 marketed its products at the department-level of
corporate customers. Within the last two years, Legato developed strategies to
pursue larger enterprise license transactions with corporate customers. Legato
may fail to successfully market its products in larger enterprise license
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transactions. This failure would seriously harm Legato's businesses, operating
results and financial conditions. Legato'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 operating results for that quarter may be seriously harmed.
Legato historically has not had a separate large enterprise or national
accounts sales force and only within the last two years has begun to develop
direct sales groups focused on these larger accounts. To succeed in the
national accounts market, Legato will be required to continue to transition its
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 products. Legato 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 operating results and financial conditions would be seriously harmed
if its sales force does 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.
Rather, they may give a higher priority to other products, including the
products of competitors, or may not continue to carry Legato's products. Events
or occurrences of this nature could seriously harm Legato's business, operating
results and financial condition. In addition, Legato may not be able to retain
any of 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
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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 Ontrack Depend on International Revenues and Therefore the Combined
Company's Business is Susceptible to Numerous Risks Associated With
International Operations.
Legato's and Ontrack's continued growth and profitability will require
further expansion of their respective international operations. To successfully
expand international sales, both Legato and Ontrack 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 Ontrack's respective operating
margins. If Legato or Ontrack fail to further expand their respective
international operations in a timely manner, Legato's or Ontrack's respective
businesses, operating results and financial condition would be seriously
harmed. In addition, Legato or Ontrack 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 Ontrack's products more expensive and, therefore, potentially less
competitive in those markets. In some markets, localization of Legato's and
Ontrack's products are essential to achieve market penetration. Legato and
Ontrack may incur substantial costs and experience delays in localizing their
products. Legato and Ontrack may fail to generate significant revenues from
localized products.
Additional risks inherent in Legato's and Ontrack's respective international
business activities generally include:
. Significant reliance on distributors and other resellers who do not
offer Legato's or Ontrack's respective products exclusively;
. Unexpected changes in regulatory requirements;
. Tariffs and other trade barriers;
21
<PAGE>
. Lack of acceptance of localized products, if any, in foreign countries;
. Fluctuations in foreign currency exchange ratios;
. Longer accounts receivable payment cycles;
. Difficulties in managing international operations;
. Potentially adverse tax consequences, including restrictions on the
repatriation of earnings; and
. The burdens of complying with a wide variety of foreign laws.
The occurrence of such factors could seriously harm Legato's or Ontrack's
respective international sales and, consequently, Legato's or Ontrack'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 426 at December 31, 1996 to 1,090
at September 30, 1999. 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 it is not
successful hiring such personnel, Legato's business, operating results and
financial condition could be seriously harmed. Legato's ability to compete
effectively and to manage the future expansion of its operations, if any, will
require the company to (a) continue to improve its financial and management
controls, reporting systems and procedures on a timely basis, and (b) expand,
train and manage its employee work force. Legato's failure to do so could
seriously harm its business, operating results and financial condition.
If Legato and Ontrack Do Not Successfully Integrate Recent Acquisitions, the
Combined Company's Business Will Be Harmed.
On April 1, 1999, Legato completed the acquisition of Intelliguard, a
developer of standards-based storage management solutions for storage area
networks. On April 19, 1999, Legato completed a merger with FullTime, a
developer of distributed, enterprise-wide, cross-platform, adaptive computing
solutions that enable customers to proactively manage application service level
availability into a wholly-owned subsidiary of Legato. On July 30, 1999, Legato
completed the acquisition of Vinca Corporation, a Utah-based provider of high
availability and data protection software. Legato may make additional
acquisitions in the future. On July 19, 1999, Ontrack completed the acquisition
of Mijenix Corporation, a Colorado-based supplier of system software products
for enhancing the use of Windows-based computer systems. Acquisitions of
companies, products or technologies entail numerous risks, including:
. An inability to successfully assimilate acquired operations and
products;
22
<PAGE>
. Diversion of management's attention;
. Loss of key employees of acquired companies;
. Substantial transaction costs; and
. Substantial additional costs charged to operations as a result of the
failure to consummate acquisitions.
Some of the products Legato and Ontrack acquired may require significant
additional development before they can be marketed and may not generate revenue
at levels we anticipate. Moreover, Legato's future acquisitions, if any, 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 expense. Legato cannot guarantee that
its or Ontrack's efforts to consummate or integrate acquisitions will be
successful. If Legato's and Ontrack's efforts are not successful, the combined
company's business, financial condition and results of operations could be
seriously harmed.
If the Enterprise Storage Management Market and the Data Availability Market
Do Not Continue to Grow, the Combined Company's Sales Opportunities Would Be
Limited.
All of Legato's business is in the enterprise storage management market and
all of Ontrack's business is in the data availability market. Both of these
markets are still emerging markets and may not continue to grow. 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 and data recovery capabilities for their client/server
computing environments. If these markets fail to grow or grow more slowly than
Legato and Ontrack currently anticipate, their respective businesses, operating
results and financial conditions would be seriously harmed.
Protection of Legato's and Ontrack's Intellectual Property Is Limited.
Both Legato and Ontrack are technology companies. The success of Legato and
Ontrack depends significantly on protecting their intellectual property which
are their most important assets. Despite Legato's and Ontrack's efforts to
protect their proprietary rights, unauthorized parties may attempt to copy
aspects of their products or to obtain and use information that Legato or
Ontrack regard as proprietary. Policing unauthorized use of Legato's or
Ontrack'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 on "shrink wrap" licenses that are not signed by
licensees. Ontrack 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 Ontrack's proprietary rights to as great an extent as do the laws
of the United States. Legato's and Ontrack's means of protecting their
proprietary rights may not be adequate. Legato's or Ontrack's competitors may
independently develop similar technology, duplicate Legato's or Ontrack's
products or design around patents issued to Legato or Ontrack or other
intellectual property rights of Legato or Ontrack.
Each of Legato and Ontrack from time to time has received claims that it is
infringing third parties' intellectual property rights. In the future, Legato
or Ontrack may be subject to claims of
23
<PAGE>
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 Ontrack 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 Ontrack, Legato's
or Ontrack's respective businesses, operating results and financial conditions
would be seriously harmed.
Defects in Legato's or Ontrack's Products Would Harm Our Business.
Legato's and Ontrack's products can be used to manage and retrieve computer
data critical to organizations. As a result, the sale and support of products
by Legato or Ontrack may entail the risk of product liability claims. A
successful product liability claim brought against Legato or Ontrack would
seriously harm Legato's or Ontrack's respective businesses, operating results
and financial conditions.
Legato and Ontrack Are Each Affected by General Economic and Market
Conditions.
During recent years, segments of the computer industry have experienced
significant economic downturns characterized by:
. Decreased product demand;
. Product overcapacity;
. Price erosion;
. Work slowdowns; and
. Layoffs.
The operations of Legato, Ontrack, and the combined company may experience
substantial fluctuations from period-to-period as a consequence of such
industry patterns, general economic conditions affecting the timing of orders
from major customers, and other factors affecting capital spending. The
occurrence of such factors could seriously harm the respective companies'
business, operating results or financial condition.
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. 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.
24
<PAGE>
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.
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 does not currently have any information concerning the Year 2000
compliance status of its customers. If its 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 could be seriously harmed.
Legato believes the software and hardware it uses internally complies with
Year 2000 requirements. During 1998, Legato replaced or upgraded much of its
internal use hardware and software. In addition, Legato is not aware of any
material operational issues or costs associated with preparing its internal use
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 may incur
additional amounts related to monitoring Year 2000 compliance review including
outside contractors to provide technical advice and technical support for its
products, product engineering, and customer satisfaction.
Legato has developed contingency plans to be implemented as part of its
efforts to identify and correct Year 2000 problems. Depending on the systems
affected, these plans could include:
. Accelerated replacement of affected equipment or software;
. Short to medium-term use of backup equipment and software;
25
<PAGE>
. 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 Ontrack discussion of Year 2000 issues, see "Ontrack Management's
Discussion and Analysis of Financial Condition and Results of Operation--Year
2000 Compliance" on page 95.
Legato's and Ontrack's Trading Prices Are Volatile
The market price of Legato's and Ontrack's common stock may decrease
significantly. A number of factors could significantly affect the market price
of each company's common stock including:
. Quarterly fluctuations in financial results or results of other software
companies;
. Changes in each company's revenue growth rates or competitors' growth
rates;
. Announcements that each company's revenue or income are below analysts'
expectations;
. Changes in analysts' estimates of Legato's or Ontrack's performance or
industry performance;
. Announcements of new products by either company's competitors or by
either company;
. Developments with respect to Legato's or Ontrack's patents, copyrights,
or proprietary rights or those of either company's competitors;
. Sales of large blocks of Legato's or Ontrack's common stock;
. Conditions in the financial markets in general;
. General business conditions and trends in the distributed computing
environment and software industry;
. Deferred purchases of Legato's or Ontrack's products as a result of
customers needs to expend available resources to become Year 2000
compliant;
. Costs and resources required to address potential Year 2000 problems
relating to Legato's or Ontrack's products or either company's internal
use software and hardware; and
. Changes in prices of Legato's or Ontrack's products.
26
<PAGE>
In addition, the stock market may experience extreme price and volume
fluctuations, which may affect the market price for the securities of
technology companies without regard to their operating performance or any of
the factors listed above. These broad market fluctuations may seriously harm
the market price of Legato's or Ontrack's common stock. In the past, securities
class action litigation has often been brought against a company following
periods of volatility in the market price of such company's securities. Such
litigation may occur in the future with respect to the combined company and
could result in substantial costs and diversion of management's attention and
resources, which could seriously harm the Legato's or Ontrack's business,
financial condition and results of operations.
27
<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, April 17, 1998 and August 13, 1999.
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
1996
Quarter Ended March 31, 1996............................... $ 5.38 $ 2.91
Quarter Ended June 30, 1996................................ 6.88 4.38
Quarter Ended September 30, 1996........................... 12.00 4.57
Quarter Ended December 31, 1996............................ 11.75 6.69
1997
Quarter Ended March 31, 1997............................... $ 8.22 $ 4.04
Quarter Ended June 30, 1997................................ 6.22 2.75
Quarter Ended September 30, 1997........................... 8.94 4.35
Quarter Ended December 31, 1997............................ 11.66 8.07
1998
Quarter Ended March 31, 1998............................... $ 14.97 $10.03
Quarter Ended June 30, 1998................................ 19.75 12.88
Quarter Ended September 30, 1998........................... 27.38 17.57
Quarter Ended December 31, 1998............................ 32.97 15.13
1999
Quarter Ended March 31, 1999............................... $ 32.75 $20.75
Quarter Ended June 30, 1999................................ 29.75 $15.25
Quarter Ended September 30, 1999........................... 49.13 28.31
Quarter Ending December 31, 1999 (Through December 20,
1999)..................................................... 73.4375 41.09
</TABLE>
Ontrack Market Price Data
Ontrack's common stock is traded on the Nasdaq National Market under the
symbol "ONDI." The following table sets forth the range of high and low closing
sales prices reported on the Nasdaq National Market for Ontrack common stock
for the periods since the initial public stock offering on October 22, 1996 as
indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1996
Quarter Ended December 31, 1996 (From October 22, 1996)..... $ 15.13 $10.88
1997
Quarter Ended March 31, 1997................................ $ 19.63 $13.13
Quarter Ended June 30, 1997................................. 23.00 14.13
Quarter Ended September 30, 1997............................ 25.50 17.25
Quarter Ended December 31, 1997............................. 27.75 18.50
1998
Quarter Ended March 31, 1998................................ $ 24.38 $14.25
Quarter Ended June 30, 1998................................. 18.25 11.94
Quarter Ended September 30, 1998............................ 14.00 6.63
Quarter Ended December 31, 1998............................. 9.63 6.38
1999
Quarter Ended March 31, 1999................................ $ 6.50 $ 3.81
Quarter Ended June 30, 1999................................. 4.94 3.56
Quarter Ended September 30, 1999............................ 5.94 4.13
Quarter Ending December 31, 1999 (Through December 20,
1999)...................................................... 12.375 5.13
</TABLE>
28
<PAGE>
Dividend Information
Neither Legato nor Ontrack 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 Ontrack common stock on the Nasdaq National Market on November
18, 1999, the last trading day before announcement of the proposed merger, and
on December 20, 1999, the latest practicable trading day before the printing of
this proxy statement/prospectus, and (2) the equivalent per share prices for
Ontrack common stock based on the corresponding Legato common stock prices and
an assumed exchange rate of 0.1491 shares of Legato common stock plus two
dollars ($2.00) for each share of Ontrack common stock:
<TABLE>
<CAPTION>
Ontrack
Legato Ontrack Equivalent
Common Stock Common Stock Per Share
Price Price Price
------------ ------------ ----------
<S> <C> <C> <C>
November 18, 1999.......................... $75.9375 $ 9.125 $13.3223
December 20, 1999.......................... $73.4375 $12.375 $12.9495
</TABLE>
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 Ontrack
common stock will receive in the merger may increase or decrease prior to and
following the merger.
You are urged to obtain current market quotations for Legato common stock and
Ontrack common stock. Legato and Ontrack cannot give you any assurances as to
the future prices or markets for Legato common stock or Ontrack common stock.
Number Of Shareholders
As of December 15, 1999, the record date, there were 93 shareholders of
record who held shares of Ontrack common stock (although Ontrack has been
informed that there are in excess of 2,600 beneficial owners), as shown on the
records of Ontrack's transfer agent for such shares.
29
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following selected historical financial information of Legato as of
December 31, 1998 and 1997 and for 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. 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. The selected historical financial information
of Ontrack as of and for the three years ended December 31, 1998 has been
derived from the audited financial statements of Ontrack included elsewhere in
this document. The selected historical financial information of Ontrack as of
and for the two years ended December 31, 1995 has been derived from audited
financial statements of Ontrack not included in this document. The selected
historical financial information of Ontrack as of and for the nine months ended
September 30, 1999 and 1998 has been derived from unaudited financial
statements of Ontrack, which are included elsewhere in this document. The
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the entire year. The selected pro
forma combined financial information of Legato and Ontrack 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. For further information
regarding the pro forma combined operating results of the two companies, see
"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.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
LEGATO SYSTEMS, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $28,357 $49,066 $88,920 $118,499 $167,907 $118,135 $186,047
Gross profit............ 20,756 36,591 70,457 97,812 143,114 100,101 163,704
Income from operations.. 831 7,288 15,747 21,589 27,815 17,595 26,736
Net income.............. 967 8,628 10,814 15,066 19,869 12,786 16,072
Basic earnings per
share.................. $ 0.06 $ 0.21 $ 0.16 $ 0.21 $ 0.26 $ 0.17 $ 0.19
Shares used in basic
earnings per share
calculations........... 15,900 41,100 68,565 72,849 76,762 76,319 81,353
Diluted earnings per
share.................. $ 0.02 $ 0.14 $ 0.14 $ 0.19 $ 0.24 $ 0.16 $ 0.18
Shares used in diluted
earnings per share
calculations........... 47,844 63,246 78,215 78,886 83,074 82,465 87,802
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, September 30,
------------------------------------------ -------------
1994 1995 1996 1997 1998 1999
------ ------- -------- ------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and investments........ $7,227 $53,805 $ 76,945 $87,433 $125,972 $144,724
Working capital......... 6,085 41,156 71,427 87,848 119,717 171,604
Total assets............ 13,984 69,946 111,704 141,908 207,747 413,071
Retained earnings
(accumulated deficit).. (9,701) (1,073) 9,741 23,495 43,364 59,436
Total stockholders'
equity................. 7,378 56,229 90,813 114,737 158,529 334,132
</TABLE>
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
ONTRACK DATA INTERNATIONAL, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Income Data:
Revenues................ $11,734 $17,145 $26,763 $35,249 $35,841 $27,044 $29,522
Gross margin............ 9,468 14,079 22,241 29,491 28,512 21,759 22,319
Operating income........ 1,548 3,465 4,632 7,400 5,981 5,183 4,515
Net income.............. 1,505 2,205 3,124 5,656 5,198 4,354 3,565
Net income per share--
basic.................. $ 0.25 $ 0.37 $ 0.46 $ 0.58 $ 0.53 $ 0.44 $ 0.36
Weighted average shares
used in per share
calculations--basic.... 6,000 6,000 6,791 9,816 9,860 9,919 9,774
Net income per share--
diluted................ $ 0.19 $ 0.28 $ 0.38 $ 0.56 $ 0.52 $ 0.43 $ 0.36
Weighted average shares
used in per share
calculations--diluted.. 7,794 7,794 8,219 10,105 10,020 10,072 9,810
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
------- ------ ------- ------- ------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short term
marketable securities.. $ 2,024 $2,028 $22,684 $32,176 $33,596 $27,135
Working capital......... 2,090 2,896 22,198 31,745 35,914 29,481
Total assets............ 4,521 6,861 36,635 45,125 46,449 53,202
Convertible redeemable
preferred stock........ 4,924 5,231 0 0 0 0
Retained earnings
(accumulated deficit).. (2,070) (217) 2,676 8,332 13,530 17,095
Total stockholders'
equity (deficit)....... (1,973) (123) 32,406 39,331 42,780 47,494
</TABLE>
32
<PAGE>
LEGATO AND ONTRACK
UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Pro Forma Combined Condensed Statements
of Operations Data:
Revenues................................. $232,251 $225,408
Gross profit............................. 198,374 194,880
Income (loss) from operations............ (34,159) 1,139
Net income (loss)........................ (25,299) 732
Basic earnings (loss) per share.......... (0.31) 0.01
Shares used in basic earnings (loss) per
share calculations...................... 81,218 84,509
Diluted earnings (loss) per share........ (0.31) 0.01
Shares used in diluted earnings (loss)
per share calculations.................. 81,218 90,958
<CAPTION>
As of
September 30,
1999
------------------
<S> <C> <C>
Pro Forma Combined Condensed Balance
Sheet Data:
Cash, cash equivalents and investments... $155,441
Working capital(1)....................... 176,792
Total assets............................. 560,514
Retained earnings........................ 55,067
Total stockholders' equity............... 451,369
</TABLE>
- --------
(1) Net of estimated expenses of $4.1 million expected to be incurred by the
combined company in connection with direct costs associated with the
Merger.
33
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Legato
and Ontrack 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
purchase business combination. 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 Ontrack common stock and options to purchase shares of Ontrack
common stock outstanding as of September 30, 1999. 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
Ontrack included elsewhere herein. Neither Legato nor Ontrack declared any cash
dividends during the periods presented.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September
December 31, 30,
------------ -----------
1998 1998 1999
------------ ----- -----
<S> <C> <C> <C>
HISTORICAL -- LEGATO
Basic earnings per share.............................. $0.26 $0.17 $0.19
Diluted earnings per share............................ $0.24 $0.16 $0.18
Book value per share(1)............................... $1.92 $1.85 $3.93
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September
December 31, 30,
------------ -----------
1998 1998 1999
------------ ----- -----
<S> <C> <C> <C>
HISTORICAL -- ONTRACK
Net income per share -- basic......................... $0.53 $0.44 $0.36
Net income per share -- diluted....................... $0.52 $0.43 $0.36
Book value per share(1)............................... $4.41 $4.32 $4.77
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
PRO FORMA COMBINED PER LEGATO SHARE
Basic earnings (loss) per share............ $(0.31) $0.01
Diluted earnings (loss) per share.......... $(0.31) $0.01
Book value per share(1).................... $ 4.42 $5.21
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
PRO FORMA COMBINED PER ONTRACK SHARE
Basic loss per share(2).................... $(0.05) $0.00
Diluted loss per share(2).................. $(0.05) $0.00
Book value per share(1).................... $ 0.67 $0.78
</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 per Ontrack share amounts are calculated by
multiplying the pro forma combined per Legato share amounts by the exchange
ratio of 0.1491 shares of Legato common stock for each share of Ontrack
common stock.
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THE SPECIAL MEETING OF ONTRACK SHAREHOLDERS
Date, Time and Place of the Ontrack Shareholder Meeting
The meeting of Ontrack shareholders to approve the reorganization agreement
and the merger will be held on January 31, 2000 at 10:00 a.m., local time, at
ONTRACK Data International, Inc., 9023 Columbine Road, Eden Prairie, MN 55347.
Record Date and Shares Entitled to Vote
Only holders of record of Ontrack common stock at the close of business on
the record date of the merger are entitled to notice of and to vote at the
Ontrack shareholder meeting. The record date has been set at December 15, 1999.
As of the close of business on the record date, there were 10,004,944 shares of
Ontrack common stock outstanding and entitled to vote, held of record by
93 shareholders. Ontrack has been informed, however, that there are in excess
of 2,600 beneficial owners of Ontrack common stock. A majority, or 5,002,473 of
these shares, present in person or represented by proxy, will constitute a
quorum for the transaction of business. You and each other Ontrack shareholder
is entitled to one vote for each share of Ontrack common stock held as of the
record date.
Voting of Proxies
The Ontrack proxy accompanying this proxy statement/prospectus is solicited
on behalf of the Ontrack board of directors for use at the Ontrack shareholder
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
Ontrack. All properly executed proxies received by Ontrack prior to the vote at
the Ontrack shareholder meeting, and that are not revoked, will be voted at the
Ontrack shareholder meeting in accordance with the instructions indicated on
the proxies or, if no direction is indicated, to approve the reorganization
agreement and the merger. Ontrack's board of directors does not presently
intend to bring any other business before the Ontrack shareholder meeting and,
so far as is known to the Ontrack board of directors, no other matters are to
be brought before the Ontrack shareholder meeting. As to any business that may
properly come before the Ontrack shareholder 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 Ontrack
shareholder meeting by:
1. Delivering to the secretary of Ontrack a written notice, bearing a
date later than the date of the previous proxy, stating that the proxy is
revoked,
2. 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 Ontrack shareholder meeting, or
3. Attending the Ontrack shareholder meeting and voting in person.
Vote Required
Approval of the reorganization agreement and the consummation of the merger
by Ontrack's shareholders is required under Minnesota law. Such approval
requires the affirmative vote of the
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holders of a majority of the shares of Ontrack common stock outstanding and
entitled to vote. Michael W. Rogers and Gary S. Stevens, each of whom is a
director and an executive officer of Ontrack, and their affiliates as a group,
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 35% of the outstanding shares of
Ontrack common stock as of the record date. Other directors and officers of
Ontrack own an additional 17.1% of the outstanding shares of common stock so
that all directors and officers own a total of 52.2% of all outstanding shares
of Ontrack common stock. As of the record date for the merger and the date of
this proxy statement/prospectus, Legato owns no shares of Ontrack common stock.
See "The Merger and Related Transactions--Related Agreements--Voting and Proxy
Agreements" on page 63.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the Ontrack
shareholder meeting is a majority of the shares of Ontrack common stock issued
and outstanding on the record date. Abstentions 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. If a broker indicates on the proxy that
it does not have discretionary authority to vote on the proposal, those shares
will not be considered as present and entitled to vote. Because approval of the
reorganization agreement and the consummation of the merger requires the
affirmative vote of a majority of the outstanding shares of Ontrack 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 Ontrack special meeting and it will have the same effect as voting against
adoption of the reorganization agreement.
Solicitation of Proxies and Expenses
Ontrack will bear the cost of soliciting of proxies from its shareholders,
which is estimated to be $15,000. In addition to solicitation by mail, the
directors, officers and employees of Ontrack may solicit proxies from you and
other Ontrack shareholders by telephone, facsimile or in person. Following the
original mailing of the proxies and other soliciting materials, Ontrack will
request brokers, custodians, nominees and other record holders to forward
copies of the proxy and other soliciting materials to persons for whom they
hold shares of Ontrack common stock and to request authority for the exercise
of proxies. In such cases, Ontrack, upon the request of the record holders,
will reimburse such holders for their reasonable expenses.
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Ontrack Board Recommendation
The Ontrack 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, Ontrack and its shareholders. The Ontrack board of directors has
unanimously approved the terms and conditions of the reorganization agreement
and the merger and recommends that you and the other Ontrack shareholders vote
for approval of the reorganization agreement and the consummation of the
merger. In considering such recommendation, you should be aware that Legato has
agreed to provide certain employment, severance and indemnification
arrangements to certain Ontrack directors and officers. See "The Merger and
Related Transactions--Interests of Certain Persons in the Merger" on page 62
and "--Indemnification and Insurance" on page 62.
Representatives of Grant Thornton LLP, Ontrack's independent auditors, are
expected to be present at the Ontrack shareholder meeting.
For information regarding instructions for the exchange of Ontrack common
stock share certificates, you should read the section entitled "Exchange of
Certificates" on page 39. The matters to be considered at the Ontrack
shareholder 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 your proxy card.
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THE MERGER AND RELATED TRANSACTIONS
General
The reorganization agreement provides for the merger of Ontrack with and into
a newly formed, wholly-owned subsidiary of Legato. After the merger, the Legato
subsidiary will be the surviving corporation and will continue to 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 which 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 Ontrack
common stock will automatically be converted into the right to receive 0.1491
of a share of Legato common stock and two dollars ($2.00) in cash.
No fractional shares of Legato common stock will be issued in the merger.
Instead, Ontrack shareholders 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
shareholder 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 Ontrack and Legato as of November 30,
1999, the shareholders and optionholders of Ontrack will own, or have rights to
own, approximately 2% of the Legato common stock outstanding immediately after
the merger is completed, assuming the exercise of all Legato stock options to
be received by Ontrack option holders.
Conversion of Options
At the time the merger is completed, Legato will assume each then outstanding
option granted under Ontrack's stock option plans. Each Ontrack option so
assumed by Legato will continue to have, and be subject to, the same terms and
conditions set forth in the Ontrack stock option plans immediately prior to
completion of the merger, except that:
. such Ontrack 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 Ontrack common stock that were issuable upon exercise of such option
immediately prior to completion of the merger multiplied by (b) 0.1822,
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
amount determined by dividing (a) the exercise price per share of
Ontrack common stock at which such option was exercisable immediately
prior to completion of the merger, by (b) 0.1822, rounded up to the
nearest whole cent; and
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. if such Ontrack option provided for acceleration of vesting upon a
change in control of Ontrack, then it will be fully vested on and after
the effective date of the merger and shall be exercisable until the date
12 months following the later of (a) the effective date of the merger or
(b) cessation of the optionee's service (if such optionee commenced
service with Legato following the Closing); and
. if such assumed Ontrack option is held by a director, former director or
consultant to the directors of Ontrack, then it will be fully vested on
and after the effective date of the merger and shall be exercisable
until the date 12 months following the effective date of the merger; and
. except as provided in the foregoing two clauses, no assumed Ontrack
option will provide for an exercise period in excess of 12 months in the
event of the cessation of the optionee's service; and
. 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
Ontrack options.
As of December 15, 1999, 1,455,783 shares of Ontrack common stock were
subject to outstanding Ontrack options.
Under the Ontrack 1996 Stock Incentive Plan, certain option agreements held
by officers provide for full acceleration of vesting upon a change in control,
including the transaction described herein. In addition, each such option
agreement provides that the option is to remain outstanding through the end of
its original 10-year term, unless the optionee commits misconduct under defined
circumstances. As described above, any such options assumed by Legato will not
provide for an exercise period in excess of 12 months in the event of the
cessation of the optionee's service.
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
Ontrack 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 Ontrack option into an option to
purchase shares of Legato common stock.
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 Ontrack common
stock certificate(s) for Legato common stock 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 Ontrack 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, payment of the cash
consideration of two dollars ($2.00) per share of Ontrack 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.
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Immediately after completion of the merger, each outstanding Ontrack 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 Ontrack common stock shall have been so converted as
a result of the merger;
. the right to receive two dollars ($2.00) per share of Ontrack common
stock; 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 Ontrack common stock certificate until you
surrender the Ontrack certificate. Subject to applicable law, following your
surrender of any Ontrack 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 Ontrack 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
Ontrack 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 Ontrack common stock certificate(s) for exchange
until you have received the letter of transmittal and instructions referred to
above.
Background of the Merger
In early September 1998, Michael W. Rogers, President and CEO of Ontrack,
reviewed Ontrack's competitive situation and analyzed complementary solutions
to those offered by Ontrack. As a result of this analysis, Mr. Rogers
identified Legato as a company that offered products which would be very
complementary to Ontrack.
Mr. Rogers subsequently contacted Hugh Hoffman from U.S. Bancorp Piper
Jaffray, Ontrack's financial advisor, to assist Ontrack in contacting Legato
regarding a potential strategic relationship.
In September 1998, Mr. Hoffman contacted James Chappell, Vice President,
Business Development of Legato, regarding Legato's potential interest in a
strategic relationship with Ontrack, up to and including an acquisition. On
September 29, 1998 Mr. Hoffman and Mr. Rogers met with Louis C. Cole, Chairman,
President and Chief Executive Officer of Legato, Mr. Chappell and Gary Archer,
Technical Director, Business Development of Legato, to discuss the level of
Legato's interest in pursuing a relationship with Ontrack.
In September and October 1998, Ontrack and Legato signed non-disclosure
agreements.
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In November 1998, Messrs. Chappell and Archer visited Ontrack's facility in
Eden Prairie, Minnesota and met with Messrs. Rogers and Hoffman, Gary S.
Stevens, Senior Vice President, Engineering of Ontrack, and certain members of
Ontrack's product management group. At the meeting the parties reviewed
Ontrack's technology and the potential strategic fit between the two companies.
In early December 1998, Legato management determined not to proceed with an
acquisition of Ontrack at that time. Instead, Legato chose to work with Ontrack
on specific customer opportunities where users of Legato's technology required
Ontrack's data recovery services. On December 14, 1998, Mr. Chappell notified
Mr. Rogers of Legato's decision to pursue only strategic partnering
opportunities with Ontrack, rather than a business combination between the two
companies, and provided Mr. Rogers with the contact information for Darlene
Davis, Director, Strategic Alliances for Legato. Over the next several months
representatives of each company talked at intermittent times regarding possible
partnering opportunities and an informal reference-selling relationship was
established between the companies. In this relationship, each company would
send sales/service opportunities to the other as appropriate to enable customer
choice for the services each company offered.
In late August 1999, Legato referred Ontrack to a Legato customer that had a
need for data recovery services. This referral renewed Legato's interest in
combining with Ontrack so that Legato could offer Ontrack's data recovery
services as part of Legato's products and services. On August 25, 1999, Mr.
Chappell called Mr. Rogers to discuss the current status of Ontrack's business.
On September 3, 1999, Messrs. Cole and Chappell met with Messrs. Rogers, John
M. Bujan, Vice President, General Counsel and Secretary of Ontrack, and
Thomas P. Skiba, Vice President and Chief Financial Officer of Ontrack, in Eden
Prairie, Minnesota. At the meeting the parties discussed the complementary
nature of their respective products and services and potential synergies that
might be realized between the two companies as a result of a business
combination.
At Legato's regularly scheduled board of directors meeting on September 24,
1999, Mr. Chappell presented a report to the Legato board of directors
regarding the discussion to date with Ontrack representatives and Legato's
potential interest in a business combination. The board of directors
recommended that Legato's representatives gather additional information
regarding Ontrack's business and technology and its potential fit with Legato.
On September 27, 1999, Messrs. Chappell and Archer and Howard Alt, Business
Line Manager for Legato, met with Messrs. Rogers, Stevens, Bujan and Skiba at
Ontrack's facility in Eden Prairie, Minnesota to review Ontrack's technology.
Representatives from U.S. Bancorp Piper Jaffray and from Bear, Stearns & Co.
Inc., Legato's financial advisor, were also present at the meeting.
On October 4, 1999 Messrs. Rogers, Skiba, Bujan and Hoffman met with Messrs.
Cole, Chappell, Archer, Mr. Stephen C. Wise, Chief Financial Officer of Legato,
Robert Brown, Controller of Legato, and Messrs. Edward Rimland, William Hsieh,
Zachary Abrams and Nhi Huynh of Bear, Stearns & Co., in Palo Alto, California
and discussed preliminary terms, operating issues, potential business
opportunities, strategic fit and preliminary valuation ranges for a possible
business combination between the two companies. During the next several days,
representatives of Legato worked with representatives of Bear Stearns to
formulate the structural terms of a potential merger of the two companies.
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Prior to this meeting, Ontrack retained U.S. Bancorp Piper Jaffray to act as
its financial advisor regarding a potential business combination between
Ontrack and Legato. In addition, U.S. Bancorp Piper Jaffray contacted other
possible merger candidates on behalf of Ontrack. During this process, U.S.
Bancorp Piper Jaffray had discussions with these companies following which U.S.
Bancorp Piper Jaffray indicated to senior management of Ontrack that none of
these companies had a continuing interest in pursuing a transaction with
Ontrack.
On October 13, 1999, Mr. Cole spoke with Mr. Rogers regarding the terms by
which a merger of the two companies might be accomplished, subject to
comprehensive investigation by Legato of Ontrack's business, the preparation
and negotiation 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. During the next several days, Legato and its financial advisor, Bear
Stearns, discussed various elements of the Legato proposal with their
counterparts at Ontrack and U.S. Bancorp Piper Jaffray.
On October 22, 1999, Legato delivered to Ontrack an outline of discussion
points regarding a potential transaction.
On October 25, 1999, the Ontrack board of directors met for a regular
quarterly meeting. In connection with this meeting, the board considered the
discussion points received from Legato and authorized Mr. Rogers to continue
discussions with Legato. Ontrack's legal counsel made a presentation to the
directors regarding their fiduciary duties. Representatives of U.S. Bancorp
Piper Jaffray also discussed various aspects of a potential transaction.
On October 29, 1999, the parties executed a mutual non-disclosure agreement
to protect the confidentiality of any information exchanged between the parties
during the negotiation of the reorganization agreement and to provide for a
period until November 20, 1999 during which Ontrack would not solicit or
entertain any competitive bids from other parties. On November 2, 1999,
Legato's outside law firm, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP delivered drafts of the merger documents to Ontrack and its
outside legal counsel. From November 2 through November 18, 1999,
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 November 2, 1999, Mr. Skiba of Ontrack and Mr. Hoffman visited with Mr.
Wise at Legato in Palo Alto, California, to discuss various business and
financial aspects of Legato.
On November 9, 1999, Mr. Archer and Mr. Randall Johnson, Senior Technical
Strategist of Legato, came to Ontrack in Minnesota and met with Mr. Stevens and
Ontrack's technical managers for additional due diligence.
On November 16, 1999, the Legato board of directors held a special meeting to
consider the proposed reorganization agreement and the merger. Bear Stearns
made a presentation to the board and delivered its verbal opinion that the
consideration proposed for the merger was fair to the Legato stockholders from
a financial point of view. Bear Stearns' oral opinion was later confirmed in
writing. Following these events, the Legato board of directors determined that
the proposed merger was in the best interest of Legato and its stockholders,
approved the reorganization agreement and
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the merger and authorized the officers of Legato to enter into the
reorganization agreement and related transactions.
On November 17, 1999, the Ontrack board of directors held a special meeting
to review the status of the negotiations, proposed merger documents and due
diligence. Counsel for Ontrack reviewed with the Ontrack board of directors the
structure and the terms and conditions of the proposed reorganization agreement
and other transaction documents as well as various legal matters. U.S. Bancorp
Piper Jaffray gave the Ontrack board of directors a preliminary evaluation of
the proposed transaction from a financial point of view. A detailed discussion
of the board followed U.S. Bancorp Piper Jaffray's presentation. The board of
directors also discussed the strategic rationale for the merger.
On November 18, 1999, the Ontrack board of directors held a special meeting
to consider the reorganization agreement and the merger. U.S. Bancorp Piper
Jaffray delivered its verbal opinion that the share exchange ratio and other
consideration proposed for the merger is fair to the holders of Ontrack common
stock from a financial point of view. Their opinion was later confirmed in
writing. The written opinion of U.S. Bancorp Piper Jaffray is set forth in full
as Appendix B to this document. Following these events, the Ontrack board of
directors unanimously approved the reorganization agreement and the merger.
On November 18, 1999, after the Nasdaq National Market closed,
representatives of Legato and Ontrack executed the reorganization agreement and
the appropriate stockholders executed the voting and proxy agreements and the
employment agreements. At approximately the same time, Legato issued a new
release announcing the signing of the definitive agreement to acquire Ontrack.
At various times during the negotiations, the management of Ontrack consulted
with its legal counsel and U.S. Bancorp Piper Jaffray. Although U.S. Bancorp
Piper Jaffray was not directly involved in the negotiations of the
consideration to be received by Ontrack shareholders, its advice as to the
financial aspects of the transaction and its input on financial due diligence
and related matters provided guidance to the Ontrack board of directors and
management in their direct negotiations with the management of Legato.
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"
beginning on page 13 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 Ontrack 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
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party, the Legato board of directors and the Ontrack 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 Ontrack have the potential to offer customers a more
comprehensive data protection solution than either could offer
independently;
. The merger would be positively received by customers of each company,
because the combined company's 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 approved the reorganization agreement and
the merger and has identified several potential benefits of the merger to
Legato. 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 enterprise storage management solutions
through the addition of Ontrack consulting and research and development
expertise;
. The extension of important elements of Legato's enterprise storage
management architecture by enhancing the accessibility of client/server
data and the availability of server resources; and
. The ability to offer the Ontrack installed customer base the increased
benefits of the Legato global support services, integrated technology
strength and a single vendor solution for enterprise storage management.
Ontrack Board of Directors Recommendation; Ontrack's Reasons for the Merger
The Ontrack board of directors has unanimously approved the reorganization
agreement, has determined that the merger is fair to, and in the best interests
of, Ontrack and its shareholders, and recommends that holders of shares of
Ontrack common stock vote FOR approval and adoption of the reorganization
agreement and the merger.
The Ontrack 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 that the consideration to be received
by Ontrack's shareholders in the transaction was fair from a financial point of
view. The Ontrack board of directors viewed Legato as a well-managed company
with very high quality products. The Ontrack board of directors also viewed
Legato and Ontrack as
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having similar corporate cultures, customers, competitors and sales focuses.
Strategic benefits of the merger that Ontrack believes will contribute to the
success of the combined entity include:
. The opportunity to benefit from Legato's greater size and financial
strength;
. 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.
Ontrack further evaluated the merits of Legato common stock and concluded
that shares of Legato common stock:
. Have appreciation potential in the long term and the increased market
capitalization of Legato common stock as compared to that of Ontrack's
common stock;
. Represent a more liquid investment than Ontrack common stock and provide
greater market capitalization as compared to that of Ontrack's common
stock; and
. Are followed by a much greater number of stock analysts.
In the course of its deliberations, the Ontrack board of directors reviewed
with Ontrack'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 its existing business 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 last three fiscal
quarters filed with the Securities and Exchange Commission;
. Ontrack 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 Ontrack common
stock and Legato common stock;
. The board's view that the transaction structure, which included Legato
common stock, could allow Ontrack shareholders to participate in the
potential upside of the combined company, while providing Ontrack
shareholders with a fixed amount of cash per share as well;
. The share exchange ratio of Legato common stock and cash for Ontrack
common stock and the relationship between the market value of Legato
common stock to be issued in exchange for each share of Ontrack 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 voting and proxy agreements under which holders of 35%
of Ontrack's common stock had committed to vote in favor of the
reorganization agreement;
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. Detailed financial analysis and other information with respect to the
companies presented by U.S. Bancorp Piper Jaffray in presentations to
the Ontrack board of directors, including U.S. Bancorp Piper Jaffray's
opinion that the consideration to be received by Ontrack shareholders in
the merger as of November 18, 1999 is fair to the holders of Ontrack
common stock from a financial point of view;
. The expected tax treatment of the merger;
. The impact of the merger on Ontrack's customers and employees; and
. Discussions with management and financial advisors as to the results of
the due diligence investigation of Legato's business.
Ontrack's board of directors believed that these factors, including the
Ontrack 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 Ontrack board of directors also considered risks arising in connection
with the merger, including:
. The potential disruption of Ontrack'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 Ontrack and Legato;
. The possibility that the merger might not be consummated;
. The effects of the public announcement of the merger on Ontrack's sales
and operating results, Ontrack'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 Ontrack 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 Ontrack's shareholders in the merger;
. The risk associated with attempting to integrate Legato's products with
Ontrack's products;
. The risk that the other benefits sought to be achieved by the merger
will not be achieved;
. 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 $5,000,000
payable to Legato if the merger is terminated by Legato following, among
other possible events, the withdrawal or modification by the Ontrack
board of directors of its recommendation of the reorganization
agreement;
. The risks associated with Messrs. Rogers and Stevens 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" beginning on page
13.
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<PAGE>
In the view of the Ontrack 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 which it was proposed. In addition, in
the view of the Ontrack board of directors, the inclusion of the non-
solicitation agreement, break-up fee and the voting and proxy agreements,
together with the limited circumstances under which Ontrack 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
Ontrack board of directors is not intended to be exhaustive, but is believed to
include all material factors considered by the Ontrack board of directors. In
view of the wide variety of factors, both positive and negative, considered by
the Ontrack board of directors, the Ontrack 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
Ontrack board of directors believed and continues to believe that the merger is
in the best interests of Ontrack and its shareholders and continues to
recommend approval and adoption of the reorganization agreement and the merger.
Operations Following the Merger
Following the merger, Ontrack will continue its operations as a wholly-owned
subsidiary of Legato. Upon consummation of the merger, the members of the
surviving company's board of directors will be Louis C. Cole and Stephen C.
Wise. 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 Shareholders of Merger Sub and Ontrack" on page 109.
Opinion of Financial Advisor
Pursuant to an engagement letter dated September 28, 1999, and executed by
Ontrack on October 4, 1999, Ontrack retained U.S. Bancorp Piper Jaffray Inc.
("U.S. Bancorp Piper Jaffray") to act as its exclusive financial advisor and,
if requested, to render to the board of directors an opinion as to the
fairness, from a financial point of view, of the consideration to be received
by Ontrack shareholders in the merger (other than Legato and its affiliates).
The merger and related transactions contemplated in the Reorganization
Agreement are collectively referred to as the "transaction."
U.S. Bancorp Piper Jaffray delivered to the board of directors of Ontrack on
November 18, 1999 its opinion that as of that date and based upon and subject
to the assumptions, factors and limitations set forth in the written opinion
and described below, the consideration as contemplated in the Reorganization
Agreement proposed to be received by Ontrack shareholders (other than Legato
and its affiliates) in the transaction was fair, from a financial point of
view, to those shareholders. A copy of U.S. Bancorp Piper Jaffray's written
opinion is attached to this proxy statement/prospectus as Appendix B and is
incorporated into this proxy statement/prospectus by reference.
While U.S. Bancorp Piper Jaffray rendered its opinion and provided certain
analyses to Ontrack's board of directors, U.S. Bancorp Piper Jaffray was not
requested to and did not make any recommendation to Ontrack's board of
directors as to the specific form for the transaction or the amount of the
consideration to be received by Ontrack shareholders in the transaction, which
was determined
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<PAGE>
through negotiations between senior management of Ontrack and Legato. U.S.
Bancorp Piper Jaffray's written opinion, which was delivered for use and
considered by Ontrack's board of directors, is directed only to the fairness,
from a financial point of view, of the proposed consideration to be received by
Ontrack shareholders in the transaction (other than Legato and its affiliates),
does not address the value of a share of Ontrack common stock or Legato common
stock, does not address Ontrack's underlying business decision to participate
in the transaction and does not constitute a recommendation to any Ontrack
shareholder as to how a shareholder should vote with respect to the
transaction.
In arriving at its opinion, U.S. Bancorp Piper Jaffray reviewed:
. a draft of the Reorganization Agreement received by U.S. Bancorp Piper
Jaffray on November 16, 1999;
. publicly available financial, operating and business information related
to Legato and Ontrack;
. publicly available market and securities data of Legato, Ontrack and
selected publicly traded companies deemed comparable to Legato and
Ontrack;
. analyst reports relating to Legato and Ontrack;
. to the extent publicly available, financial information relating to
selected transactions in industries deemed comparable to those of
Ontrack and Legato; and
. internal financial information of Ontrack prepared for financial
planning purposes and furnished by Ontrack management.
In addition, U.S. Bancorp Piper Jaffray visited facilities of Legato and
Ontrack and conducted discussions with members of senior management of both
Legato and Ontrack concerning the financial condition, current operating
results and business outlook of Legato, Ontrack and the combined company
following the transaction.
In delivering its opinion to the board of directors of Ontrack, U.S. Bancorp
Piper Jaffray prepared and delivered to the Ontrack board of directors written
materials containing various analyses and other information material to the
opinion. The following is a summary of the analyses contained in those
materials.
Consideration
Based on the consideration, as set forth in the reorganization agreement, of
$2.00 in cash and 0.1491 of a share of Legato's common stock for each share of
Ontrack's common stock, U.S. Bancorp Piper Jaffray calculated the aggregate
implied value of the stock and cash consideration payable in the transaction
for Ontrack, on a fully diluted basis, to be approximately $13.45 per share
based on the closing price of Legato's common stock on November 17, 1999.
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<PAGE>
Company Market Analysis
U.S. Bancorp Piper Jaffray reviewed the stock trading history and published
analyst estimate of Ontrack common stock. U.S. Bancorp Piper Jaffray presented
the recent Ontrack common stock trading information contained in the following
table:
<TABLE>
<S> <C>
Closing price on November 17, 1999................................ $ 9.00
30 trading day closing average.................................... 6.83
60 trading day closing average.................................... 5.81
90 trading day closing average.................................... 5.49
180 trading day closing average................................... 4.87
52 week high trade................................................ 10.00
52 week low trade................................................. 3.38
</TABLE>
Comparable Public Company Analysis
U.S. Bancorp Piper Jaffray compared financial information and valuation
ratios relating to Ontrack to corresponding data and ratios from 90 publicly
traded companies having primary and secondary SIC codes similar to Ontrack,
including 7372 (Prepackaged Software), 7379 (Computer-Related Services), 7375
(Information Retrieval Services) or 7370 (Computer Programming and Data
Processing), having market capitalizations of $50 million to $100 million, and
having latest 12 months revenue of more than $10 million. In addition, U.S.
Bancorp Piper Jaffray selected a focus group of ten publicly traded companies
engaged primarily in the software and services universe and having market
capitalizations of between $50 million and $4 billion for further comparison.
These ten focus group companies consisted of Cambridge Technology, Computer
Horizons, ILOG, Keane, Network Associates, Rogue Wave Software, Softworks,
Sungard Data Systems, Symantec and Technology Solutions.
The analysis of the 90 comparable publicly traded companies produced
multiples of selected valuation data as follows:
COMPARABLE PUBLIC COMPANIES (GENERAL)
<TABLE>
<CAPTION>
Ontrack(1) Low Mean Median High
---------- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue(2)................................ 3.0x 0.1x 1.7x 1.1x 7.7x
Company value to estimated calendar 1999
revenue(3)................................ 2.7x 0.1x 1.3x 1.1x 3.8x
Company value to estimated calendar 2000
revenue(3)................................ 2.0x 0.1x 1.1x 1.0x 2.7x
Company value to latest 12 months operating
income(2)................................. 21.5x 0.8x 10.6x 9.1x 34.6x
Common stock value per share to latest 12
months net income per share(2)(4)......... 29.2x 7.3x 23.1x 20.0x 85.0x
Common stock value per share to estimated
calendar 1999 net income per share(3)(4).. 25.4 x 8.2x 22.8x 18.5x 64.5x
Common stock value per share to estimated
calendar 2000 net income per share(3)(4).. 18.7x 6.5x 17.1x 14.7x 54.8x
</TABLE>
- --------
(1) Based on the implied value of the consideration.
(2) Ontrack latest 12 months revenue, operating income and net income are as of
September 30, 1999.
(3) Estimated revenue and net income for Ontrack are based on management
estimates. Estimated net income for the comparable publicly traded
companies are based on IBES estimates, and estimated revenues for
comparable publicly traded companies are based on research analysts
estimates.
(4) Net income for Ontrack excludes goodwill amortization expense.
49
<PAGE>
The analysis of the ten focus group companies produced multiples of selected
valuation data as follows:
COMPARABLE PUBLIC COMPANIES (FOCUS GROUP)
<TABLE>
<CAPTION>
Ontrack(1) Low Mean Median High
---------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue(2).............................. 3.0x 0.6x 2.0x 1.7x 4.9x
Company value to estimated calendar 1999
revenue(3).............................. 2.7x 0.6x 2.0x 1.6x 5.1x
Company value to estimated calendar 2000
revenue(3).............................. 2.0x 0.4x 1.8x 1.6x 4.0x
Company value to latest 12 months
operating income(2)..................... 21.5x 8.9x 20.0x 10.4x 53.6x
Common stock value per share to latest 12
months net income per share(2)(4)....... 29.2x 15.2x 32.6x 19.3x 114.3x
Common stock value per share to estimated
calendar 1999 net income per
share(3)(4)............................. 25.4 x 14.2x 30.2x 21.5x 89.2x
Common stock value per share to estimated
calendar 2000 net income per
share(3)(4)............................. 18.7x 7.4x 26.0x 21.7x 51.9x
</TABLE>
- --------
(1) Based on the implied value of the consideration.
(2) Ontrack latest 12 months revenue, operating income and net income are as of
September 30, 1999.
(3) Estimated revenue and net income for Ontrack are based on management
estimates. Estimated net income for the comparable publicly traded
companies are based on IBES estimates, and estimated revenues for
comparable publicly traded companies are based on research analysts
estimates.
(4) Net income for Ontrack excludes goodwill amortization expense.
Merger and Acquisition Analysis
U.S. Bancorp Piper Jaffray reviewed general merger and acquisition
transactions selected by searching SEC filings, public company disclosures,
press releases, industry and popular press reports, databases and other sources
and by applying the following criteria:
. transactions that were announced between January 1, 1995 and November
17, 1999;
. transactions in which the acquiring company purchased 100% of a public
target;
. transactions in which the target company had a business that was deemed
by U.S. Bancorp Piper Jaffray to be similar to that of Ontrack;
. transactions with a value of $50 million to $200 million; and
. transactions that do not include repurchases, minority interests or
hostile transactions.
This search yielded 39 merger and acquisition transactions. In addition, U.S.
Bancorp Piper Jaffray selected a focus group of six merger and acquisition
transactions for further comparison. The six focus group merger and acquisition
transactions consisted of:
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C>
Equant NV TechForce Corp.
CompuWare Corp. VIASOFT Inc.
Sterling Software Inc. Information Advantage Software
Legato Systems Inc. Fulltime Software Inc.
Symantec Corp. Quarterdeck Corp.
Network Associates Inc. CyberMedia Inc.
</TABLE>
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<PAGE>
U.S. Bancorp Piper Jaffray compared the resulting multiples of selected
valuation data of the 39 comparable merger and acquisition transactions to
multiples for Ontrack derived from the implied value of the consideration
payable in the transaction as follows:
COMPARABLE ACQUISITIONS (GENERAL)
<TABLE>
<CAPTION>
Ontrack(1) Low Mean Median High
---------- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue(2)............................... 3.0x 0.3x 2.6x 2.2x 6.9x
Company value to latest 12 months net
income(2)(3)............................. 29.2x 12.7x 32.5x 32.2x 55.3x
</TABLE>
- --------
(1) Based on the implied value of the consideration.
(2) Ontrack latest 12 months revenue and net income are as of September 30,
1999.
(3) Net income for Ontrack excludes goodwill amortization expense.
U.S. Bancorp Piper Jaffray compared the resulting multiples of selected
valuation data in the six focus group merger and acquisition transactions to
multiples for Ontrack derived from the implied value of the consideration
payable in the transaction as follows:
COMPARABLE ACQUISITIONS (FOCUS GROUP)
<TABLE>
<CAPTION>
Ontrack(1) Low Mean Median High
---------- -------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue(2)............................ 3.0x 0.8x 1.6x 1.7x 2.2x
Company value to latest 12 months net
income(2)(3).......................... 29.2x Negative 30.3x 30.3x 37.5x
</TABLE>
- --------
(1) Based on the implied value of the consideration.
(2) Ontrack latest 12 months revenue and net income are as of September 30,
1999.
(3) Net income for Ontrack excludes goodwill amortization expense.
Premiums Paid Analysis
U.S. Bancorp Piper Jaffray reviewed publicly available information for
selected announced merger and acquisition transactions by applying the
following criteria:
. transactions that were announced between January 1, 1995 and November
17, 1999;
. transactions in which the acquiring company purchased 100% of a public
target;
. transactions in which the target company had a business that was deemed
by U.S. Bancorp Piper Jaffray to be similar to that of Ontrack;
. transactions with a value of $50 million to $200 million; and
. transactions that do not include repurchases, minority interests or
hostile transactions.
This search yielded 39 merger and acquisition transactions. The table below
shows a comparison of the premiums paid in these 39 merger and acquisition
transactions to the premium for Ontrack derived from the implied value of the
consideration payable in the transaction. The premium calculations for Ontrack
stock are based upon an assumed announcement date of November 18, 1999.
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<PAGE>
IMPLIED PREMIUM
COMPARABLE TRANSACTIONS
<TABLE>
<CAPTION>
Ontrack(1) Low Mean Median High
---------- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C>
One day before announcement................. 49.4% 0.1% 34.7% 20.5% 187.0%
One week before announcement................ 47.3% 0.5% 47.4% 35.6% 358.0%
One month before announcement............... 150.2% 1.0% 60.7% 38.9% 326.0%
</TABLE>
- --------
(1) Based on the implied value of the consideration.
U.S. Bancorp Piper Jaffray also analyzed the implied premiums to average
historical closing prices of Ontrack for the 5-day, 10-day, 15-day, 20-day, 30-
day, 60-day, 90-day and 180-day trading day periods using the implied price per
share as set forth in the following table:
<TABLE>
<CAPTION>
Average Stock
Price
------------- Implied Price
Ontrack Legato Per Share(1) Premium
Time Period ------- ------ ------------- -------
<S> <C> <C> <C> <C>
November 17, 1999 $9.00 $76.78 $13.45 49.4%
5-Day Average $8.83 $71.69 $12.69 43.8%
10-Day Average $8.11 $68.86 $12.26 51.2%
15-Day Average $8.00 $64.19 $11.57 44.6%
20-Day Average $7.54 $59.97 $10.94 45.0%
30-Day Average $6.83 $56.65 $10.44 53.0%
60-Day Average $5.81 $50.94 $ 9.59 65.0%
90-Day Average $5.49 $46.40 $ 8.92 62.5%
180-Day Average $4.87 $35.80 $ 7.34 50.8%
</TABLE>
- --------
(1) Based on $2.00 cash and a fixed exchange ratio of 0.1491 shares of Legato
common stock per share of Ontrack common stock.
Pro Forma Analysis
U.S. Bancorp Piper Jaffray analyzed pro forma effects resulting from the
impact of the transaction on the projected earnings per share of the combined
company for Legato's fiscal year ending December 31, 2000 using management
estimates for Ontrack and an equity research analyst model for Legato. Without
taking into account certain synergies that the combined company may realize
following consummation of the transaction, U.S. Bancorp Piper Jaffray
determined that the transaction would be dilutive in fiscal year 2000 to
Legato's fiscal year 2000 earnings or accretive to Legato's earnings if
goodwill amortization expense is excluded from the transaction.
Discounted Cash Flow Analysis
U.S. Bancorp Piper Jaffray performed a discounted cash flow analysis for
Ontrack in which it calculated the present value of the projected future cash
flows of Ontrack using internal financial planning data prepared by Ontrack's
senior management. U.S. Bancorp Piper Jaffray estimated a range of theoretical
values for Ontrack based on the net present value of its implied annual cash
flows and a terminal value for Ontrack in fiscal year 2002 calculated based
upon a multiple of revenue. U.S. Bancorp Piper Jaffray applied a range of
discount rates of 20% to 30% and a range of terminal value multiples of 1.0x to
2.0x of forecasted fiscal year 2002 revenue. This analysis yielded a range of
estimated present values of Ontrack's equity value, on a fully diluted basis,
from $7.46 to
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<PAGE>
$13.58 per share with a midpoint of $10.41 per share, compared to the implied
value of the consideration of $13.45 per share.
Analysis of Legato Common Stock
U.S. Bancorp Piper Jaffray reviewed general background information concerning
Legato, including publicly available analyst estimates and ratings of Legato
common stock and the price performance of Legato common stock over the previous
12 months. U.S. Bancorp Piper Jaffray also reviewed the stock trading history
of Legato common stock at the dates or for the periods indicated below:
<TABLE>
<S> <C>
Closing price on November 17, 1999................................ $76.78
30 trading day closing average.................................... 56.65
60 trading day closing average.................................... 50.94
90 trading day closing average.................................... 46.40
180 trading day closing average................................... 35.80
52 week high trade................................................ 79.50
52 week low trade................................................. 15.06
</TABLE>
In addition, U.S. Bancorp Piper Jaffray compared selected financial data and
ratios for Legato to the corresponding data and ratios for six publicly traded
companies similar to Legato in the high-availability data management industry
(Citrix Systems, Concord Communications, Micromuse, Veritas Software, Visual
Networks and Webtrends), of which Veritas Software was deemed most relevant to
Legato. This analysis produced multiples of selected valuation data as follows:
COMPARABLE PUBLIC COMPANIES
<TABLE>
<CAPTION>
Legato(1) Low Mean Median High
--------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue 27.1x 12.1x 30.5x 22.7x 55.0x
Company value to estimated calendar 1999
revenue(2) 23.3x 11.2x 23.9x 20.5x 43.8x
Company value to estimated calendar 2000
revenue(2) 13.8x 7.8x 15.5x 14.4x 24.2x
Company value to latest 12 months
operating income 119.7x 41.6x 141.0x 127.1x 319.8x
Common stock value per share to latest
12 months net income per share 147.7x 125.8x 227.0x 186.8x 457.6x
Common stock value per share to
estimated calendar 1999 net income per
share(2) 128.0x 61.2x 163.6x 149.0x 331.9x
Common stock value per share to
estimated calendar 2000 net income per
share(2) 83.5x 48.6x 104.2x 99.8x 191.2x
</TABLE>
- --------
(1) Based on closing price of $76.78 per share on November 17, 1999.
(2) Estimated revenue and net income for comparable publicly traded companies
are based on IBES estimates, and estimated revenues and net income for
Legato are based on a research analyst model.
In reaching its conclusion as to the fairness of the transaction
consideration and in its presentation to Ontrack's board of directors, U.S.
Bancorp Piper Jaffray did not rely on any single analysis or factor described
above, assign relative weights to the analyses or factors considered by it, or
make any conclusion as to how the results of any given analysis, taken alone,
supported its opinion. The preparation of a fairness opinion is a complex
process and not necessarily susceptible to partial analysis or summary
description. U.S. Bancorp Piper Jaffray believes that its analyses must be
53
<PAGE>
considered as a whole and that selection of portions of its analyses and of the
factors considered by it, without considering all of the factors and analyses,
would create a misleading view of the processes underlying the opinion.
The analyses of U.S. Bancorp Piper Jaffray are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by the analyses. Analyses relating to the value of
companies do not purport to be appraisals or valuations or necessarily reflect
the price at which companies may actually be sold. No company or transaction
used in any analysis for purposes of comparison is identical to Ontrack, Legato
or the transaction. Accordingly, an analysis of the results of the comparisons
is not mathematical; rather, it involves complex considerations and judgments
about differences in the companies to which Ontrack and Legato were compared
and other factors that could affect the public trading value of the companies.
For purposes of its opinion, U.S. Bancorp Piper Jaffray relied upon and
assumed the accuracy and completeness of the financial statements and other
information provided to it by Ontrack and Legato and otherwise made available
to it and did not assume responsibility for the independent verification of
that information. Information prepared for financial planning purposes was not
prepared with the expectation of public disclosure. U.S. Bancorp Piper Jaffray
relied upon assurances from management of Ontrack and Legato that the
information provided to it by the respective companies was prepared on a
reasonable basis in accordance with industry practice, and with respect to
financial planning data, reflects the best currently available estimates and
judgment of management of Ontrack and Legato, and such management was not aware
of any information or facts that would make the information provided to U.S.
Bancorp Piper Jaffray incomplete or misleading.
For purposes of its opinion, U.S. Bancorp Piper Jaffray assumed that the
transaction would qualify as a tax-free reorganization for federal income tax
purposes. U.S. Bancorp Piper Jaffray assumed that neither Ontrack nor Legato is
a party to any pending transactions other than the transaction or in the
ordinary course of business. U.S. Bancorp Piper Jaffray also assumed that, in
the course of obtaining the necessary regulatory approvals and consents for the
transaction, the purchase price for Ontrack would not be changed.
In arriving at its opinion, U.S. Bancorp Piper Jaffray did not perform any
appraisals or valuations of any specific assets or liabilities of Ontrack or
Legato, and was not furnished with any such appraisals or valuations. U.S.
Bancorp Piper Jaffray expressed no opinion regarding the liquidation value of
any entity. U.S. Bancorp Piper Jaffray undertook no independent analysis of any
pending or threatened litigation, possible unasserted claims or other
contingent liabilities to which Ontrack or Legato or any of their affiliates is
a party or may be subject, and its opinion did not consider the possible
assertion of claims, outcomes or damages arising out of any such matters.
U.S. Bancorp Piper Jaffray expressed no opinion as to the price at which
shares of Ontrack or Legato common stock have traded or at which the shares of
Ontrack, Legato or the combined company may trade at any future time. The
opinion is based on information available to U.S. Bancorp Piper Jaffray and the
facts and circumstances as they existed and were subject to evaluation on the
date of the opinion. Events occurring after that date could materially affect
the assumptions used in preparing the opinion. U.S. Bancorp Piper Jaffray has
not undertaken to and is not obligated to reaffirm or revise its opinion or
otherwise comment on any events occurring after the date it was given.
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<PAGE>
U.S. Bancorp Piper Jaffray, as a customary part of its investment banking
business, evaluates businesses and their securities in connection with mergers
and acquisitions, underwritings and secondary distributions of securities,
private placements and valuations for estate, corporate and other purposes.
Ontrack's board of directors selected U.S. Bancorp Piper Jaffray because of its
expertise, reputation and familiarity with the technology industry in general
and with Ontrack in particular. U.S. Bancorp Piper Jaffray acted as a financial
advisor to Ontrack in connection with its acquisition of Mijenix Corporation in
July 1999. In the ordinary course of its business, U.S. Bancorp Piper Jaffray
and its affiliates may actively trade securities of Ontrack or Legato for their
own accounts or the accounts of their customers and, accordingly, may at any
time hold a long or short position in those securities.
Under the terms of the engagement letter dated September 28, 1999, Ontrack
has agreed to pay U.S. Bancorp Piper Jaffray a fee of $350,000 for rendering
its fairness opinion. Such fee is to be credited against the financial advisory
fee and is not contingent upon completion of the transaction. Pursuant to the
terms of U.S. Bancorp Piper Jaffray's engagement letter, Ontrack agreed to pay
U.S. Bancorp Piper Jaffray a financial advisory fee equal to one and one-half
percent (1.50%) of the aggregate consideration payable in the merger up to $100
million, plus three-quarters of one percent (0.75%) of the aggregate
consideration payable in the merger in excess of $100 million, provided such
financial advisory fee shall be no less than $1.5 million in any event. Ontrack
also has agreed to reimburse U.S. Bancorp Piper Jaffray for its reasonable out-
of-pocket expenses, including fees and disbursements of counsel whether or not
a sale is consummated, and to indemnify U.S. Bancorp Piper Jaffray and related
parties against certain liabilities, including liabilities under the federal
securities laws, arising out of U.S. Bancorp Piper Jaffray's engagement.
The Agreement and Plan of Reorganization
Representations, Warranties and Covenants
The reorganization agreement contains various representations and warranties,
including representations by both Legato and Ontrack as to:
. Their organization and capitalization;
. Their authority to enter into the reorganization agreement and to
consummate the merger;
. The existence of liabilities;
. The absence of material undisclosed liabilities and changes in their
businesses; and
. The status of intellectual property, environmental matters, employee
benefit plans, litigation and compliance with laws.
Ontrack 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. Ontrack 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.
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<PAGE>
The reorganization agreement restricts Ontrack's and its subsidiaries'
ability, without Legato's prior written consent, to among other things:
. Amend its articles 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 any material contract, agreement, license or commitment
(other than in the ordinary course of business);
. Violate or amend the terms of any material contract, agreement or
license (other than in the ordinary course of business);
. 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;
. Enter into or amend any agreements granting exclusive marketing,
manufacturing or other exclusive rights to its products or technology;
. Sell, dispose of, or encumber its material assets;
. Incur or commit to indebtedness for borrowed money;
. Enter into operating leases requiring payments in excess of $100,000;
. Pay, discharge or satisfy claims, liabilities and obligations exceeding
certain amounts;
. Incur or commit to capital expenditures exceeding certain amounts;
. Reduce insurance coverage levels in material respects;
. Terminate or waive any right of substantial value;
. Increase or modify compensation or severance arrangements (other than
with respect to non-officer employees in the ordinary course of
business);
. Commence lawsuits and arbitration proceedings;
. Acquire or agree to acquire any other business or material assets;
. Make material tax elections or amend tax returns;
. Materially revalue its assets; or
. Take or agree to take in writing any of the actions described above.
No Solicitation of Transactions
Ontrack 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 by a
party other than Legato; or
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. Engage in negotiations or discussions for, or provide any non-public
information to any third party relating to, an acquisition proposal; or
. Agree to or recommend such alternative acquisition proposal.
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, Ontrack may furnish non-public information to, or enter into
discussions or negotiations with respect to a written unsolicited acquisition
proposal, so long as:
. The Ontrack 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 Ontrack signed.
Ontrack 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 Ontrack 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 manner adverse to Legato. However, the Ontrack
board of directors may recommend an unsolicited, bona fide, written acquisition
proposal to the Ontrack shareholders, 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 Ontrack 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 Ontrack board of directors determines that its fiduciary duties
under applicable law require it to take this action.
Ontrack 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.
Ontrack must keep Legato informed of the status of any acquisition related
discussions or negotiations and the terms being discussed or negotiated.
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Conditions to the Merger
Ontrack'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 Ontrack common stock;
. No temporary restraining order, preliminary or permanent injunction or
other court order preventing the consummation of the merger can be in
effect;
. 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 nor can any statute, rule, regulation or order be
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 Ontrack 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; and
. Legato 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 Ontrack common stock in the merger and
upon exercise of the options under the Ontrack stock option plans
assumed by Legato.
Ontrack'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 in all material respects on and as of the
completion of the merger.
. 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; and
. No material adverse change in the condition of Legato has occurred since
the date of the reorganization agreement.
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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 Ontrack 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 in all material respects on and as of the
completion of the merger.
. Ontrack 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 change in the condition of Ontrack has occurred
since the date of the reorganization agreement;
. Mr. Rogers, Mr. Stevens and Mr. Zahn must have entered into an
employment agreement with Legato;
. Those third parties who must consent to the merger must have provided
their consent;
. The directors of Ontrack must have resigned from the board of directors;
. Ontrack and Ms. Kronenberg shall have filed a joint election under
Section 338(h)(10) of the Internal Revenue Code with respect to
Ontrack's purchase from Ms. Kronenberg of all outstanding stock of
Mijenix Corporation; and
. Ontrack must have terminated its 401(k) plan.
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
Ontrack and Legato agree, Ontrack 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 Minnesota.
It is anticipated that, assuming all conditions are met, the merger will be
effective on approximately January 31, 2000.
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 Ontrack shareholders may not:
. Alter the amount or kind of consideration to be received in exchange for
the Ontrack common stock;
. Alter any material term of the articles 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 Ontrack
common stock.
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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 Ontrack shareholders,
. By the written mutual consent of Legato and Ontrack;
. By either Ontrack or Legato if the merger has not been consummated by
June 30, 2000;
. By either Ontrack 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 Ontrack or Legato, if at the Ontrack shareholder meeting, the
requisite vote of the shareholders of Ontrack in favor of the adoption
of the reorganization agreement has not been obtained;
. By Legato, if
(1)the Ontrack board of directors has withdrawn or modified its
recommendation of the reorganization agreement or the merger;
(2) the Ontrack 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 Ontrack board
recommendation be reaffirmed at any time following the public
announcement of another acquisition proposal;
(3) the Ontrack board of directors has recommended to the Ontrack
shareholders any transaction which could result in a party other than
Legato acquiring 15% or more of the equity or assets of Ontrack;
(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 Ontrack common stock and the Ontrack 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 Ontrack recommends rejection of that tender or exchange
offer; or
(5) Ontrack fails to call and hold the meeting of its shareholders to
approve the merger within forty-five days after Legato's registration
statement on Form S-4 is declared effective and such declaration occurs
on or before June 30, 2000; or
. By Ontrack 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.
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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 to the reorganization agreement; and
. Waive compliance with any of the agreements or conditions for its
benefit contained in the reorganization agreement.
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 Ontrack 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.
Ontrack will pay Legato a termination fee of $5,000,000 within five business
days after termination of the reorganization agreement by Legato as a result of
one of the following events:
. The Ontrack board of directors withdraws or modifies its recommendation
of the reorganization agreement or the merger;
. The Ontrack 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 Ontrack board recommendation
be reaffirmed at any time following the public announcement of an
acquisition proposal;
. The Ontrack board of directors recommends to the Ontrack shareholders
any transaction which could result in a party other than Legato
acquiring 15% or more of the equity or assets of Ontrack;
. 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 Ontrack common stock and the Ontrack 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 Ontrack board of directors recommends rejection of
that tender or exchange offer; or
. Ontrack fails to call and hold the meeting of its shareholders to
approve the merger within forty-five days after Legato's registration
statement on Form S-4 is declared effective and such declaration occurs
on or before June 30, 2000.
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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 Ontrack 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 Ontrack's articles 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 Ontrack's directors' and
officers' liability insurance policy as of the date of execution of the
reorganization agreement on terms substantially similar to those applicable to
the current directors and officers of Ontrack. In no event, however, will
Legato or the surviving corporation be required to spend more than $250,000 in
the aggregate for this coverage or the coverage that may be available for
$250,000.
Interests of Certain Persons in the Merger
In considering the recommendation of the merger by Ontrack's board of
directors, you should be aware that certain Ontrack officers and directors have
interests in the merger, including those referred to below, that presented them
with potential conflicts of interests. The Ontrack board of directors was aware
of these potential conflicts and considered them along with the other matters
described in "The Special Meeting of Ontrack Shareholders--Ontrack Board
Recommendation" on page 37 and "The Merger and Related Transactions--Reasons
for the Merger" on page 43.
Two Ontrack directors and executive officers, Messrs. Rogers and Stevens,
have agreed to vote all shares of Ontrack 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 63.
Certain options to purchase Ontrack common stock held by Ontrack directors
and executive officers will become fully exercisable and vested in connection
with the merger pursuant to the applicable employment agreements and stock
option agreements entered into by Ontrack with such individuals.
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Related Agreements
Voting and Proxy Agreements
In connection with the merger, two Ontrack shareholders, executive officers
and directors, Messrs. Rogers and Stevens, have entered into voting and proxy
agreements. They hold approximately 35% of Ontrack's outstanding common stock.
The terms of the voting and proxy agreements provide that:
. These shareholders may not transfer, sell, exchange, pledge or otherwise
dispose of or encumber their shares of Ontrack 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 shareholders will vote all shares of Ontrack 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 Messrs.
Rogers and Stevens provide to Legato the right to vote their shares on the
proposals relating to the reorganization agreement and the merger at the
meeting of Ontrack shareholders to approve the merger. 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.
Employment Agreements
Legato has or will enter into employment agreements with each of Messrs.
Zahn, Rogers and Stevens. 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 the respective employee is
terminated for any reason other than cause during the initial one-year term of
employment or resigns his position for good reason, then Legato will pay the
terminated employee his base compensation for a period of 12 months following
the termination. If Legato terminates the respective employee for cause or the
employee resigns for other than good reason, then that employee will be paid
all salary and benefits accrued through the date of termination of employment,
but nothing else.
Additionally, during the respective employee's employment with Legato and for
one year after termination of such employment, Messrs. Zahn, Rogers and Stevens
will not, directly or indirectly, solicit or attempt to solicit the employment
of any Legato employee to work for others.
Legato is also negotiating an employment agreement with Mr. Kronenberg. This
agreement is contingent upon the consummation of the merger and will become
effective, if at all, upon completion of the merger.
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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.
Each of Legato and Ontrack filed their respective notification and report
forms required under the Hart-Scott Rodino Act with the Federal Trade
Commission and the Antitrust Division on December 9, 1999. The applicable
waiting period under the Hart-Scott Rodino Act is expected to be terminated in
early January 2000. 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 Ontrack.
Based on information available to them, Legato and Ontrack 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
Ontrack 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
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, Ontrack or you and the
other Ontrack shareholders.
You should be aware that this discussion does not deal with all federal
income tax considerations that may be relevant to particular Ontrack
shareholders that are subject to special rules or that may be important in
light of such shareholders' individual circumstances, such as shareholders 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 Ontrack shares as capital assets;
. Acquired their shares in connection with the stock option or stock
purchase plans or in other compensatory transactions;
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. Hold Ontrack common stock as part of an integrated investment (including
a "straddle" or "conversion" transaction) comprised of shares of Ontrack
common stock and one or more other positions; or
. May hold Ontrack common stock subject to the constructive sale
provisions of Section 1259 of the IRS code.
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 Ontrack shares are acquired or Legato shares are disposed of; or
. Tax consequences to holders of options, warrants or similar rights to
acquire Ontrack common stock, including the assumption by Legato of
outstanding options and subscriptions to acquire Ontrack 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 Ontrack have received tax opinions (the "Exhibit Tax Opinions")
from their respective counsel, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP and Robins, Kaplan, Miller & Ciresi L.L.P., 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 Ontrack, receipt by Legato and
Ontrack of tax opinions (the "Final Tax Opinions") substantially similar to the
Exhibit Tax Opinions but based on representations of Legato, Ontrack 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 Ontrack
shareholders 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 Ontrack common
stock.
. Under Section 356(a)(1) of the IRS Code, you will recognize gain in an
amount equal to the lesser of (A) the amount of gain realized and (B)
the amount of cash received (other than cash received in lieu of
fractional shares, which is discussed below). The amount of gain
realized will generally be calculated as the amount by which the sum of
the fair market value of the Legato common stock you receive plus the
amount of cash you receive
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exceeds the tax basis of the Ontrack common stock surrendered. Any gain
that you recognize should be capital gain except in the circumstances
described in the next paragraph.
. In certain circumstances, you may be required to treat any such gain
recognized as dividend income (rather than capital gain) up to your
proportionate share of the accumulated earnings and profits of Ontrack,
if any, if the receipt of cash by you has the effect of a distribution
of a dividend under Section 302 of the IRS Code. Whether the receipt of
cash by you has the effect of a distribution of a dividend to you
depends on your particular circumstances. In particular, if the receipt
of cash is deemed to result in a meaningful reduction in your ownership
of Legato (as compared to the amount of Legato stock you would have
owned had you received solely Legato stock in the merger) and your
exercise of control over Legato (as compared to the amount of Legato
stock you would have owned had you received solely Legato stock in the
merger) then the receipt of such cash will not have the effect of a
distribution of a dividend. In this regard, the Internal Revenue Service
(the "IRS") has indicated in published rulings that a distribution that
results in an actual reduction in interest of a small, minority
shareholder in a publicly held corporation will result in a meaningful
reduction of interest and therefore not constitute a dividend if the
shareholder exercises no control with respect to corporate affairs.
Regardless of whether the receipt of cash constitutes a dividend, in the
event that it is determined that Ontrack is a "collapsible corporation"
as defined in Section 341 of the Code, then gain recognized by certain
Ontrack shareholders with respect to the receipt of cash in the merger
would be treated as ordinary income. In general, for purposes relevant
to the merger a "collapsible corporation" is a corporation that is
formed or availed of principally for the production of property with a
view to the sale or exchange of stock of the corporation by its
stockholders before the corporation has realized 2/3 of the income to be
derived from such property. While Ontrack does not believe that it
should be considered to be a "collapsible corporation," due to the
inherently subjective nature of the determination, there can be no
assurance that Ontrack would not be found to be a collapsible
corporation.
. 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
Ontrack common stock you surrendered in exchange therefor, decreased by
the amount of cash received directly from Legato (other than cash
received for a fractional share interest), and increased by the amount
of gain recognized on the exchange (including any portion that is
treated as a dividend).
. The holding period of the Legato common stock you receive in the merger
should include the period for which the surrendered Ontrack common stock
was considered to be held, provided that the Ontrack 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 then redeemed by Legato. If you
receive cash for fractional shares, you should recognize capital gain or
loss with respect to such payment measured by the difference (if any)
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between the amount of cash received and the basis in the fractional
share. The discussion above regarding the tax treatment of the $2.00 per
share in cash to be received on Ontrack shareholders also applies to the
character of the gain or loss on fractional shares.
. If you chose to exercise dissenters' rights with respect to your shares
of Ontrack common stock and you receive payment for such shares in cash,
you should generally recognize gain or loss measured by the difference
between the amount of cash received and your basis in the surrendered
shares, provided that the payment is neither a essentially equivalent to
a dividend within the meaning of Section 302 of the IRS Code nor has the
effect of a distribution of a dividend within the meaning of Section
356(a)(2) of the Code (collectively, a "Dividend Equivalent
Transaction"). A sale of Ontrack common stock pursuant to the exercise
of dissenters' rights will generally not be a Dividend Equivalent
Transaction if, as a result of such exercise, you own no shares of
Ontrack stock (either actually or constructively within the meaning of
Section 318 of the IRS Code) immediately after the merger. If, however,
your sale for cash of Ontrack common stock pursuant to the exercise of
dissenters' rights is a Dividend Equivalent Transaction, then you may
recognize ordinary income for federal income tax purposes in an amount
equal to the entire amount of cash so received.
. Neither Legato, Merger Sub nor Ontrack should recognize gain or loss
solely as a result of the merger.
Although Legato and Ontrack 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 Ontrack 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 Ontrack common stock.
Legato and Ontrack will not request a ruling from the 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
Ontrack to support the opinions, and in other documents related to
Legato, Merger Sub and Ontrack 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
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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 Ontrack shareholder has guaranteed or will guarantee any Ontrack
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 Ontrack, Legato or Merger
Sub has or will represent equity for tax purposes, (ii) no outstanding
equity of Legato, Ontrack 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 Ontrack stock or to share in the
appreciation thereof constitutes or will constitute "stock" for purposes
of Section 368(c) of the IRS code;
. After the merger, Merger Sub will hold "substantially all" of its and
Ontrack's properties within the meaning of Section 368(a)(2)(D) of the
IRS code and the regulations promulgated thereunder and will continue
Ontrack's historic business or use a significant portion of Ontrack's
historic assets in a business; and
. Legato, Ontrack 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.
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
Ontrack 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
shareholder'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
shareholder's holding period for such stock would begin the day after the
merger.
Accounting Treatment
The merger will be accounted for as a purchase business combination.
Dissenters' Appraisal Rights
Ontrack shareholders have the right to dissent from the proposed merger and,
subject to certain conditions provided for under Minnesota law, are entitled to
receive payment of the fair value of their common stock. Shareholders will be
bound by the terms of the merger unless they dissent by complying with all of
the requirements of the Minnesota Dissenters' Rights Statute. Any Ontrack
shareholder contemplating exercising the right to demand such payment should
carefully review the
68
<PAGE>
Minnesota Dissenters' Rights Statutes, which are attached as Appendix C to this
document, and in particular the procedural steps. A SHAREHOLDER WHO FAILS TO
COMPLY WITH THESE PROCEDURAL REQUIREMENTS MAY LOSE THE RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of the
Minnesota Dissenters' Rights Statute, is a summary of the procedures relating
to the exercise of dissenters' rights by Ontrack shareholders.
Any Ontrack shareholder who wishes to dissent must deliver to Ontrack, prior
to the vote on the reorganization agreement and the merger, a written notice of
intent to demand payment for such shareholder's shares if the merger is
effectuated. In addition, such shareholder must not vote their shares of
Ontrack common stock in favor of the merger. An Ontrack shareholder who fails
to deliver the notice on time or who votes in favor of the reorganization
agreement and the merger will not have any dissenters' rights. If an Ontrack
shareholder returns a signed proxy but does not specify a vote against approval
of the merger or a direction to abstain, the proxy will be voted for approval
of the merger, which will have the effect of waiving that shareholder's
dissenter's rights.
If the reorganization agreement and the merger are approved by Ontrack
shareholders, Ontrack is required to deliver a written dissenters' notice to
all Ontrack shareholders who gave timely notice of intent to demand payment and
who did not vote in favor of the reorganization agreement. The notice must (i)
state where the payment demand and certificates of certificated shares must be
sent in order to obtain payment and the date by which they must be received;
(ii) inform shareholders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received; (iii)
supply a form for demanding payment and requiring the dissenting shareholder to
certify the date on which such shareholder acquired the shares of Ontrack
common stock; and (iv) be accompanied by a copy of the Minnesota Dissenters'
Rights Statute.
A shareholder who is sent the dissenters' notice described above must demand
payment, deposit such shareholder's certificates of Ontrack common stock and
complete other information as required by such notice. A shareholder who
demands payment and deposits their certificates of Ontrack common stock as
requested by the dissenters' notice retains all other rights of a Ontrack
shareholder until such rights are canceled by the consummation of the merger.
Ontrack may restrict the transfer of uncertificated shares from the date of the
demand for payment until the merger is consummated; however, the holder of
uncertificated shares retains all other rights of a shareholder until those
rights are canceled by the consummation of the merger.
Except for shares of Ontrack common stock acquired by a dissenter after the
date of the first announcement to the public of the merger, upon the
consummation of the merger or upon receipt of the payment demand (whichever is
later), Ontrack must pay each dissenter who complies with the foregoing
requirements the amount Ontrack estimates to be the fair value of the
dissenter's shares of Ontrack common stock plus accrued interest. The payment
must be accompanied by certain financial information concerning Ontrack, a
statement of Ontrack's estimate of the fair value of the shares, an explanation
of the method used to reach the estimate, a brief description of the procedure
to be followed to demand supplemental payment and a copy of the Minnesota
Dissenters' Rights Statute.
A dissenter may notify Ontrack in writing of the dissenter's own estimate of
the fair value of the dissenter's shares and the amount of interest due, if
different from Ontrack's estimate, and may
69
<PAGE>
demand payment of the dissenter's estimate, by following the procedures set
forth in the Minnesota Dissenters' Rights Statute.
Any Ontrack shareholder contemplating the exercise of dissenters' rights is
urged to review the full text of the Minnesota Dissenters' Rights Statute.
Resale of Legato Common Stock
The Legato common stock to be issued in connection with the merger will be
freely transferable, except that shares issued to any Ontrack shareholder or
optionholder who is an affiliate of Ontrack or who becomes an affiliate of
Ontrack are subject to restrictions on resale. An affiliate is defined
generally as including, without limitation, directors, executive officers and
other persons who control a company. Shareholders of Ontrack who may be deemed
to be affiliates are prohibited from selling, transferring or otherwise
disposing their Ontrack common stock or Legato common stock received by
shareholders in the merger, except in compliance with the requirements of
federal securities laws.
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 Ontrack
accounted for as a business purchase combination. The pro forma combined
condensed statements of operations assume the merger occurred at the beginning
of the earliest year presented.
Legato and Ontrack estimate that they will incur direct transaction costs of
approximately $4,110,000 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 included in
the purchase price and capitalized upon consummation of the merger. There can
be no assurance that Legato and Ontrack 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 share information presented reflects Legato's two-for-one stock split (in
the form of a dividend) effected on August 13, 1999.
On April 1, 1999, Legato completed the acquisition of Intelliguard Software,
Inc. and O.R.P., Inc., developers of standards-based storage management
solutions for storage area networks. In this document, we refer to Intelliguard
Software, Inc. and O.R.P., Inc. collectively as "Intelliguard." Legato issued
1,440,000 shares of its common stock and provided cash consideration of
$9,022,000 for all of the outstanding stock and stock rights of Intelliguard.
Legato accounted for the transaction as a purchase business combination.
Accordingly, Intelliguard's results of operations are included in Legato's
historical results of operations for the period beginning from the date of
consummation of the acquisition.
On April 19, 1999, Legato completed the merger of Qualix Group, Inc., dba
FullTime Software, Inc. ("FullTime"), a developer of distributed, enterprise-
wide, cross-platform, adaptive computing solutions that enable customers to
proactively manage application service level availability into a wholly-owned
subsidiary of Legato. Legato issued 3,442,000 shares of its common stock in
exchange for all the common stock and options of Qualix Group, Inc. Legato
accounted for the transaction as a pooling-of-interests. Accordingly, all of
Legato's financial information has been restated to include FullTime's results
of operations.
On July 30, 1999, Legato completed the acquisition of Vinca Corporation
("Vinca"), a developer of high availability and data protection software.
Legato issued 1,530,732 shares of its common stock, exchanged options to
purchase 589,580 shares of Legato's common stock for all vested and unvested
outstanding Vinca options and provided cash consideration of $18,800,000 in
exchange for all the common stock and options of Vinca. Legato accounted for
the transaction as a purchase business combination. Accordingly, Vinca's
results of operations are included in Legato's historical results of operations
for the period beginning from the date of consummation of the acquisition.
In July 1999, Ontrack completed the acquisition of Mijenix Corporation.
Ontrack accounted for the transaction as a purchase business combination.
Accordingly, Mijenix's results of operations are
71
<PAGE>
included in Ontrack's historical results of operations for the period
beginning from the date of acquisition. Mijenix did not meet the definition of
a significant subsidiary and therefore has not been included in the following
unaudited pro forma combined condensed consolidated financial statements.
The unaudited condensed combined balance sheet of Legato gives effect to the
Ontrack transaction as if it had been consummated as of September 30, 1999.
The unaudited pro forma combined condensed balance sheet of Legato combines
the unaudited historical condensed balance sheets of Legato and Ontrack as of
September 30, 1999.
The unaudited pro forma combined condensed statements of operations of
Legato give effect to the transactions as if they had been consummated at the
beginning of each period presented. The unaudited pro forma combined statement
of operations of Legato for the nine-months ended September 30, 1999 combines
the unaudited historical statement of operations of Legato for the nine-months
ended September 30, 1999 which includes the results of operations of
Intelliguard and Vinca for the six-months and two-months ended September 30,
1999, respectively, the unaudited historical statement of operations of
Intelliguard for the three-month period ended April 1, 1999, the unaudited
condensed statement of operations of Vinca for the seven-month period ended
July 30, 1999 and the unaudited condensed statement of operations of Ontrack
for the nine-month period ended September 30, 1999. The unaudited pro forma
combined statement of operations of Legato for the year ended December 31,
1998 combines audited historical statements of operations of Legato,
Intelliguard, Vinca and Ontrack for the year ended December 31, 1998.
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. The pro forma adjustments are based
upon information and assumptions available at the time of the filing of this
document. The pro forma information should be read in conjunction with the
accompanying notes thereto and with the historical financial statements and
related notes thereto in Legato's Form 10K/A, Amendment No. 2, filed in
December 1999, Intelliguard's 1998 audited combined financial statements and
related notes in Legato's Form 8-K/A, filed in May 1999, Vinca's 1998 audited
financial statements and related notes in Legato's Form 8-K/A filed in October
1999, all incorporated by reference herewith and Ontrack's Consolidated
Financial Statements included elsewhere in this document.
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<PAGE>
LEGATO SYSTEMS, INC. AND ONTRACK DATA INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Legato Ontrack Adjustments Combined
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 97,319 $11,733 $(19,920)(1) $ 89,132
Short-term investments............ 37,127 15,402 52,529
Accounts receivable, net.......... 62,087 5,753 67,840
Other current assets.............. 17,752 1,260 19,012
Deferred tax asset................ 10,740 778 11,518
-------- ------- -------- --------
Total current assets............ 225,025 34,926 (19,920) 240,031
Long-term investments............... 10,278 3,502 13,780
Property and equipment, net......... 23,895 6,232 30,127
Intangible assets, net.............. 151,620 8,279 (8,279)(2) 274,060
102,052 (2)
Other assets........................ 2,253 263 20,388 (2) 2,516
-------- ------- -------- --------
Total assets.................... $413,071 $53,202 $ 94,241 $560,514
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................. $ 2,935 $ 2,880 $ $ 5,815
Accrued liabilities............... 16,627 2,368 4,110 (3) 23,105
Deferred revenues................. 33,859 460 34,319
-------- ------- -------- --------
Total current liabilities....... 53,421 5,708 4,110 63,239
Deferred tax liability.............. 25,518 -- 20,388 (2) 45,906
Stockholders' equity:
Capital stock..................... 274,696 30,399 91,207 (4) 396,302
Retained earnings................. 59,436 17,095 (17,095)(5) 55,067
(4,369)(5)
-------- ------- -------- --------
Total stockholders' equity...... 334,132 47,494 69,743 451,369
-------- ------- -------- --------
Total liabilities and stockholders'
equity............................. $413,071 $53,202 $ 94,241 $560,514
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
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<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION AND
ONTRACK DATA INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE-MONTHS ENDED SEPTEMBER 30, 1999
(amount in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Legato Intelliguard Vinca Ontrack Adjustments Combined
-------- ------------ ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product and other...... $138,306 $ 1,359 $ 7,411 $ 5,042 $ (1,145)(6) $150,973
Service and support.... 47,741 835 1,379 24,480 -- 74,435
-------- ------- ------- ------- -------- --------
Total revenue.......... 186,047 2,194 8,790 29,522 (1,145) 225,408
Cost of revenue:
Product and other...... 4,363 35 296 939 -- 5,633
Service and support.... 17,980 188 463 6,264 -- 24,895
-------- ------- ------- ------- -------- --------
Total cost of revenue.. 22,343 223 759 7,203 -- 30,528
-------- ------- ------- ------- -------- --------
Gross profit............ 163,704 1,971 8,031 22,319 (1,145) 194,880
Operating expenses:
Research and
development........... 27,414 858 2,934 4,914 -- 36,120
Sales and marketing.... 66,317 2,332 5,358 7,135 -- 81,142
General and
administrative........ 14,637 452 3,975 5,398 -- 24,462
Amortization of
intangibles........... 12,162 -- -- 357 39,498 (7) 52,017
Purchased in-process
research and
development........... 11,470 (11,470)(10) --
Merger expenses........ 4,968 -- -- -- (4,968)(10) --
-------- ------- ------- ------- -------- --------
Total operating
expenses.............. 136,968 3,642 12,267 17,804 23,060 193,741
-------- ------- ------- ------- -------- --------
Income from operations.. 26,736 (1,671) (4,236) 4,515 (24,205) 1,139
Other income (expense),
net.................... 3,877 32 116 823 -- 4,848
-------- ------- ------- ------- -------- --------
Income before provision
for income taxes....... 30,613 (1,639) (4,120) 5,338 (24,205) 5,987
Provision for (benefit
from) income taxes..... 14,541 -- (732) 1,773 (10,327)(8) 5,255
-------- ------- ------- ------- -------- --------
Net income.............. $ 16,072 $(1,639) $(3,388) $ 3,565 $(13,878) $ 732
======== ======= ======= ======= ======== ========
Basic earnings per
share.................. $ 0.19 $ 0.36 $ 0.01
======== ======= ========
Diluted earnings per
share.................. $ 0.18 $ 0.36 $ 0.01
======== ======= ========
Shares used in basic
earnings per share
calculations........... 81,353 9,774 (6,618) 84,509
======== ======= ======== ========
Shares used in diluted
earnings calculations.. 87,802 9,810 (6,654) 90,958
======== ======= ======== ========
</TABLE>
See notes to unaudited proforma combined condensed financial statements.
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<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION AND
ONTRACK DATA INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(amount in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Legato Intelliguard Vinca Ontrack Adjustments Combined
-------- ------------ ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product and other...... $129,133 $ 6,947 $17,198 $ 6,636 $ (251)(6) $159,663
Service and support.... 38,774 3,306 1,303 29,205 -- 72,588
-------- ------- ------- ------- -------- --------
Total revenue......... 167,907 10,253 18,501 35,841 (251) 232,251
Cost of revenue:
Product and other...... 9,696 301 193 1,265 -- 11,455
Service and support.... 15,097 905 356 6,064 -- 22,422
-------- ------- ------- ------- -------- --------
Total cost of
revenue.............. 24,793 1,206 549 7,329 -- 33,877
-------- ------- ------- ------- -------- --------
Gross profit............ 143,114 9,047 17,952 28,512 (251) 198,374
Operating expenses:
Research and
development........... 25,645 3,509 2,568 6,499 -- 38,221
Sales and marketing.... 72,017 8,605 8,140 9,023 -- 97,785
General and
administrative........ 15,874 1,735 2,575 7,009 -- 27,193
Amortization of
intangibles........... 1,118 -- -- -- 68,216 (7) 69,334
Merger expenses........ 645 -- -- -- (645)(10) --
-------- ------- ------- ------- -------- --------
Total operating
expenses............. 115,299 13,849 13,283 22,531 67,571 232,533
-------- ------- ------- ------- -------- --------
Income (loss) from
operations............. 27,815 (4,802) 4,669 5,981 (67,822) (34,159)
Other income (expense),
net.................... 4,799 (163) 142 1,523 -- 6,301
-------- ------- ------- ------- -------- --------
Income (loss) before
provision for income
taxes.................. 32,614 (4,965) 4,811 7,504 (67,822) (27,858)
Provision for (benefit
from) income taxes..... 12,745 -- (803) 2,306 (16,807)(8) (2,559)
-------- ------- ------- ------- -------- --------
Net income (loss)....... $ 19,869 $(4,965) $ 5,614 $ 5,198 $(51,015) $(25,299)
-------- ------- ------- ------- -------- --------
Basic earnings (loss)
per share.............. $ 0.26 $ 0.53 $ (0.31)
======== ======= ========
Diluted earnings (loss)
per share.............. $ 0.24 $ 0.52 $ (0.31)
======== ======= ========
Shares used in basic
earnings (loss) per
share calculations..... 76,762 9,860 (5,404) 81,218
======== ======= ======== ========
Shares used in diluted
(loss) earnings per
share calculations..... 83,074 10,020 (11,876)(9) 81,218
======== ======= ======== ========
</TABLE>
See notes to unaudited proforma combined condensed financial statements.
75
<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION AND
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma combined condensed financial statements of Legato
have been prepared on the basis of assumptions relating to the allocation of
the amount of consideration paid to the assets and liabilities of Ontrack based
on preliminary estimates. The actual allocation of the amount of such
consideration may differ from that reflected in these unaudited pro forma
combined condensed financial statements after valuations and other procedures
have been completed. Below is a table of the estimated acquisition cost,
estimated purchase price allocation and estimated amortization of intangible
assets as of September 30, 1999 and January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999:
-------------------
<S> <C>
Estimated acquisition price:
Value of securities issued....................................... $121,606
Cash consideration paid.......................................... 19,920
Acquisition costs................................................ 4,110
--------
Total acquisition costs.......................................... 145,636
Deferred tax liability........................................... 20,388
--------
Total............................................................ $166,024
========
Estimated purchase price allocation:
Tangible net assets acquired..................................... $ 39,215
Goodwill and intangible assets................................... 122,440
In-process research and development.............................. 4,369
--------
Total............................................................ $166,024
========
Estimated amortization
(based on amortization period of five years)
Annual........................................................... $ 31,284
========
</TABLE>
<TABLE>
<CAPTION>
January 1, 1998:
----------------
<S> <C>
Estimated acquisition price:
Value of securities issued....................................... $121,606
Cash consideration paid.......................................... 19,920
Acquisition costs................................................ 4,110
--------
Total acquisition costs.......................................... 145,636
Deferred tax liability........................................... 20,388
--------
Total............................................................ $166,024
========
Estimated purchase price allocation:
Tangible net assets acquired..................................... $ 39,331
Goodwill and intangible assets................................... 122,324
In-process research and development.............................. 4,869
--------
Total............................................................ $166,024
========
Estimated amortization
(based on amortization period of five years)
Annual........................................................... $ 31,248
========
</TABLE>
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<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION
AND ONTRACK DATA INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
The tangible net assets acquired from Ontrack include cash, accounts
receivable, other current assets and property and equipment. Liabilities
assumed include accounts payable and other accrued liabilities.
The amount allocated to the in-process research and development represents
the estimated purchased in-process technology for projects that had not yet
reached technological feasibility and have no alternative future use.
The amount ultimately allocated to those projects identified as in-process
research and development of Ontrack will be charged to the income statement in
the period the valuation analysis is completed after the consummation of the
acquisition. Such charges related to in-process research and development have
not been included in the Legato unaudited pro forma combined condensed
statement of operations since they are non-recurring in nature. However, the
charges have been reflected in the Legato unaudited pro forma combined
condensed balance sheet.
2. UNAUDITED PRO FORMA COMBINED EARNINGS (LOSS) PER SHARE
The share information presented reflects Legato's two-for-one stock split (in
the form of a dividend) effected August 13, 1999. The unaudited pro forma
combined earnings (loss) per share is based on the weighted average number of
common and common equivalent shares of Legato, 1,440,000 shares issued to
Intelliguard shareholders, 1,530,732 shares issued to Vinca shareholders, and
an estimated 1,485,022 shares to be issued to Ontrack shareholders for the
nine-month period ended September 30, 1999 and the year ended December 31,
1998. The dilutive effect of stock options has been included in the unaudited
pro forma combined condensed statement of operations for the nine months ended
September 30, 1999 and excluded in the year ended December 31, 1998.
77
<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION,
AND ONTRACK DATA INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
The pro forma combined basic and diluted earnings per share information was
determined as follows for the nine-months ended September 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
Basic Diluted
------ -------
<S> <C> <C>
Legato shares used for earnings per share calculation.......... 81,353 87,802
Adjustment to give full period effect of Legato shares issued
for the acquisition of Intelliguard........................... 480 480
Adjustment to give full period effect of Legato shares issued
for the acquisition of Vinca.................................. 1,191 1,191
Legato shares issued for the acquisition of Ontrack............ 1,485 1,485
------ ------
Pro forma combined Legato shares used for loss per share
calculation................................................... 84,509 90,958
====== ======
The pro forma combined basic and diluted loss per share information was
determined as follows for the year ended December 31, 1998 (in thousands):
Legato shares used for earnings per share calculation.......... 76,762
Legato shares issued for the acquisition of Intelliguard....... 1,440
Legato shares issued for the acquisition of Vinca.............. 1,531
Legato shares issued for the acquisition of Ontrack............ 1,485
------
Pro forma combined Legato shares used for loss per share
calculation................................................... 81,218
======
</TABLE>
3. PRO FORMA UNAUDITED COMBINED SHARES OUTSTANDING
These unaudited pro forma combined condensed financial statements reflect the
issuance of 1,485,022 shares of Legato common stock in exchange for the all of
the outstanding shares of common stock of Ontrack as of September 30, 1999.
The following table details the pro forma share issuance in connection with
the acquisition as of September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Number of shares of Legato common stock issued for Ontrack
net tangible assets......................................... 1,485,022
Number of shares of Legato common stock outstanding as of
September 30, 1999.......................................... 84,981,147
----------
Number of Legato common shares outstanding after the
completion of acquisition................................... 86,466,169
==========
</TABLE>
78
<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION,
AND ONTRACK DATA INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
4. PRO FORMA ADJUSTMENTS
The unaudited pro forma combined condensed financial statements of Legato
give effect to the following pro forma adjustments:
(1) To reflect the cash consideration paid for the acquisition of
Ontrack.
(2) To reflect elimination of Ontrack's goodwill and intangible assets
and record goodwill and intangible assets resulting from the allocation of
the total amount of the consideration paid for the pending Ontrack
acquisition prior to recording the deferred tax liability resulting from
the acquisition.
The $20.4 million recorded reflects an additional amount recorded to
goodwill for the deferred tax liability attributed to the Ontrack
acquisition since the amortization of goodwill related to the acquisition
is not deductible for income tax purposes. The amount was determined based
on applying the statutory income tax rate of 40% to the intangible assets
recorded from the acquisition.
(3) To reflect the accrual of direct costs arising from the pending
acquisition of Ontrack, estimated at approximately $4,110,000 consisting
primarily of investment banking, legal, accounting and filing fees.
(4) To reflect the elimination of Ontrack additional paid in capital of
$30.4 million and the issuance of Legato common stock and options to
purchase common stock with the value of $121.6 million in connection with
Legato's proposed acquisition of Ontrack.
(5) To reflect the elimination of Ontrack's retained earnings of $17.1
million and estimated write-off of in-process research and development
costs of $4.4 million. The estimated charges related to in-process research
and development have not been included in the Legato unaudited pro forma
combined condensed statement of operations since they are non-recurring in
nature. However, the charges have been reflected in the Legato unaudited
pro forma combined condensed balance sheet.
(6) To reflect the elimination of Vinca's revenue relating to product
revenue recognized from sales into the distributor channel as Legato does
not recognize product revenue until products are sold to the end-user.
(7) To reflect the amortization of goodwill and intangibles related to
the acquisitions of Vinca and Intelliguard and proposed acquisition of
Ontrack. Amortization related to the Vinca and Intelliguard acquisitions
and proposed Ontrack acquisition are approximately $16.1 million, $11.6
million, and $23.5 million respectively, for the nine-months ended
September 30, 1999, and $21.4 million, $15.6 million and $31.2 million,
respectively for the year ended December 31, 1998.
79
<PAGE>
LEGATO SYSTEMS, INC., INTELLIGUARD SOFTWARE, INC., VINCA CORPORATION
AND ONTRACK DATA INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
Legato's statement of operations for the nine-month period ended
September 30, 1999 includes $7.8 million of intangible amortization related
to the Intelliguard acquisition completed in April 1999 and $3.6 million of
intangible amortization related to the Vinca acquisition completed in July
1999.
(8) Pro forma adjustments have been made to account for the operating
losses of Intelliguard and Vinca and the tax benefit received from the
amortization of goodwill and intangible assets from the acquisition of
Intelliguard, amortization of intangible assets from the acquisitions of
Vinca and Ontrack, in the pro forma combined condensed statement of
operations by decreasing income tax expense by $10.3 million and $16.8
million at a statutory tax rate of 40% for the nine-months ended September
30, 1999 and the year ended December 31, 1998, respectively.
Amortization of goodwill relating to the Vinca acquisition and proposed
Ontrack acquisition is not deductible for income tax purposes. Therefore,
no tax benefit from the amortization of goodwill for the acquisitions of
Vinca and Ontrack is reflected in the unaudited pro forma combined
condensed statement of operations herewith.
(9) To reflect anti-dilutive effect of stock options as the unaudited pro
forma combined condensed statement of operations results in a net loss for
the year ended December 31, 1998 and to reflect the elimination of
Ontrack's shares.
(10) Charge for the write-off of purchase in-process research and
development costs and merger-related expenses are non-recurring in nature.
Therefore, the amounts are eliminated from the unaudited pro forma combined
condensed statement of operations.
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BUSINESS OF ONTRACK
Overview of Business
Ontrack provides a wide range of computer services and software products that
enable users to maintain constant access to their critical data and permit fast
recovery from system failure.
Ontrack's principal business is data recovery. Ontrack can recover lost or
corrupted data from nearly all operating systems and types of storage devices,
using thousands of proprietary tools and techniques. Ontrack performs data
recoveries for Fortune 500 corporations, governmental agencies, educational and
financial institutions, small businesses and individuals. Ontrack can perform
remote data recovery via a modem and internet in many cases. In other cases,
customers ship disk drives or other storage media to Ontrack for data recovery.
Ontrack also offers a do-it-yourself data recovery software product and other
data access and protection software. Ontrack believes it is the only company in
the world offering this complete range of data recovery products and services.
Ontrack also offers services in related areas such as computer evidence
services for both civil and criminal cases. Ontrack's data recovery services
revenues represented approximately 81% of total revenues in 1998, with software
revenues representing the balance.
Ontrack also offers proactive solutions to help prevent system failures and
enable users to maintain access to data. In the past twelve months, Ontrack has
developed or acquired technology that lets it offer a comprehensive single
source solution for client and laptop data access and recovery:
. Ontrack acquired Mijenix Corporation in July 1999. This lets Ontrack
offer proactive software tools and diagnostics to help customers avoid
system failure. Mijenix has developed several software products that
enhance the use of Windows-based personal computer systems, including
ZipMagic 2000 and FreeSpace compression tools, Fix-It Utilities 2000,
and Ontrack SystemSuite 2000, a general purpose utility for Windows 95,
98 and NT operating systems. Mijenix also recently released a software
update management tool called EasyUpdate. Mijenix had $4 million in
revenues in 1998.
. Ontrack acquired the Tiramisu product line in December 1998 from the
German company Plug'n Play Computerberatung GbR and in 1999, re-named it
EasyRecovery. EasyRecovery is a do-it-yourself data recovery software
product. Ontrack sells EasyRecovery primarily over the Internet.
EasyRecovery is effective in cases where the lost data is relatively
easy to recover and does not require the expertise of a data recovery
engineer. Ontrack is expanding promotion of the software and integrating
the product line into its wide array of data recovery solutions.
Ontrack also continues to market Disk Manager, its first software product.
Disk Manager is a hard disk drive installation and partitioning utility for
personal computers. The product facilitates the process of installing
replacement or upgrade hard disk drives on personal computers. It also
optimizes storage capacity on hard disk drives. Ontrack generally sells Disk
Manager through hard disk drive manufacturers on an original equipment
manufacturer (OEM) basis.
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Ontrack was incorporated in 1985 under the laws of the State of Minnesota.
Ontrack's main office is located at 9023 Columbine Drive, Eden Prairie,
Minnesota 55347, and its telephone number is (612) 937-1107.
Background of Data Recovery Business
The amount of data stored in hard disk drives, floppy disks, CD-ROMs,
magnetic tape and other types of storage media has been growing rapidly over
the past several years. The growth in stored data has been fueled in part by
the rapid expansion of the installed base of personal computers, midrange
computers, servers and mainframes. With this proliferation of storage capacity
has come an increased dependence on fast and reliable access to stored data in
both the office and the home. Much of the stored data is essential, and
sometimes mission-critical, to the user or the user's organization.
Data can often become inaccessible to the user as a result of a wide variety
of either hardware or software failures. Hardware failures involve physical
damage to the mechanism that retrieves the data or to the storage media itself,
including wear, aging, physical abuse, vandalism or environmental hazards.
Software failures involve corruption of the software file structure that makes
the data inaccessible, including user errors, improper or incompatible software
installation or computer viruses. In both types of failures, the data often
still exists on the storage media but cannot be retrieved by the user.
In an effort to prevent data loss, users may pursue one or more protective
measures. The most common method is to automatically or manually back up data
on a routine basis for onsite or offsite storage. Backup systems and other data
protection methods have become faster, more effective and more sophisticated in
recent years, and computer users have invested heavily in faster drives and
storage systems in an attempt to prevent data loss. Now many backup systems,
such as disk array (RAID) systems, involve distribution of data across
corporate networks to minimize loss in case of a hardware or software failure.
Other methods of protecting data include securing access to computer equipment,
implementing anti-virus procedures, and developing disaster recovery plans for
floods, fires and other natural disasters. All of these methods may be helpful
in reducing the likelihood of data loss in certain instances, and the use and
effectiveness of these methods is likely to increase in future years. However,
these methods are not used by all computer users, and they have not been able
to prevent a wide variety of data loss situations from occurring and may not
represent a cost-effective alternative.
When users experience data loss, they generally first determine whether a
backup has been made and, if so, whether it is current, easily accessible and
functional. If not, the users will seek assistance from the nearest perceived
computer expert, which may include an MIS department or other corporate
personnel, a local computer store or a third party computer maintenance
provider. In many cases, these people do not have the specialized training,
software or equipment necessary to recover lost data, and their attempts to
recover the data can actually exacerbate the data loss and hinder the data
recovery. If these recovery efforts are unsuccessful, users are often informed
or conclude that the data loss is "terminal" and that the data is not
recoverable. In many cases, however, the lost data can be recovered by a
properly trained and equipped data recovery specialist.
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Data Recovery Services and Products
Ontrack provides data recovery services and products to address a wide
variety of data loss situations. Ontrack has the ability to recover data stored
in nearly all types of storage media and operating systems, regardless of the
sophistication or age of the storage media or the operating system.
Customers worldwide can call Ontrack's customer service representatives to
report a data loss. The customer service representative discusses the data loss
situation with the customer and describes the availability of EasyRecovery
software and Ontrack's service options, including an estimated cost range. In
most cases, the customer ships the hard disk drive or other storage media by
overnight courier to one of Ontrack's facilities. Remote Data Recovery and
onsite service options are also available. Ontrack's data recovery engineers
perform a thorough diagnostic evaluation to determine the nature and cause of
the data loss, the quantity of data that can be recovered, and the prescribed
course of data recovery. If the specified data cannot be recovered, Ontrack
returns the storage media to the customer. If the specified data is
recoverable, the sales representative quotes a specific price. If the customer
elects to proceed, Ontrack performs the recovery using one or more of Ontrack's
data recovery tools. These tools include numerous proprietary software programs
and specialized devices, fixtures and other equipment. Ontrack stores the
recovered data on the medium of the customer's choice, returns the data along
with the customer's original equipment and invoices the customer.
Ontrack acquired the Tiramisu product line in December 1998 from the German
company Plug'n Play Computerberatung GbR. In 1999, the product was re-named
EasyRecovery. EasyRecovery is sold primarily over the Internet. Ontrack has
expanded promotion of the software and has integrated the product line into its
wide array of data recovery solutions. EasyRecovery is effective in cases where
the lost data is relatively easy to recover and does not require the expertise
of a data recovery engineer. EasyRecovery provides risk-free reconstruction of
data in many cases where the recovery requires rebuilding system software to
access the data.
Ontrack also offers services in related areas such as computer evidence
services (CES) where Ontrack specializes in recovering and analyzing electronic
documents and e-mail as critical evidence stored on a variety of computer
platforms including corporate network, back-up and mainframe systems. CES
provides the tools and techniques needed to identify and produce evidence for
legal purposes while protecting confidential information.
Commercial Software Products
Ontrack offers a range of software products that allow users to protect their
computer equipment in a variety of circumstances.
Retail Products
Ontrack SystemSuite is a suite of integrated utility products that supports
Windows 95, 98, NT and 2000 operating systems and is designed to keep PC
systems operating at peak performance. It includes some or all of the
functionality found in the EasyUninstall, Fix It Utilities and Zip Magic
products.
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EasyUninstall is a software utility program that assists users in removing
unwanted personal computer files and programs.
Fix-It Utilities is a software utility program for Windows 95/98 and Windows
NT that defragments disks, recovers deleted files, cleans and optimizes the
Windows registry, provides system monitoring and includes other system
administration functionality.
ZipMagic is a software program that provides a patented method for viewing
and handling compressed files. The ZipMagic 2000 version of the product
includes the capability to stop and resume Internet downloads, a DOS command
line version, the ability to split self-extracting zip files into predetermined
sizes, and anti-virus program support.
Corporate/Other Products
Disk Manager DiskGo! is a software utility that assists users in the
installation of hard disk drives.
EasyUpdate is an Internet software development kit (SDK) for Windows 95/98
and Windows NT that allows software and hardware vendors to create an automatic
"product updater" for end users to get software patches and drivers through an
ftp or http connection.
Data Advisor is a self-booting software diagnostic utility that assists users
in determining what is preventing access to their data. The utility scans
systems for memory errors and a wide variety of disk corruptions that can lead
to data loss.
Ontrack Y2K Advisor is a software utility that assists users in assessing
whether a computer's Basic Input/Output System (BIOS) firmware and Real-Time
Clock (RTC) will properly roll over to the year 2000.
EasyRecovery is a software product that can recover files from a variety of
hard disk problems, including corrupt FAT tables, inaccessible partitions,
virus attacks, and accidental reformatting. EasyRecovery scans a drive and
rebuilds the file table in memory to facilitate the safe transfer of data to
another device.
Research and Development
Ontrack's staff of 65 software developers continually develops and updates
Ontrack's data recovery tools and commercial software products. In addition, in
the performance of data recovery services, Ontrack's data recovery engineers
collaborate with the software developers in creating new tools and procedures.
Ontrack will devote additional software development resources to developing new
software products related to the data recovery and protection business.
Sales and Marketing
Ontrack has historically generated a large proportion of its data recovery
services revenue as a result of general name recognition, referrals from
existing customers and disk drive manufacturers and advertising. Ontrack
believes it must expand and change its marketing efforts to achieve growth in
the data recovery business. Ontrack continues to develop and support its Web
site and will focus on Internet-related marketing. The EasyRecovery software
product is principally marketed over the Internet and Ontrack plans to develop
further products that will serve the needs of a range of potential customers
visiting the Web site.
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Ontrack has dedicated sales and marketing resources to obtain relationships
with other computer service companies which would offer Ontrack's data recovery
services to their customers as part of their service offerings. In addition,
Ontrack advertises its services and products through direct mail, periodicals
and trade journals and participates in selected industry trade shows.
Ontrack markets its retail software products through its sales force, which
deals principally with distributors who then sell Ontrack products into the
retail channels. Ontrack markets Disk Manager and other commercial software
products through its sales force, which attempts to maintain and expand
relationships with hard disk drive manufacturers and other corporate partners
for sales on an OEM basis.
Customers
Ontrack provides data recovery services to a broad range of customers,
including Fortune 500 companies, governmental agencies, educational and
financial institutions, as well as small businesses and individuals. Ontrack
believes a greater proportion of its sales will come from small businesses and
individuals as it increases its focus on sales of do-it-yourself software and
remote data recovery.
Ontrack's retail software products are sold to third party distributors who
then resell the products into retail stores. Disk Manager is sold principally
on an OEM basis to hard disk drive manufacturers. Historically sales of
software products to individual OEMs have varied from period to period and
there can be no assurance that such deviations will not continue.
No single customer accounted for 10% or more of Ontrack's revenues in 1996,
1997 or 1998.
Competition
The data recovery market is currently served by a large number of relatively
small, independent service providers. Competition among these firms is intense
and barriers to entry are low for competitors seeking to offer data recovery
services. A large number of new, relatively small, data recovery companies have
entered the marketplace in recent years. Ontrack believes that the primary
competitive factors in the data recovery business are name recognition, the
effectiveness of the data recovery services, the ability to operate within a
large number of operating environments with a variety of storage media, the
timeliness of the services, the number of emergency and custom services
provided, and cost. Ontrack believes that its broad product and service line,
its experience with data storage, its substantial investment in personnel, its
data recovery tools and its remote data recovery capabilities provides it with
a significant competitive advantage.
The computer software industry is highly competitive and characterized by
significant and rapid technological advances. Ontrack's retail software
products compete with products offered by much larger companies such as Network
Associates and Symantec. These competitors have greater economic resources and
more name and brand recognition than Ontrack and there can be no guarantee that
Ontrack's products will compete successfully in the future. Ontrack currently
sells the vast majority of its Disk Manager software to hard disk drive
manufacturers on an OEM basis, and there is no assurance that any such
relationships will continue. Developers of competing software may offer their
products to the OEMs at prices lower than those of Ontrack's products. This
price
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competition may cause Ontrack to lose OEM customers or may force Ontrack to
lower its prices, which may have a material adverse effect on software revenues
and margins. In addition, as higher capacity drives and improved operating
systems are designed and marketed, Ontrack must continue to develop and market
enhanced versions of its products to complement the new technologies.
Proprietary Technology
Ontrack currently relies on a combination of copyright, trademark and trade
secret laws, non-disclosure agreements and other methods to protect its
proprietary technology. In addition, Ontrack has applied for patents in the
United States and certain other countries relating to technology used in Remote
Data Recovery. In July 1998, Ontrack also filed a U.S. patent application
covering technology for remote virus scanning and repair. There can be no
assurance that any meaningful patent protection will result from these patent
applications and/or that systems or methods disclosed in the patent
applications do not infringe any third party patents or copyrights. There can
be no assurance that any future patents acquired by Ontrack will be of
sufficient scope or strength to provide meaningful protection of its products
and technologies. In addition, Ontrack's proprietary technology involves the
use of copyrightable material such as computer software. Existing copyright
laws afford only limited protection, and it may be possible for unauthorized
third parties to copy Ontrack's products and processes or to reverse engineer
or obtain and use information that Ontrack regards as proprietary. Ontrack also
relies on proprietary processes and techniques, materials expertise and trade
secrets applicable to the computer data recovery industry. Ontrack believes
that these proprietary rights may provide it with a competitive advantage as
important, if not more important, to Ontrack as patent protection. There can be
no assurance that protective measures taken by Ontrack will provide Ontrack
with adequate protection of its proprietary information or with adequate
remedies in the event of unauthorized use or disclosure.
Company Offices
Ontrack's main office is in Eden Prairie, Minnesota. In addition, Ontrack has
offices in Los Angeles, California, Washington, D.C., Boulder, Colorado, New
York, London, England, Stuttgart, Germany, and Paris, France. Each of Ontrack's
facilities has stand alone data recovery capabilities, except for the Boulder,
Colorado, office and the Paris office, which is strictly a sales office.
Ontrack also offers data recovery, data conversion and consulting services in
Tokyo, Japan through a licensing arrangement with Y-E Data, a subsidiary of
Yaskawa Electric, Inc., a major technology company.
Employees
As of December 1, 1999, Ontrack had a total of 337 full time employees,
including 96 in data recovery engineering, 65 in software development, 91 in
sales and marketing, 18 in customer support and 67 in administration and
finance. None of Ontrack's employees are represented by a labor union or are
subject to a collective bargaining agreement. Ontrack has never experienced a
work stoppage and believes its employee relations are good.
The success of Ontrack depends in large part upon the ability of Ontrack to
recruit and retain qualified employees, particularly highly skilled engineers.
The competition for such personnel is intense. There can be no assurance that
Ontrack will be successful in retaining or recruiting key personnel.
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Properties
Ontrack maintains its headquarters in Eden Prairie, Minnesota, in
approximately 62,200 square-foot leased facilities, expiring in August 2009.
Ontrack also leases approximately 7,200 square feet of space in Los Angeles
under a lease expiring in July 2001; approximately 7,800 square feet of space
in Washington, D.C. under a lease that expires in June 2003; approximately
6,000 square feet of space in the New York metropolitan area under a lease
which expires in July 2001; and approximately 8,300 square feet in Boulder,
Colorado under a lease that expires in December 2000.
Ontrack also leases approximately 5,600 square feet of space which expires in
November 2005 and another 5,200 square feet of space which expires in April
2008 for its office in London. Additionally, approximately 8,600 square feet of
space is leased for its office in Stuttgart under a lease which expires in
October 2001 and approximately 500 square feet of space in Paris office under a
month-to-month lease.
The Minneapolis, Washington, D.C., New York and Stuttgart leases each have a
three-to-five year option for extension. The Boulder, Colorado, lease has two
three-year renewal options.
Legal Proceedings
From time to time Ontrack has been, or may become, involved in litigation
proceedings incidental to the conduct of its business. Ontrack does not believe
these proceedings presently pending will seriously harm Ontrack's financial
position or its results of operations.
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ONTRACK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Ontrack's data recovery revenues are derived principally from the performance
of data recovery services and the sale of data recovery products. The principal
factors affecting data recovery service revenues are the number and type of
data recovery jobs Ontrack performs during the period. Ontrack's data recovery
revenues are dependent on the occurrence of numerous isolated data loss events
and on potential customers' decisions to use Ontrack's services and products
when a data loss occurs.
Up through the second quarter of 1999, software revenues were derived
principally from royalties on the use of Disk Manager by hard disk drive OEMs
in their disk drive products sold through distribution channels. The market in
which the OEMs are selling their products is becoming increasingly cost
competitive. They are faced with offering products with increased storage
capacity while being unable to increase the price of their products.
Consequently these OEMs are extremely cost conscious when it comes to bundling
third party software products with their drives. Although Disk Manager
continues to be used in greater quantities, the price per unit charged to the
OEMs has been decreasing rapidly. Beginning in the third quarter of 1999,
software revenues include sales of retail software products of Ontrack's newly
acquired wholly-owned subsidiary Mijenix Corporation in Boulder, Colorado.
Ontrack acquired Mijenix in July 1999.
International revenues consist of data recovery services and products from
Ontrack's wholly-owned subsidiaries in London, England, Stuttgart, Germany, and
Paris, France and royalties from the license of Ontrack's data recovery
technology in Japan to Y-E Data, a Japanese company. Total international
revenues were 22%, 20% and 17% of consolidated revenues for the years ended
December 31, 1998, 1997 and 1996, respectively.
Results of Operations
The following table sets forth the results of operations data for Ontrack for
each of the five years in the period ended December 31, 1998 and for the nine
months ended September 30, 1999 and 1998. The information for the nine months
ended September 30, 1999 and 1998 has been derived from unaudited consolidated
financial statements of Ontrack that, in the opinion of management, reflect all
recurring adjustments necessary to fairly present this information when read in
conjunction with Ontrack's Consolidated Financial Statements and notes thereto
appearing elsewhere in this proxy statement/prospectus.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------------------- ---------------
1998 1997 1996 1995 1994 1999 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue........... $35,841 $35,249 $26,763 $17,145 $11,734 $29,522 $27,044
Gross profit............ 28,512 29,491 22,241 14,079 9,468 22,319 21,759
Income from operations.. 5,981 7,400 4,632 3,465 1,548 4,515 5,183
Net income.............. 5,198 5,656 3,124 2,205 1,505 3,565 4,354
Net income per share,
diluted................ $ 0.52 $ 0.56 $ 0.38 $ 0.28 $ 0.19 $ 0.36 $ 0.43
</TABLE>
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Comparison of Nine Months Ended September 30, 1999 and 1998
Revenues
Data Recovery Services And Products. Ontrack's data recovery services and
products revenues for the third quarter of 1999 increased 25% compared to the
third quarter of 1998. For the nine months ended September 30, 1999, data
recovery services and products revenues increased 11%. Data recovery services
and products revenues consist of the following:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Data recovery lab services...................... $ 7,014 $ 7,120 $18,993 $20,394
Remote data recovery services................... 355 251 1,305 551
Data recovery products.......................... 564 -- 1,747 --
Information management services................. 1,589 230 2,435 1,096
------- ------- ------- -------
Total data recovery services and products
revenues..................................... $ 9,522 $ 7,601 $24,480 $22,041
======= ======= ======= =======
</TABLE>
The increases in revenues from remote data recovery services and data
recovery products are a result of Ontrack's efforts to leverage its data
recovery technology into new revenue generating products and services.
Information management revenues increased dramatically in the third quarter in
part due to a large project, which contributed approximately $1.1 million in
revenue during the quarter. This project will continue to generate revenue in
the fourth quarter of 1999. The remaining increase in information management
revenue is a result of increased project opportunities.
Software. Ontrack's software revenues for the third quarter of 1999 increased
72% compared to the third quarter of 1998. The increase is due entirely to
sales of products of Ontrack's newly acquired wholly-owned subsidiary
headquartered in Boulder, Colorado, Mijenix Corporation. These products
contributed approximately $1.2 million in revenue during the quarter. For the
nine months ended September 30, 1999, software revenues increased 1% compared
to the first nine months of 1998. The increase is a net result of the new
revenues Mijenix generated combined with a decline in the sales of Disk
Manager. While Disk Manager continues to contribute strong operating margins,
downward pricing pressure continues from Ontrack's main customers.
Gross Margins
Data Recovery Services and Products. Gross margins on data recovery services
and products revenues for the third quarter and nine months ended September 30,
1999 were 76% and 74%, respectively, compared to 79% and 80% for the comparable
periods of 1998. The decreases are due primarily to the amortization of
capitalized software related to the EasyRecovery product line and, to a lesser
degree, higher data recovery engineering labor costs.
Software. Gross margins on software revenues for the third quarter and nine
months ended September 30, 1999 were 80% and 81%, respectively, and were
approximately the same as the comparable periods of 1998. As revenues from
Mijenix's products make up a larger portion of software revenues, software
gross margins are expected to decline to the range of 70% to 75%.
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Operating Expenses
Research and Development. Research and development expenses for the third
quarter of 1999 increased 15% compared to the third quarter of 1998 and
decreased 2% in the first nine months of 1999 compared to the same period of
1998. As a percentage of revenues, research and development expenses were 17%
for both the third quarter and nine months ended September 30, 1999, compared
to 19% for the comparable periods of 1998. The third quarter increase is due
primarily to research and development expenditures incurred by Mijenix as they
prepare new products for launch.
Sales And Marketing. Sales and marketing expenses for the third quarter of
1999 increased 19% compared to the third quarter of 1998 and increased 11% in
the first nine months of 1999 compared to the same period of 1998. The
increases are due principally to the activities of Mijenix. As a percentage of
revenues, sales and marketing expenses were 23% and 24% for the third quarter
and nine months ended September 30, 1999, respectively, compared to 25% and 24%
for the comparable periods of 1998. The decline in third quarter percentage is
due to the increase in consolidated revenues.
General and Administrative. General and administrative expenses for the third
quarter of 1999 increased 15% compared to the third quarter of 1998 and
increased 5% in the first nine months of 1999 compared to the same period of
1998. The increases are due mainly to the expenses of Mijenix. As a percentage
of revenues, general and administrative expenses were 17% and 18% for the third
quarter and nine months ended September 30, 1999, respectively, compared to 20%
and 19% for the comparable periods of 1998. The decreased percentage is due to
increased revenues, as general and administrative expenses do not fluctuate
directly with revenues.
Goodwill
Effective July 15, 1999 Ontrack completed the acquisition of Mijenix. The
purchase price consisted of $6 million in cash and 215,345 shares of Ontrack
common stock. The acquisition is being accounted for as a purchase and
accordingly, goodwill of $7.3 million was recorded. The terms of the purchase
contain an earn-out whereby the former shareholders of Mijenix can receive up
to $2.5 million of additional consideration if certain financial goals are met
during the period July 16, 1999 to December 31, 1999.
Goodwill is being amortized over a period of 60 months. Any amounts paid
pursuant to the earn-out will be added to the purchase price and amortized over
the remainder of the 60-month period.
Interest and Other Income
The decrease in interest and other income for the third quarter and nine
months ended September 30, 1999 is due principally to exchange differences
resulting from currency fluctuations in the value of the Euro against the US
dollar.
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Provision for Income Taxes
For the third quarter and nine months ended September 30, 1999, Ontrack
provided for taxes at effective rates of 34% and 33%, respectively. The
effective rate is lower than the statutory rate because of the impact of tax-
exempt interest income earned on investments and research and development
credits.
Net Income per Share
The changes in basic and diluted net income per share for the third quarter
and nine months ended September 30, 1999 and 1998 are due to changes in net
income.
Comparison of Years Ended December 31, 1998 and 1997
Revenues
Service revenues increased 9% to $29.2 million in 1998 from $26.7 million in
1997. This compares to growth in service revenue of 35% from 1996 to 1997.
Historically, Ontrack had seen consistent growth in its service revenues.
However, beginning in the fourth quarter of 1997 and continuing throughout
1998, Ontrack's service revenues have been flat. Quarterly service revenues for
the past six quarters have been as follows (in millions):
<TABLE>
<CAPTION>
1997 1998
------------------- -----------------------------------------------------------------
Q3 Q4 Q1 Q2 Q3 Q4
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$ 7.2 $ 7.3 $ 7.2 $ 7.2 $ 7.6 $ 7.2
</TABLE>
Ontrack believes the factors contributing to the lack of growth in its data
recovery service business include the following:
. The number of data recovery opportunities at the high end of the market
has declined as a result of investments by potential customers in
storage and back-up technologies;
. There has been an increase in the number of small companies performing
low end data recovery services. Although the technology of these
companies does not match that of Ontrack, they have had a negative
impact upon service revenue growth; and
. Ontrack has not had a service or product for customers who preferred a
low cost, do-it-yourself solution to data loss, and many potential
customers looked elsewhere for a solution.
In 1999 Ontrack plans to undertake several initiatives in order to grow its
revenues, including diversification of its current business and promotion of
its do-it-yourself data recovery software product and remote data recovery
business. There is no assurance that Ontrack's strategies to enhance its growth
in service revenues will be successful in the near term, or at all.
Software revenues decreased 23% to $6.6 million in 1998 from $8.6 million in
1997. Disk Manager is Ontrack's principal software product and comprised 92%
and 87% of software revenue in 1998 and 1997. The decrease in Disk Manager
revenue was attributed to lower per unit prices for Disk Manager charged by
Ontrack due to pricing pressure from the OEMs. Ontrack expects this situation
to continue and expects 1999 revenues from Disk Manager to decline further.
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Gross Margins
Services. Gross margins on service revenues were 79% in 1998 compared to 83%
in 1997. In 1997 Ontrack decided that in order to support the growth in service
business that it anticipated, it needed to add people and expand
geographically. Accordingly, in late 1997 and 1998, Ontrack opened new offices
in San Jose, California, the New York City area, and Paris, France. These new
offices required additional staff and along with headcount expansions in its
other locations, resulted in Ontrack's worldwide headcount growing from 236 in
January, 1997 to 293 in January, 1998, to 311 by the end of December, 1998.
These increases coupled with slower growth in service revenues caused Ontrack's
service gross margin percentage to decline to 76% in the 4th quarter of 1998.
Ontrack expects service margin percentages to remain at or below the
percentage experienced in the fourth quarter of 1998 until the strategies
discussed earlier produce incremental growth in service revenues.
Software. Gross margins on software revenues were 81% in 1998 compared to 84%
in 1997. The decreased percentage was attributed to lower per unit prices on
royalty revenues. As revenues from Disk Manager software continue to decline,
Ontrack expects its software margin percentage also to decline.
In December, 1998 Ontrack purchased the Tiramisu software product line. The
purchase price of $2.1 million was recorded as capitalized software on
Ontrack's balance sheet. This asset will be amortized into cost of sales over
the life of the software, which will reduce the 1999 margin percentage for the
software business from historical levels.
Operating Expenses
Research and Development. Research and development expenses decreased 6% to
$6.5 million in 1998 from $6.9 million in 1997. As a percentage of revenue,
research and development expenses were 18% in 1998 and 20% in 1997. The decline
was due principally to lower incentive compensation, as Ontrack did not achieve
its targeted revenue and profit goals.
Ontrack's research and development efforts are expended primarily in four
main areas: the development of new data recovery tools and techniques, the
development and continued expansion of its remote data recovery capabilities,
continued upgrading and maintenance of its primary software product, Disk
Manager, and research into new products and services. Ontrack expects to
allocate more of its research and development resources towards the development
of new products and services in future periods.
Sales and Marketing. Sales and marketing expenses increased 14% to $9.0
million in 1998 from $7.9 million in 1997. As a percentage of revenues, sales
and marketing expenses were 25% in 1998 and 23% in 1997. The increase in sales
and marketing dollars was due to three main factors: 1) efforts to increase
Ontrack's base of corporate and service partners who refer data loss situations
to Ontrack, 2) efforts to obtain awareness of Ontrack's remote data recovery
capabilities, 3) increased efforts in Europe with the Stuttgart, Germany
office's first full year of operations and the opening of a sales office in
Paris, France. The increase in such expenses as a percentage of sales was due
to the lower than anticipated increase in service revenues and decline in
software revenues.
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<PAGE>
General and Administrative. General and administrative expenses decreased 3%
to $7.0 million in 1998 from $7.2 million in 1997. As a percent of revenues,
general and administrative expenses were 20% in 1998 and 21% in 1997. The
decreases arose principally from lower incentive compensation due to Ontrack
not achieving its targeted revenue and profit goals.
Interest and Other Income
Interest and other income increased to $1.5 million in 1998 from $1.1 million
in 1997. The increase was due to increased cash and marketable securities
balances throughout 1998 compared to 1997.
Provision for Income Taxes
Ontrack's effective tax rate was 31% in 1998 compared to 34% in 1997. The
decrease in the rate for 1998 was due principally to tax exempt interest
earnings being a higher percentage of pre-tax income in 1998 compared to 1997.
Corporate statutory tax rates in England approximated those in the United
States for these periods while the German statutory tax rate for 1998 was
approximately 42%.
Diluted Net Income Per Share
Diluted net income per share decreased 7% to $0.52 in 1998 from $0.56 in
1997. The decrease was due to lower net income.
Comparison of Years Ended December 31, 1997 and 1996
Revenues
Ontrack's total revenues increased 31% to $35.2 million in 1997 from $26.8
million in 1996.
Services. Service revenues increased 36% to $26.7 million in 1997 from $19.7
million in 1996. The increase was due to more data recovery jobs being
performed on a worldwide basis. The increase in jobs was a result of an
increased awareness by computer users of Ontrack's services as well as the
addition of new data recovery facilities that opened in Stuttgart, Germany in
November, 1996 and San Jose, California in September, 1997.
Software. Software revenues increased 21% to $8.6 million in 1997 from $7.1
million in 1996. Disk Manager comprised 87% and 85% of software revenue in 1997
and 1996, respectively. The increase in Disk Manager revenue was attributed to
higher volumes of shipments of hard disk drives by Ontrack's customers who
include copies of Disk Manager. These volume increases were partially offset by
lower per unit prices for Disk Manager charged by Ontrack.
Gross Margins
Services. Gross margins on service revenues were 83% in 1997 compared to 86%
in 1996. The decrease in gross margin percentage in 1997 was principally due to
costs relating to the new offices in Germany and San Jose as well as the
addition of additional engineering personnel. Ontrack views
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<PAGE>
the addition of qualified engineers as critical to its growth strategy in order
to support growth in the data recovery business.
Software. Gross margins on software revenues were 84% in 1997 compared to 76%
in 1996. The improved gross margin percentage was attributed to the increase in
royalty revenue as a percent of total software revenues, which involve minimal
costs to Ontrack. Future gross margins in the software business will continue
to be impacted by the mix of royalty and non-royalty revenues.
Operating Expenses
Research and Development. Research and development expenses increased 35% to
$6.9 million in 1997 from $5.1 million in 1996. The increase was due to the
addition of software developers and data recovery engineers who perform
research and development activities. Also contributing to the increase was
completion in 1997 of the development of a new process to provide diagnostic
and data recovery services on a remote basis. As a percentage of revenue,
research and development expenses were 20% in 1997 and 19% in 1996. Research
and development expenses, and such expenses as a percentage of revenues, may
fluctuate in the future as Ontrack identifies and responds to such market
opportunities as remote data recovery services, or as necessary to respond to
new technologies that pose challenges in the data recovery and software
businesses.
Sales and Marketing. Sales and marketing expenses increased 11% to $7.9
million in 1997 from $7.1 million in 1996. As a percentage of revenues, sales
and marketing expenses were 23% in 1997 and 26% in 1996. The decrease in
percentage was due principally to 1996 being a year of investing heavily in
additional sales and marketing personnel to support the anticipated growth in
service revenue. Additional investments were not made to the same extent in
1997. The decreased percentage was also partially due to the 21% increase in
software revenue. Software revenue is reliant principally on shipments of hard
drives by Ontrack's customers and is not directly influenced by Ontrack's sales
and marketing activities.
General and Administrative. General and administrative expenses increased 31%
to $7.2 million in 1997 from $5.5 million in 1996. As a percent of revenues,
general and administrative expenses were 21% in both 1997 and 1996. The
increase in dollars spent was due in part to costs incurred in connection with
the opening of Ontrack's new offices in Stuttgart, Germany and San Jose,
California as well as the cost of being a public company for a full year in
1997.
Interest and Other Income
Interest and other income increased to $1.1 million in 1997 from $0.3 million
in 1996. The increase was due to increased cash and marketable securities
balances, resulting from Ontrack's initial public offering completed in October
1996 and from cash flows generated from its operations.
Provision for Income Taxes
Ontrack's effective tax rate was 34% in 1997 compared to 37% in 1996. The
decrease in the rate for 1997 was due principally to the cash received from
Ontrack's initial public offering being invested in tax-exempt securities.
Corporate statutory tax rates in England approximated those in the United
States for these periods while the German statutory tax rate for 1997 was
approximately 42%.
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<PAGE>
Diluted Net Income Per Share
Diluted net income per share increased 47% to $0.56 in 1997 from $0.38 in
1996. The increase was due to higher net income, partially offset by increases
in weighted average shares outstanding resulting from Ontrack's initial public
offering in October 1996.
Liquidity and Capital Resources
Net cash flows from operations were $4.0 million and $2.4 million for the
nine months ended September 30, 1999 and 1998, respectively. Cash used in
investment activities was primarily for the Mijenix acquisition discussed
above, and for the purchases of furniture and equipment.
Ontrack has invested its cash principally in high-grade taxable and tax
exempt government securities. As of September 30, 1999, $3.5 million is
classified as long-term, with the remaining amount classified as cash and cash
equivalents or short-term marketable securities.
Ontrack expects that its current cash and marketable securities balances
along with cash generated from its operations will be adequate to meet its
capital needs for the foreseeable future.
Year 2000 Compliance
The "Year 2000" problem concerns the inability of existing information
systems to properly recognize and process date-sensitive information beyond
January 1, 2000. If not corrected, these systems could fail or create erroneous
information. Ontrack has undertaken various initiatives to evaluate and respond
to the potential impact of the Year 2000 issue on its computer and other
operating systems. A Year 2000 committee has formulated a plan to address the
Year 2000 issue. Under this plan, Company personnel have identified business
systems that are critical to the Company's business operations that require
testing. Ontrack has completed testing and remediation of its software
products, the software and hardware used in product development, its internal
systems, non-information technology systems, the hardware and software tools it
uses in its data recovery business and the systems in its satellite offices.
Ontrack has completed this testing and remediation except for certain systems
that are being updated for reasons other than Year 2000 compliance. These
systems are expected to be tested and remediated by December 31, 1999.
Ontrack is also communicating and working with its significant vendors,
customers and other business partners to minimize Year 2000 risks and protect
Ontrack and its customers from potential service interruptions. However,
Ontrack could be adversely affected by the failure of third parties to become
Year 2000 compliant, including the risk of operational outages due to
disruptions in communications or electrical service. Although Ontrack believes
the effect of such disruptions would be localized and temporary, there is no
assurance that these or other Year 2000 risks will not have a material
financial impact in any future period.
After assessing the information received from vendors, customers and other
business partners, and evaluating the completion of its Year 2000 project,
Ontrack believes all systems will be compliant and does not anticipate any
problems due to the date change. In the event that a system should fail, plans
have been developed to allow daily operations to continue.
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Ontrack believes that its expenses for the Year 2000 compliance through
September 30, 1999 are not material, and total expenses for compliance are not
expected to exceed $100,000.
Quantitative And Qualitative Disclosures About Market Risk
Ontrack has three foreign subsidiaries, located in England, Germany, and
France and generates approximately 22% of its revenues outside of North
America. Ontrack's ability to sell its products in these foreign markets may be
affected by changes in economic, political or market conditions in the foreign
markets in which it does business. The impact of the stronger U.S. dollar on
the translation of foreign currency-denominated sales and related gross profit
thereon was not material in 1998 and 1997.
Ontrack experiences foreign currency gains and losses, which are reflected in
Ontrack's income statement, due to the strengthening and weakening of the U.S.
dollar against the currencies of Ontrack's three foreign subsidiaries and the
resulting effect on the valuation of the intercompany accounts. The net
exchange gain or loss arising from this was not material in 1998, 1997 and
1996. Ontrack anticipates that it will continue to have exchange gains or
losses from foreign operations in the future.
Ontrack's net investment in its foreign subsidiaries was $798,000 and
$299,000 at December 31, 1998 and 1997 translated into U.S. dollars using the
year end exchange rates.
Forward-Looking Statements
Information included in this Ontrack Management's Discussion and Analysis of
Financial Condition and Results of Operations which uses forward-looking
terminology such as "may," "will," "expect," "plan," "intend," "anticipate,"
"estimate," or "continue" or other variations thereon constitutes forward-
looking information. The factors set forth below and other risk factors
described elsewhere in this Proxy Statement/Prospectus constitute cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements:
. The computer industry is characterized by rapid technological changes
and frequent introductions of new enhanced products and Ontrack must
constantly adapt its data recovery techniques, its data recovery
hardware and software tools and its commercial software products to keep
pace with these technological changes;
. Ontrack intends to invest in product development, joint ventures,
acquisitions and other projects to enhance its revenues, and there is no
assurance that these projects will yield the desired growth in revenues
and earnings;
. Future technological developments in computer operating systems,
automatic data backup systems and other data protection techniques have
the potential to eliminate or reduce the risk of data loss;
. Ontrack's software revenues depend on disk drive shipments by OEM's and
trends in the disk drive industry which Ontrack cannot control;
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<PAGE>
. Addressing the Year 2000 issue may involve greater cost or delay than
anticipated by Ontrack, and some parts of the solution will depend on
the efforts of third parties;
. Ontrack depends to a large degree on its ability to attract and retain
technical personnel; and
. If Legato and Ontrack do not integrate their technologies and operations
effectively (including the integration of Mijenix into Ontrack), some or
all of the expected benefits of the merger may not occur and Ontrack's
expected results may not occur.
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ONTRACK MANAGEMENT
The executive officers and directors of Ontrack are as follows:
<TABLE>
<CAPTION>
Name Age Position with Ontrack
---- --- ---------------------
<S> <C> <C>
Michael W. Rogers.......... 43 Chairman and Chief Executive Officer
Lee B. Lewis............... 52 President, Chief Operating Officer and Director
Gary S. Stevens............ 42 Senior Vice President, Engineering and Director
Thomas P. Skiba............ 44 Vice President and Chief Financial Officer
John M. Bujan.............. 55 Vice President, General Counsel and Secretary
Jeffrey J. May............. 57 Vice President, Product Management
John E. Pence.............. 52 Director
Robert M. White, Ph.D. .... 61 Director
Roger D. Shober............ 61 Director
</TABLE>
Michael W. Rogers has served as Chief Executive Officer of Ontrack since 1986
and as Chairman since 1989. Additionally, Mr. Rogers has served as a Director
of Ontrack since 1985 and from 1989 to May 1996 as Chief Financial Officer.
From 1980 to 1985, Mr. Rogers was employed by Control Data Corporation ("CDC"),
where he served as a Senior Developer of diagnostic software routines and as a
Senior Electrical Engineer and an Electrical Engineer for software and hardware
development. From 1978 to 1980, he was an Associate Engineer with Westinghouse
Bettis Atomic Power Laboratory, a subsidiary of Westinghouse Electric
Corporation.
Lee B. Lewis has served as President and Chief Operating Officer of Ontrack
since February 1999 and as Director since May 1999. From 1993 to 1998, Mr.
Lewis was employed by Ancor Communications, Inc., most recently as Vice
President, Administration. From 1982 to 1993 Mr. Lewis was employed by Magnetic
Data, Inc. in various positions, most recently as Vice President/General
Manager of the Minnesota Division.
Gary S. Stevens has served as Senior Vice President, Engineering and as a
Director of Ontrack since 1985. From 1979 to 1985, Mr. Stevens was a designer
and diagnostic programmer of disk subsystems for CDC.
Thomas P. Skiba has served as Vice President and Chief Financial Officer of
Ontrack since May 1996. From 1992 to April 1996, Mr. Skiba was Chief Financial
Officer of IVI Publishing, Inc., a publicly-held electronic publisher of health
and medical information.
John M. Bujan has served as General Counsel and Secretary to Ontrack since
March 1996 and Vice President since 1999. From 1981 to March 1996, Mr. Bujan
was the principal of John M. Bujan, P.A., an Edina, Minnesota law firm
concentrating in business and commercial matters and computer software
licensing. From 1985 through March 1996, John M. Bujan, P.A. provided legal
services to Ontrack.
Jeffrey J. May has served as Vice President, Product Management since June,
1999. From 1988 to 1998, Mr. May was the Owner and Chief Executive Officer of
Fitness Master, Inc. From 1990 to 1991, Mr. May was employed by Digital
Equipment Corporation, most recently as General Manager of their Film Head
Division. From 1987 to 1989, Mr. May was employed by Lafe Magnetics, Ltd., most
recently as Vice President of US Business Activities.
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<PAGE>
John E. Pence served as President of Ontrack from 1985 until 1998 and has
served as a Director of Ontrack since 1985. From 1971 to 1985, he was employed
by CDC, where he served as Department Head for the Program Management Office
for CDC's mini-micro peripheral development (1984 to 1985), managed the
Technical Support organization for worldwide support of CDC's plug compatible
peripheral business (1981 to 1984) and served in various other capacities
related to software development and computer programming (1971 to 1981).
Robert M. White, Ph.D. is a University Professor and has served as the Head
of the Department of Electrical and Computer Engineering at Carnegie Mellon
University since 1993. He previously served as Vice President and Chief
Technical Officer of CDC, and in 1990 was appointed by President Bush and
served as the first Under Secretary of Commerce for Technology until 1993. He
is also a director of ENSCO, Inc., a contract research firm, and
STMicroelectronics, a manufacturer of semiconductors. He is a member of the
National Academy of Engineering.
Roger D. Shober served as President and Chief Operating Officer of Ontrack
from September 21, 1998 until February 11, 1999. He is a retired executive with
38 years of management experience within the computer industry. Most recently,
he served as Executive Vice President of World Wide Operations at Control Data
Systems from 1991 to 1994, as President and Chief Operating Officer of
Rigidyne, Inc., a hard disk drive research and development company that was
subsequently acquired by Seagate, from 1988 to 1991 and as Executive Vice-
President of Micom Systems, Inc., a manufacturer of data communications
equipment, from 1986 to 1988.
Other Information Regarding the Board
Meetings. During 1998, the Board of Directors met four times and held three
telephonic meetings. Each director attended more than 75% of the meetings of
the Board of Directors or any Committee on which such director served.
Board Committees. The Audit Committee, currently consisting of Dr. White
(Chairman), and Mr. Shober, met once in 1998. Among other duties, the Audit
Committee reviews Ontrack's accounting, auditing and reporting practices, makes
recommendations concerning the work of Ontrack's independent auditors and
reviews the adequacy of internal controls.
The Compensation Committee, currently consisting of Mr. Shober (Chairman),
Mr. Pence and Dr. White, met three times in 1998. The Compensation Committee's
duties include establishing salaries, bonuses and other compensation for
Ontrack's executive officers, and for the administration of the Non-Qualified
Stock Option Plan, the 1996 Stock Incentive Plan and the Employee Stock
Purchase Plan.
Compensation of Directors. Directors who are not employees of Ontrack receive
$2,500 for each meeting of the Board of Directors attended in person (plus
reimbursement of travel expenses). No additional fees are paid for attendance
at telephonic meetings or committee meetings. Directors who are officers of
Ontrack do not receive any additional compensation for serving on the Board of
Directors.
Directors are also eligible to receive options under Ontrack's 1996 Stock
Incentive Plan. In January 1998, each non-employee director received an option
to purchase 10,000 shares at $20.38
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per share, equal to the closing sale price of the common stock on the date of
grant. The options have a ten year term and vest equally over the first four
years. In September 1998, these options were amended to change the exercise
price to $7.88 per share, equal to the closing sale price of the common stock
on the date of the amendment.
In 1998, Ontrack entered into a six-month Consulting Agreement with Roger D.
Shober under which Mr. Shober served as interim president and chief operating
officer of Ontrack from September 21, 1998 through February 11, 1999. Under the
agreement, Mr. Shober received cash consulting fees and waived any fees to
which he was otherwise entitled as a director of Ontrack. Mr. Shober was
entitled to receive none of the benefits accorded other executive management of
Ontrack other than reimbursement of reasonable out-of-pocket expenses. As
compensation for his services, in September 1998, Mr. Shober received a fully-
vested option to purchase up to 50,000 shares of common stock of Ontrack at an
exercise price of $7.125.
Compensation Committee Interlocks and Insider Participation
Roger D. Shober was a member of the Compensation Committee through September
21, 1998. On that date, Mr. Shober was appointed as interim president and chief
operating officer of Ontrack, positions in which he served until February 11,
1999.
On September 21, 1998, John E. Pence became a member of the Compensation
Committee. Mr. Pence was a founder of Ontrack and served as its President until
September 18, 1998. Mr. Pence was an employee of Ontrack through December 31,
1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Ontrack's directors and executive
officers to file with the Securities and Exchange Commission reports of
ownership and changes in ownership of Ontrack's common stock, and Ontrack is
required to identify any of those persons who fail to file such reports on a
timely basis. To Ontrack's knowledge, all insiders of Ontrack filed in a timely
manner all such reports for 1998.
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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.
Executive Compensation
Summary of Cash and Certain Other Compensation. The following table sets
forth, for the years ended December 31, 1998, 1997 and 1996, the compensation
earned by the Chief Executive Officer and each of the other four most highly
compensated executive officers of Ontrack whose salary and bonus exceeded
$100,000 for the year ended December 31, 1998 (collectively, the "Named
Executives"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------- ------------
No. of
Securities All Other
Name and Principal Underlying Compensation
Position Year Salary($) Bonus($) Options(#) ($)(1)
------------------ ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael W. Rogers........ 1998 $241,000 $ 0 25,000 $ 3,600
Chairman and Chief 1997 230,000 250,000 25,000 10,500
Executive Officer 1996 190,000 190,000 50,000 9,000
John E. Pence(2)......... 1998 125,000 0 20,000 3,600
1997 200,000 205,000 15,000 10,500
1996 185,000 185,000 50,000 9,000
Gary S. Stevens.......... 1998 212,000 0 25,000 3,600
Senior Vice President, 1997 200,000 225,000 15,000 10,500
Engineering 1996 180,000 180,000 50,000 9,000
John M. Bujan(3)......... 1998 133,000 0 15,000 3,600
General Counsel and 1997 125,000 145,000 15,000 10,500
Secretary 1996 92,000 92,000 13,750 --
Thomas P. Skiba(4)....... 1998 143,000 0 15,000 3,600
Vice President and 1997 135,000 152,000 15,000 10,500
Chief Financial Officer 1996 78,000 118,000(5) 75,000 --
</TABLE>
- --------
(1) Amounts indicated represent contributions by Ontrack to Ontrack's 401(k)
Profit Sharing Plan on behalf of the named individuals.
(2) Mr. Pence retired as an officer of Ontrack effective September 18, 1998
and as an employee on December 31, 1998.
(3) Mr. Bujan became General Counsel and Secretary in March 1996 and received
a salary for only ten months in 1996.
(4) Mr. Skiba became Vice President and Chief Financial Officer in May 1996 and
received a salary for only 8 months in 1996.
(5) Includes a signing bonus of $20,000 paid to Mr. Skiba upon joining Ontrack
in May 1996.
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The following table summarizes option grants in 1998 to each of the Named
Executives:
Option Grants In 1998
<TABLE>
<CAPTION>
Potential
Realizable Value
At Assumed Annual
Rates of Stock
Percent of Price
Total Appreciation for
Number of Securities Options Granted Option Term(1)
Underlying Options Employees in Exercise Price Expiration -----------------
Name Granted(#) 1998(%) Per Share Date 5% 10%
---- -------------------- --------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Rogers....... 25,000(2) 6.5% $7.88(3) 01/22/08 $124,000 $314,000
John E. Pence........... 20,000(4) 5.2% 7.25 09/18/08 91,000 231,000
Gary S. Stevens......... 25,000(2) 6.5% 7.88(3) 01/22/08 124,000 314,000
John M. Bujan........... 15,000(2) 3.9% 7.88(3) 01/22/08 74,000 188,000
Thomas P. Skiba......... 15,000(2) 3.9% 7.88(3) 01/22/08 74,000 188,000
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. For options granted and repriced in 1998,
appreciation is calculated from the date of repricing. The actual value of
these option grants is dependent on future performance of the Common Stock
and overall stock market conditions. There is no assurance that the values
reflected in this table will be achieved.
(2) The options vest as follows: 25% on each of January 20, 1999, 2000, 2001
and 2002.
(3) These options were granted at an exercise price of $20.38 per share on
January 22, 1998 and were amended on September 3, 1998 to change the
exercise price to $7.88 per share.
(4) The options vest as follows: 25% on each of September 18, 1999, 2000, 2001
and 2002.
The following table summarizes the exercises of options by the Named
Executives in 1998 and the value of options held at December 31, 1998 by the
Named Executives:
<TABLE>
<CAPTION>
December 31, 1998(#) December 31, 1998($)(1)
Shares Acquired Value ------------------------- -------------------------
Name On Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Rogers....... 0 $ 0 25,000 75,000 $ 0 $ 0
John E. Pence........... 0 0 65,000 20,000 0 0
Gary S. Stevens......... 0 0 23,000 67,000 0 0
John M. Bujan........... 0 0 16,000 30,750 29,325 0
Thomas P. Skiba......... 0 0 78,000 27,000 179,250 0
</TABLE>
- --------
(1) The amounts set forth represent the difference between the closing sale
price of $6.38 per share of Common Stock on December 31, 1998 and the
exercise price of the options, multiplied by the applicable number of
shares underlying the options.
Employment Agreements
Ontrack entered into employment agreements with each of Messrs. Rogers, Pence
and Stevens (the "Founders") in 1996. If Ontrack terminates a Founder for
cause, such Founder will receive severance payments equal to two times his base
salary payable in the then-current fiscal year. Upon the termination of a
Founder without cause, the Founder shall receive severance payments equal to
two times his base salary payable in the then-current fiscal year, plus an
amount equal to his prior year's base salary and bonus. The Founders are also
prohibited from competing for two years after termination of their employment.
Mr. Pence retired as an officer and employee in 1998.
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<PAGE>
In connection with the merger, Messrs. Rogers and Stevens have entered into
employment agreements with Legato. These employment agreements are contingent
upon the consummation of the merger and will become effective and replace their
previous employment agreements (described above) upon completion of the merger.
For a description of these employment agreements, see "The Merger and Related
Transactions--Related Agreements--Employment Agreements" on page 63.
Ontrack entered into letter agreements with each of Messrs. Bujan and Skiba
upon the commencement of each officer's employment in 1996. The agreements
generally provide for severance payments upon their termination for reasons
other than gross misconduct equal to twelve and 6 months of base salary,
respectively.
Limitations on Liability and Indemnification
Minnesota law requires the indemnification of persons made or threatened to
be made a party to a proceeding by reason of acts or omissions performed in
their official capacity as an officer, director, employee or agent of the
corporation against judgments, penalties and fines (including attorneys' fees)
if such person is not otherwise indemnified, acted in good faith, received no
improper benefit, reasonably believed that such conduct was in the best
interests of the corporation, and, in the case of criminal proceedings, had no
reason to believe the conduct was unlawful. In addition, Minnesota law requires
payment by the corporation, upon written request, of reasonable expenses in
advance of final disposition in certain instances if a decision as to required
indemnification is made by a disinterested majority of the Board of Directors
present at a meeting at which a disinterested quorum is present, or by a
designated committee of the Board, by special legal counsel, by the
shareholders or by a court.
Ontrack's Restated and Amended Bylaws provide for the indemnification of its
directors, officers, employees, and agents, in accordance with, and to the
fullest extent permitted by, the provisions of the Minnesota law, as amended
from time to time.
Stock Plans
Stock Option Plans. Pursuant to the reorganization agreement, Legato will
assume the outstanding options to purchase shares of Ontrack common stock. See
"The Merger and Related Transactions--Conversion of Options" on page 38 for a
detailed description of the assumption of these options. Each officer, employee
or consultant who exercises his or her Ontrack options prior to the merger will
receive shares of Legato common stock upon completion of the merger. All
Ontrack officers and directors hold outstanding Ontrack options granted under
Ontrack's stock option plans.
The current employment agreements of Messrs. Rogers and Stevens provide for
the immediate vesting of all stock options upon the consummation of the merger.
In addition, the stock option agreements of Messrs. Rogers, Stevens, Skiba,
Bujan, Lewis and May provide for the immediate vesting of options upon
consummation of the merger. Following the merger, these options continue to be
exercisable for a period of twelve months from the effective date of the merger
or the date on which the optionee is no longer employed by Ontrack, whichever
is later.
Under the Ontrack 1996 stock option plan, options to purchase Ontrack common
stock that were granted to certain consultants and non-employee members of the
Ontrack board of directors will become fully exercisable and vested in
connection with the merger. The fully vested options continue
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to be exercisable for a period of twelve months following the effective time of
the merger. The following consultants and non-employee board members of Ontrack
hold options to purchase shares of Ontrack common stock that will become fully
vested in connection with the merger: Messrs. Richard Runbeck, Duane Bojack,
John Pence, Roger Shober and Dr. Robert White.
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Ontrack's Common Stock as of December 1, 1999 by (a) each person
known to Ontrack to beneficially own more than five percent (5%) of Common
Stock, (b) each director of Ontrack, (c) each executive officer named in the
table on page 101, and (d) all directors and executive officers of Ontrack as a
group. Except as otherwise indicated below, to the knowledge of Ontrack, all
shareholders have sole voting and investment power over the shares beneficially
owned, except to the extent authority is shared by spouses under applicable
law.
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address of Beneficial Owner Beneficially Owned(1) of Class
------------------------------------ --------------------- --------
<S> <C> <C>
Michael W. Rogers(2)........................... 1,775,800 17.6%
9023 Columbine Road
Eden Prairie, MN 55347
Gary S. Stevens(3)............................. 1,849,800 18.4%
9023 Columbine Road
Eden Prairie, MN 55347
John E. Pence(4)............................... 1,748,751 17.4%
HCR 52
Box 102--A6
Hot Springs, SD 57747
John M. Bujan.................................. 38,394 *
Lee B. Lewis................................... 278 *
Thomas P. Skiba................................ 95,250 *
Roger D. Shober................................ 79,750 *
Robert M. White, Ph.D.......................... 16,500 *
All executive officers and directors as a group
(9 persons)................................... 5,609,523 54.0%
</TABLE>
- --------
* Less than 1%
(1) Includes the following number of shares which could be purchased under
stock options exercisable within 60 days of the date hereof: Mr. Rogers,
57,500 shares; Mr. Pence, 70,000 shares; Mr. Stevens, 51,500 shares; Mr.
Bujan, 35,750 shares; Mr. Skiba, 95,250 shares; Mr. Shober, 62,500 shares;
Dr. White, 12,500 shares; and all executive officers and directors as a
group, 385,000 shares.
(2) Includes 621,430 shares of Common Stock owned by the Rogers Family Limited
Partnership, of which Mr. Rogers is the General Partner.
(3) Includes 29,946 shares of Common Stock owned by the Stevens Family Limited
Partnership, of which Mr. Stevens is the General Partner.
(4) Includes 262,996 shares of Common Stock owned by the Pence Family Limited
Partnership, of which Mr. Pence is the General Partner, and 4,150 shares
of Common Stock owned by the Pence Family Foundation, of which Mr. Pence
is the Director with sole dispositive power.
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<PAGE>
COMPARISON OF CAPITAL STOCK
Description of Legato Capital Stock
The authorized capital stock of Legato consists of 200,000,000 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 September 30, 1999, there were 84,981,147 shares of Legato common stock
outstanding held of record by approximately 200 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 Junior Participating 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
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<PAGE>
(a 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 Ontrack Capital Stock
The authorized capital stock of Ontrack consists of 25,000,000 shares of
common stock, $0.01 par value per share, and 1,000,000 shares of preferred
stock, $0.01 par value per share.
Ontrack Common Stock
As of the record date, there were 10,004,944 shares of Ontrack common stock
outstanding held of record by approximately 93 shareholders, although Ontrack
has been informed that there are in excess of 2,600 beneficial owners. Ontrack
common stock is listed on the Nasdaq National Market under the symbol ONDI.
Holders of Ontrack common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Pursuant to Ontrack's amended and
restated articles of incorporation, the shareholders do not have a right to
cumulate votes in connection with the election of Ontrack directors. Subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of Ontrack common stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Ontrack board of directors
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of Ontrack, the holders of Ontrack common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to the rights of holders of Ontrack preferred stock that may be then
outstanding. The Ontrack common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Ontrack common stock. All outstanding shares of Ontrack
common stock are fully paid and non-assessable, and the shares of Legato common
stock which are to be received in exchange for the Ontrack common stock to be
outstanding upon completion of the Merger will be fully paid and non-
assessable.
Ontrack Preferred Stock
Ontrack has 1,000,000 shares of preferred stock authorized. As of the record
date, no shares of Ontrack preferred stock are outstanding. The Ontrack board
of directors has the authority to issue the
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<PAGE>
undesignated shares of Ontrack 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 Ontrack 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 shareholders. Although it presently
has no intention to do so, the Ontrack board of directors, without shareholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power or other rights of the holders of
Ontrack common stock and the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Ontrack.
Transfer Agent and Registrar
The transfer agent and registrar of the Ontrack common stock is Norwest Bank
Minnesota, N.A. and its telephone number is 651-450-4064.
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<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF LEGATO AND SHAREHOLDERS OF MERGER SUB AND ONTRACK
Ontrack and Merger Sub are both Minnesota corporations. Legato is
incorporated under the laws of Delaware. In connection with the merger, Ontrack
shareholders will receive shares of Legato in exchange for their Ontrack
shares. After the merger, therefore, Delaware corporate law will govern the
rights of the Ontrack shareholders. In addition, Legato's certificate of
incorporation and bylaws will govern certain aspects of Ontrack shareholders'
rights after the merger.
The following is a summary of the material differences between the rights of
holders of Ontrack common stock and the rights of holders of Legato common
stock. These differences arise from differences between Minnesota and Delaware
law, Ontrack's amended and restated articles of incorporation, Ontrack's
bylaws, Legato's amended and restated certificate of incorporation, and
Legato'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.
Ontrack's bylaws provide that nominations for the election of directors may
be made
. By the Board of Directors or a committee appointed by the Board of
Directors, or
. By any shareholder entitled to vote generally in the election of
directors who has complied with certain notice provisions.
Nominations by Ontrack shareholders must be preceded by written notice
received by the secretary of the corporation not less than 60 days nor more
than 90 days prior to a meeting date corresponding to the previous year's
regular meeting.
Amendment To Governing Documents
Certificate of Incorporation, Delaware. 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
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<PAGE>
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.
Articles of Incorporation, Minnesota. Minnesota law requires a vote of the
corporation's board of directors or a resolution proposed by a shareholder
holding three percent or more of the voting power of the shares entitled to
vote, followed by the affirmative vote of a majority of the voting power
present and entitle to vote, provided that such number is at least the minimum
number of shares that would constitute a quorum for the transaction of business
at the meeting, for any amendment to the articles of incorporation. A greater
level of approval than is mandated by Minnesota law may be required by the
articles of incorporation. Furthermore, under Minnesota law, if an amendment
would alter the powers, preferences or special rights of a particular class or
series of stock, the class or series shall be given the power to vote as a
class notwithstanding the absence of any specifically enumerated power in the
articles of incorporation.
Bylaws of the Corporation, Delaware. Delaware law 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
incorporation may confer such power on its board of directors in addition to
the stockholders. The certificate of incorporation of Legato expressly
authorizes the board of directors to make, repeal, alter, amend and rescind the
Legato bylaws.
Bylaws of the Corporation, Minnesota. Minnesota law provides that the power
to adopt, amend or repeal a corporation's bylaws shall be in the board of
directors, provided that the corporation in its articles of incorporation may
confer such power to the shareholders. In all cases, however, the power of the
board is subject to the power of the shareholders to adopt, amend, or repeal
any bylaw by a resolution proposed by a shareholder holding three percent or
more of the voting power of the shares entitled to vote and approved by a
majority of the outstanding stock entitled to vote. The articles of
incorporation of both Ontrack and Merger Sub do not change the relative power
of either the board of directors or the shareholders to adopt, amend or repeal
bylaws from that provided for under the default provisions of Minnesota law.
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
certificate of incorporation of Legato provides that stockholders may not take
any action by written consent in lieu of a meeting.
Under Minnesota corporate law, any action required or permitted to be taken
at a meeting of the shareholders may be taken without a meeting by written
action signed by all of the shareholders entitled to vote on that action. The
written action is effective when it has been signed by all of those
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<PAGE>
shareholders, unless a different effective time is provided in the written
action. The articles of incorporation of both Ontrack and Merger Sub do not
alter these default provisions of Minnesota corporate law.
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.
Ontrack's bylaws and Minnesota law provide that special meetings of its
shareholders may only be called by the Chairman of the Board, the chief
executive officer, the chief financial officer, any two or more members of the
board of directors, or stockholders owning not less than ten percent (10%) of
the voting power of shares entitled to vote. Ontrack's bylaws and Minnesota law
further provide, however, that a special meeting for the purpose of considering
any action to directly or indirectly facilitate or effect a business
combination, including any action to change or otherwise affect the composition
of the board of directors for that purpose, must be called by 25 percent or
more of the voting power of all shares entitled to vote. The Merger Sub's
bylaws provide that special meetings of its shareholders may be called by the
president and shall be called by the president or secretary at the request in
writing of a majority of the Board of Directors, or at the request in writing
of shareholders owning at least ten percent (10%) in amount of the entire
capital stock of the corporation issued and outstanding and entitled to vote.
As provided for by Minnesota corporate law, however, a special meeting of the
Merger Sub's shareholders for the purpose of considering any action to directly
or indirectly facilitate or effect a business combination, including any action
to change or otherwise affect the composition of the board of directors for
that purpose, must be called by 25 percent or more of the voting power of all
shares entitled to vote.
Legato has adopted shareholder rights plan. See "Comparison of Capital
Stock." Neither Ontrack nor Merger Sub has adopted a shareholder rights plan.
Section 203 of the Delaware General Corporation Act provides that a
corporation may not engage in any business combination with any interested
stockholder for a period of three years following the date that such
shareholder became an interested stockholder unless
. prior to the date the stockholder became an interested stockholder the
board of directors approved the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding, those shares owned by persons who are
directors and also officers and shares owned by employee stock plans in
which employee participant do not have the right to determine
confidentially whether share held subject to the plan will be tendered
in a tender or exchange offer; or
. the business combination is approved by the board of directors and
authorized by 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder. An interested stockholder means any
person that is the owner of 15% or more of the outstanding voting stock;
however, the statute provides for certain exceptions to parties who
otherwise would be designated interested stockholders.
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<PAGE>
Ontrack is governed by Sections 302A.671 and 302A.673 of the Minnesota
Business Corporation Act. In general, Section 302A.671 provides that the shares
of a corporation acquired in a "control share acquisition" have no voting
rights unless voting rights are approved in a prescribed manner. A control
share acquisition is an acquisition, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power of 20% or more in the
election of directors. In general, Section 302A.673 prohibits a public
Minnesota corporation from engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. A business combination
includes any merger, asset sale or other transaction resulting in a financial
benefit to the interested shareholder. An interested shareholder is a person
who is the beneficial owner of 10% or more of the corporation's voting stock or
who is an affiliate or associate of the corporation and at any time within four
years prior to the date in question was the beneficial owner of 10% or more of
the corporation's voting stock. These provisions of the Minnesota law do not
apply to the merger but in the absence of the merger could delay, defer or
prevent a change in control of Ontrack.
Cumulative Voting
Neither the bylaws or certificates of incorporation of Legato provides for
cumulative voting in elections of directors. Therefore, under Delaware law,
cumulative voting rights are not available to Legato stockholders. The articles
of incorporation of both Ontrack and Merger Sub expressly deny any right of the
shareholders to cumulate votes in the election of directors. Therefore, under
Minnesota law, cumulative voting rights are not available to Ontrack or Merger
Sub shareholders.
The foregoing discussion of certain similarities and material differences
between the rights of Ontrack shareholders, the rights of Legato stockholders
and the rights of the Merger Sub shareholders under the respective certificates
of incorporation, articles 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 and the common law
thereunder, the Minnesota Business Corporation Act and the common law
thereunder, and the full text of Legato's, Ontrack's and Merger Sub's
respective certificate of incorporation, articles of incorporation and bylaws.
EXPERTS
The financial statements incorporated in this proxy statement/prospectus by
reference to the Annual Report on Form 10-K/A of Legato Systems, Inc. for the
year ended December 31, 1998 and the audited historical financial statements of
Intelliguard Software Inc., included under item 7 (a) of Legato Systems, Inc.'s
Form 8-K/A dated June 1, 1999 have been so incorporated in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements and the related financial statement
schedule of Qualix Group Inc. for the year ended June 30, 1997, incorporated in
this prospectus by reference from the Annual Report of Legato Systems, Inc. on
Form 10-K/A for the year ended December 31, 1998, have
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<PAGE>
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The audited financial statements of Vinca Corporation as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
incorporated by reference in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said report.
The consolidated financial statements of Ontrack at December 31, 1998 and for
the year then ended, included in this proxy statement/prospectus have been
audited by Grant Thornton LLP, independent certified public accountants, as
stated in their report appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Ontrack Data International, Inc. as of December
31, 1997 and for each of the two years in the period ended December 31, 1997
included in this proxy statement/prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
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. 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 Ontrack by Robins, Kaplan, Miller & Ciresi L.L.P.,
Minneapolis, Minnesota.
FUTURE STOCKHOLDER PROPOSALS
If the merger is consummated, Ontrack will not hold a 2000 annual meeting of
shareholders, because Ontrack would become a wholly-owned subsidiary of Legato
following the merger. In the event the merger is not consummated, proposals of
Ontrack shareholders to be included in the proxy statement to be mailed to all
Ontrack shareholders entitled to vote at the 2000 annual meeting of Ontrack
shareholders must have been received by December 17, 1999. Additionally, if
Ontrack receives notice of a shareholder proposal after January 24, 2000, such
proposal will be considered untimely pursuant to Rules 14a-4 and 14a-5(e) and
the persons named as proxies solicited by Ontrack's board of directors for the
2000 annual meeting may exercise discretionary voting power with respect to
such proposal. These dates would change if the 2000 annual meeting were not
held within specified time periods of the first anniversary of the 1999 annual
meeting of shareholders of Ontrack.
113
<PAGE>
INDEX TO ONTRACK DATA INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants--Grant Thornton
LLP................................................................... F-2
Report of Independent Accountants--PricewaterhouseCoopers LLP.......... F-3
Consolidated Balance Sheets--December 31, 1998 and 1997................ F-4
Consolidated Statements of Income--Years Ended December 31, 1998, 1997
and 1996.............................................................. F-5
Consolidated Statements of Shareholders' Equity--Years Ended December
31, 1998, 1997 and 1996............................................... F-6
Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997 and 1996......................................................... F-7
Notes to Consolidated Financial Statements............................. F-8
Condensed Consolidated Balance Sheets--September 30, 1999 (unaudited)
and December 31, 1998................................................. F-17
Condensed Consolidated Statements of Income (unaudited)--Three and Nine
Months Ended September 30, 1999 and 1998.............................. F-18
Condensed Consolidated Statements of Cash Flows (unaudited)--Nine
Months Ended September 30, 1999 and 1998.............................. F-19
Notes to Condensed Consolidated Financial Statements (unaudited)....... F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
ONTRACK Data International, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of ONTRACK Data
International Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ONTRACK Data
International Inc. and subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 3, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of ONTRACK Data International, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of shareholders' equity and of cash flows as of and for
each of the two years in the period ended December 31, 1997, present fairly, in
all material respects, the financial position, results of operations and cash
flows of ONTRACK Data International, Inc. and its subsidiaries as of and for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of ONTRACK Data International,
Inc. for any period subsequent to December 31, 1997.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 4, 1998
F-3
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $14,724 $17,315
Marketable securities........................................ 18,872 14,861
Accounts receivable, net..................................... 3,759 3,321
Deferred income taxes and other current assets............... 2,228 2,042
------- -------
Total current assets....................................... 39,583 37,539
Furniture and equipment, net................................... 4,019 4,080
Capitalized software, net...................................... 2,131 --
Long-term marketable securities................................ 716 3,506
------- -------
Total assets............................................... $46,449 $45,125
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 782 $ 770
Accrued income taxes......................................... 810 1,019
Other accrued expenses....................................... 2,077 4,005
------- -------
Total current liabilities.................................. 3,669 5,794
Commitments and Contingencies.................................. -- --
Shareholders' equity:
Preferred stock; $.01 par value; 1 million shares authorized;
no shares issued or outstanding............................. -- --
Common stock; $.01 par value; 25 million shares authorized;
9,697,234 and 9,910,190 shares issued and outstanding at
December 31, 1998 and 1997.................................. 97 99
Additional paid-in capital................................... 29,131 30,880
Cumulative translation adjustment............................ 22 20
Retained earnings............................................ 13,530 8,332
------- -------
Total shareholders' equity................................. 42,780 39,331
------- -------
Total liabilities and shareholders' equity................. $46,449 $45,125
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Services.................................. $ 29,205 $ 26,689 $ 19,654
Software.................................. 6,636 8,560 7,109
----------- ----------- ----------
Total revenues.......................... 35,841 35,249 26,763
Cost of revenues:
Services.................................. 6,064 4,415 2,804
Software.................................. 1,265 1,343 1,718
----------- ----------- ----------
Total cost of revenues.................. 7,329 5,758 4,522
----------- ----------- ----------
Gross margin................................ 28,512 29,491 22,241
Operating expenses:
Research and development.................. 6,499 6,922 5,052
Sales and marketing....................... 9,023 7,934 7,077
General and administrative................ 7,009 7,235 5,480
----------- ----------- ----------
Total operating expenses................ 22,531 22,091 17,609
----------- ----------- ----------
Operating income............................ 5,981 7,400 4,632
Interest and other income................... 1,523 1,115 292
----------- ----------- ----------
Income before income taxes.................. 7,504 8,515 4,924
Provision for income taxes.................. 2,306 2,859 1,800
----------- ----------- ----------
Net income.................................. $ 5,198 $ 5,656 $ 3,124
=========== =========== ==========
Net income per share
Basic..................................... $ 0.53 $ 0.58 $ 0.46
Diluted................................... $ 0.52 $ 0.56 $ 0.38
Weighted average shares outstanding
Basic..................................... 9,860,033 9,815,657 6,791,231
Diluted................................... 10,020,266 10,105,054 8,219,180
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained
Common stock Additional Cumulative earnings
-------------- paid-in translation (accumulated)
Shares Amount capital adjustments deficit) Total
------ ------ ---------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1996................... 6,000 $60 $ -- $ 34 $ (217) $ (123)
Accrued dividends on
Convertible
Redeemable Preferred
Stock................ -- -- -- -- (231) (231)
Exercise of stock
options.............. 106 1 284 -- -- 285
Stock purchased
through Employee
Stock Purchase Plan.. 3 1 41 -- -- 42
Conversion of
Convertible
Redeemable Preferred
Stock into common
stock................ 1,500 15 5,446 -- -- 5,461
Issuance of common
stock, net of
expenses............. 2,180 21 23,828 -- -- 23,849
Translation
adjustment........... -- -- -- (1) -- (1)
Net income............ -- -- -- -- 3,124 3,124
----- --- ------- ---- ------- -------
Balances at December 31,
1996................... 9,789 98 29,599 33 2,676 32,406
Exercise of stock
options.............. 100 1 338 -- -- 339
Tax benefit from
exercise of
nonqualified stock
options.............. -- -- 628 -- -- 628
Stock purchased
through Employee
Stock Purchase Plan.. 21 -- 315 -- -- 315
Translation
adjustment........... -- -- -- (13) -- (13)
Net income............ -- -- -- -- 5,656 5,656
----- --- ------- ---- ------- -------
Balances at December 31,
1997................... 9,910 99 30,880 20 8,332 39,331
Exercise of stock
options.............. 59 1 192 -- -- 193
Tax benefit from
exercise of
nonqualified stock
options.............. -- -- 122 -- -- 122
Stock purchased
through Employee
Stock Purchase Plan.. 31 -- 326 -- -- 326
Repurchase of common
stock................ (303) (3) (2,389) -- -- (2,392)
Translation
adjustment........... -- -- -- 2 -- 2
Net income............ -- -- -- -- 5,198 5,198
----- --- ------- ---- ------- -------
Balances at December 31,
1998................... 9,697 $97 $29,131 $ 22 $13,530 $42,780
===== === ======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 5,198 $ 5,656 $ 3,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation..................................... 2,230 1,930 1,320
Deferred income taxes............................ (225) (309) (571)
Provision for doubtful accounts and returns...... (375) 279 409
Changes in operating assets and liabilities:
Accounts receivable............................. (63) (1,100) (1,498)
Other current assets............................ 38 (305) 167
Accounts payable and accrued expenses........... (2,001) 2,179 2,475
------- -------- -------
Net cash provided by operating activities...... 4,802 8,330 5,426
Cash flows provided by (used in) investing
activities:
Purchases of furniture and equipment.............. (2,168) (2,275) (2,892)
Net sales (purchases) of marketable securities.... (1,221) (12,510) (5,857)
Purchase of capitalized software.................. (2,131) -- --
Other assets...................................... -- 432 (197)
------- -------- -------
Net cash used in investing activities.......... (5,520) (14,353) (8,946)
Cash flows provided by (used in) financing
activities:
Proceeds from Employee Stock Purchase Plan........ 326 315 42
Proceeds from exercise of stock options........... 193 339 285
Net proceeds from sale of common stock............ -- -- 23,849
Repurchase of common stock........................ (2,392) -- --
------- -------- -------
Net cash provided by (used in) financing
activities.................................... (1,873) 654 24,176
------- -------- -------
Net (decrease) increase in cash and cash
equivalents....................................... (2,591) (5,369) 20,656
Cash and cash equivalents, beginning of year....... 17,315 22,684 2,028
------- -------- -------
Cash and cash equivalents, end of year............. $14,724 $ 17,315 $22,684
======= ======== =======
Supplementary disclosure of cash flow activity:
Income taxes paid................................. $ 2,608 $ 1,968 $ 1,550
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ONTRACK Data International, Inc. (the "Company") provides data recovery
services and software, utility software and other computer data related
services. The Company's headquarters are in Minneapolis, Minnesota, and has
locations in Los Angeles, California; San Jose, California; Washington, D.C.;
New York, New York; London, England; Stuttgart, Germany; and Paris, France.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Preparation of the consolidated 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from data recovery services is recognized upon shipment or
transmission of the recovered data back to customers. Software revenue is
recognized either upon shipment or upon receipt of OEM royalty reports,
whichever is applicable. Software revenue is stated net of estimated customer
returns and allowances. The estimated costs of future technical support to
customers in their use of the Company's software products are accrued upon
shipment of the product.
The allowance for doubtful accounts and returns at December 31, 1998 and 1997
was $483 and $858.
Research and Development
Expenditures for research and software development costs are expensed as
incurred. Such costs related to the development of software products are
required to be expensed until the point that technological feasibility and
proven marketability of the product under development are established. Costs
otherwise capitalizable after technological feasibility is achieved have also
been expensed because they have been insignificant. Costs to acquire software
products which are complete and ready for sale are capitalized and are
amortized over the product's estimated life.
F-8
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expenses of
approximately $2,199, $1,639, and $1,304 were charged to operations during the
years ended December 31, 1998, 1997, and 1996.
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less and which are readily convertible to cash.
Marketable securities generally consist of taxable and tax exempt government
agency securities and are classified as short-term or long-term in the balance
sheet based on their maturity date. Marketable securities are carried at
amortized cost and unrealized holding gains and losses have not been
significant.
Fair Value of Financial Instruments
Cash, cash equivalents and marketable securities are valued at their carrying
amounts, which approximates fair value. The fair value of all other financial
instruments approximates cost as stated.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to
customers in the ordinary course of business but generally does not require
collateral for amounts due. No single customer or region represents a
significant concentration of credit risk.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
generally range from 3 to 5 years. Leasehold improvements are amortized over
the term of the lease or the asset life, whichever is less. Significant
additions or improvements extending asset lives are capitalized, while repairs
and maintenance are charged to expense as incurred.
Stock-Based Compensation
The Company utilizes the intrinsic value method of accounting for its stock-
based employee compensation plans. Pro-forma information related to the fair
value based method of accounting is contained in Note 9.
F-9
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Foreign Currency
All assets and liabilities of foreign subsidiaries are translated from
foreign currencies to U.S. dollars at period-end rates of exchange, while the
statement of income is translated at the average exchange rates during the
period. Translation adjustments are recorded in shareholders' equity.
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130") effective January 1, 1998. SFAS
No. 130 requires that items defined as other comprehensive income, such as
foreign currency translation adjustments, be separately classified in the
financial statements and that the accumulated balance of the other
comprehensive income be reported separately from retained earnings and
additional paid-in-capital in the equity section of the balance sheet.
Comprehensive income is not separately reported within the statement of income
as amounts were not significant for the years ended 1998, 1997, and 1996.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of outstanding common shares. Diluted net income per share is
computed by dividing net income by the weighted average number of outstanding
common shares and common share equivalents relating to stock options, when
dilutive. Options to purchase 430,760 and 8,940 shares of common stock with
weighted average exercise prices of $13.33 and $21.49 were outstanding during
1998 and 1997, but were excluded from the computation of common share
equivalents because they were anti-dilutive. There were no anti-dilutive
options outstanding in 1996.
F-10
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--FINANCIAL STATEMENT COMPONENTS
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Computer equipment......................................... $ 8,191 $ 7,145
Furniture and office equipment............................. 1,933 1,434
Leasehold improvements..................................... 940 503
Purchased software......................................... 868 689
Less accumulated depreciation.............................. (7,913) (5,691)
------- -------
$ 4,019 $ 4,080
======= =======
Accrued expenses consist of the following:
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Accrued wages and benefits................................. $ 333 $ 3,054
Other accrued expenses..................................... 1,744 951
------- -------
$ 2,077 $ 4,005
======= =======
</TABLE>
NOTE 3--PURCHASE OF SOFTWARE PRODUCT LINE
In December 1998, the Company purchased the assets related to the Tiramisu
software product line from a German company. Tiramisu is a do-it-yourself data
recovery software and will be sold as a solution for those who have lost data
that is relatively easy to recover and do not need the assistance of a data
recovery engineer. The purchase price was approximately $2,100 and is
classified as capitalized software in the Company's balance sheet.
NOTE 4--LINE OF CREDIT
The Company maintains a line of credit which allows maximum borrowings of
$1,000 subject to a borrowing base of 80% of accounts receivable outstanding
less than 90 days. The line of credit carries an interest rate of 0.5% over the
prime lending rate and is collateralized by all assets of the Company. There
were no borrowings outstanding under the line of credit at December 31, 1998
and 1997.
F-11
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--INCOME TAXES
The provision for income taxes is based on income before income taxes
reported for financial statement purposes. The components of income (loss)
before income taxes consist of the following:
<TABLE>
<CAPTION>
Years ended December
31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States............... $7,850 $8,487 $4,853
Foreign..................... (346) 28 71
------ ------ ------
Income before income
taxes.................... $7,504 $8,515 $4,924
====== ====== ======
The Company's provision for income taxes consists of the following:
<CAPTION>
Years ended December
31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................... $2,097 $2,541 $1,909
State..................... 317 348 160
Foreign................... 117 272 241
------ ------ ------
Total current........... 2,531 3,161 2,310
Deferred:
Federal................... (44) (186) (270)
State..................... (4) (19) (22)
Foreign................... (177) (97) (218)
------ ------ ------
Total deferred.......... (225) (302) (510)
------ ------ ------
$2,306 $2,859 $1,800
====== ====== ======
The Company's effective tax rates differed from the federal statutory tax
rate as follows:
<CAPTION>
Years ended December
31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate...... 34.0 % 34.0 % 34.0 %
State income taxes, net of
federal tax benefit........ 2.7 2.5 1.8
Tax exempt interest......... (4.7) (4.1) (1.1)
Other, net.................. (1.3) 1.2 1.9
------ ------ ------
30.7 % 33.6 % 36.6 %
====== ====== ======
</TABLE>
F-12
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--INCOME TAXES--Continued
Deferred income taxes result from differences between the financial reporting
and income tax basis of the Company's assets and liabilities and are calculated
using current tax rates. Deferred tax assets consist of the following
components:
<TABLE>
<CAPTION>
December
31,
-----------
1998 1997
------ ----
<S> <C> <C>
Allowance for doubtful accounts and returns..................... $ 170 $300
Accrued expenses................................................ 82 133
Loss carryforwards of foreign subsidiaries...................... 490 315
Depreciation.................................................... 300 69
------ ----
$1,042 $817
====== ====
</TABLE>
There is no limit on the loss carryforwards of any of the foreign
subsidiaries.
NOTE 6--EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for employees who have completed one
year of service and attained the age of 21. Contributions to the plan by the
Company are determined by the Board of Directors. The Company recorded profit
sharing expense of approximately $230, $569, and $333 for the years ended
December 31, 1998, 1997, and 1996.
The Company's profit sharing plan also incorporates a 401(k) savings plan for
its employees. Eligible employees may elect to contribute up to 15% of their
salaries to the plan, up to limits defined by the Internal Revenue Code. There
are no employer matching contributions.
NOTE 7--OPERATING LEASES
The Company leases office and warehouse facilities under noncancelable
operating leases which expire on various dates through August, 2009. Rental
expense under such leases was $1,367, $934, and $782 for the years ended
December 31, 1998, 1997, and 1996.
Future minimum lease commitments for the next five years under all operating
leases are as follows:
<TABLE>
<S> <C>
1999............................................................... $1,222
2000............................................................... 1,349
2001............................................................... 1,285
2002............................................................... 1,147
2003............................................................... 1,027
------
$6,030
======
</TABLE>
F-13
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--SEGMENT INFORMATION AND FOREIGN OPERATIONS
During 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The Company conducts its business
within one reportable segment: software and services for the protection of
data. European operations include data recovery services in England, Germany
and France by Ontrack Data Recovery Europe Ltd., Ontrack Data Recovery GmbH,
and Ontrack France Sarl, all wholly-owned subsidiaries.
The Company licenses its data recovery technology to a Japanese company, Y-E
Data. In exchange for the license, Y-E Data pays the Company royalties which
are paid monthly based on the amount of gross data recovery revenues earned by
Y-E Data each month.
Revenues, net income and identifiable assets by geographic area are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Domestic operations............................. $29,470 $29,526 $22,555
European operations............................. 7,284 6,470 4,011
Japanese operations............................. 502 414 661
Eliminations.................................... (1,415) (1,161) (464)
------- ------- -------
Consolidated.................................... $35,841 $35,249 $26,763
======= ======= =======
Net income (loss):
Domestic operations............................. $ 5,151 $ 5,208 $ 2,581
European operations............................. (405) 75 (52)
Japanese operations............................. 452 373 595
------- ------- -------
Consolidated.................................... $ 5,198 $ 5,656 $ 3,124
======= ======= =======
Identifiable assets:
Domestic operations............................. $46,347 $44,558 $36,050
European operations............................. 3,241 2,531 1,856
Eliminations.................................... (3,139) (1,964) (1,271)
------- ------- -------
Consolidated.................................... $46,449 $45,125 $36,635
======= ======= =======
</TABLE>
Intercompany transactions are eliminated in consolidation and consist
primarily of royalty charges by the U.S. parent to the European subsidiaries
for data recovery technology.
NOTE 9--SHAREHOLDERS' EQUITY
Stock Option Plans
The Company has stock option plans that provide for incentive and non-
qualified stock options to be granted to directors, officers and other key
employees or consultants. The stock options granted generally have a six to ten
year life, vest over a period of three to five years, and have an exercise
price equal to the fair market value of the stock on the date of grant. At
December 31, 1998, the Company had 1,400,000 shares of common stock available
for grant under the plans.
F-14
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--SHAREHOLDERS' EQUITY--Continued
Transactions under the plans during each of the three years in the period
ended December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Number of Weighted
shares under average
option exercise price
------------ --------------
<S> <C> <C>
Outstanding at January 1, 1996.................... 275,620 $ 2.56
Granted......................................... 420,128 9.79
Exercised....................................... (105,924) 2.58
--------- ------
Outstanding at December 31, 1996.................. 589,824 7.71
Granted......................................... 265,500 17.38
Cancelled....................................... (9,100) 15.22
Exercised....................................... (99,822) 2.89
--------- ------
Outstanding at December 31, 1997.................. 746,402 11.69
Granted......................................... 385,000 13.04
Cancelled....................................... (62,126) 9.22
Exercised....................................... (50,526) 13.23
--------- ------
Outstanding at December 31, 1998.................. 1,018,750 $ 7.13
========= ======
</TABLE>
The Company repriced substantially all outstanding stock options in May and
September 1998 to bring them in line with the market value of the Company.
Options exercisable at December 31:
<TABLE>
<S> <C> <C>
1996.................................................... 290,944 $3.29
1997.................................................... 252,738 $5.56
1998.................................................... 450,389 $6.31
</TABLE>
The following tables summarize information concerning currently outstanding
and exercisable stock options:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
Range of Weighted Average
Exercise Number Remaining Weighted Average
Prices Outstanding Contractual Life Exercise Price
-------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$2.58--$ 3.99 145,322 3.2 years $3.42
$6.50--$12.00 873,428 8.5 years $7.75
---------
1,018,750
=========
</TABLE>
F-15
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--SHAREHOLDERS' EQUITY--Continued
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
Range of
Exercise Number Weighted Average
Prices Outstanding Exercise Price
-------- ----------- ----------------
<S> <C> <C>
$2.58--$ 3.99 145,322 $3.42
$6.50--$12.00 305,067 $7.69
-------
450,389
=======
</TABLE>
The Company's pro forma net income and basic and diluted net income per share
would have been as follows had the fair value method been used for valuing
stock options granted to employees in 1996 through 1998:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income.... $ 4,011 $ 4,875 $ 2,949
Pro forma diluted net
income per share....... $ 0.40 $ 0.48 $ 0.36
The weighted average fair value of options granted and the weighted average
assumptions used in the Black-Scholes options pricing model are as follows:
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Fair value of options
granted................ $ 7.96 $ 14.35 $ 6.71
Dividend yield.......... 0% 0% 0%
Average term............ 6.0 years 8.4 years 7.3 years
Volatility.............. 82.4% 75.0% 57.8%
Risk-free rate of
return................. 5.2% 6.0% 6.5%
</TABLE>
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (ESPP) which is available to
eligible employees. Under terms of the plan, eligible employees may designate
from 1% to 10% of their compensation to be withheld through payroll deductions
for the purchase of common stock at 85% of the lower of the market price on the
first or last day of the offering period. Under the plan, 250,000 shares of
common stock have been reserved for issuance. As of December 31, 1998, 63,462
shares have been issued under the plan. Fair value disclosures under SFAS No.
123 have not been disclosed for shares under the ESPP as such values are
immaterial.
Stock Repurchase
In August 1998, the Board of Directors authorized a stock buy-back program
which allowed the Company to repurchase up to 500,000 shares, or approximately
5%, of its outstanding shares of stock. As of December 31, 1998, a total of
302,500 shares were repurchased at a total cost of $2,392
and an average cost of $7.91 per share. No shares have been repurchased
subsequent to this date.
F-16
<PAGE>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, Except Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................... $11,733 $14,724
Marketable securities............................. 15,402 18,872
Accounts receivable, net.......................... 5,753 3,759
Deferred income taxes and other assets............ 2,301 2,228
------- -------
Total current assets............................ 35,189 39,583
Long-term marketable securities..................... 3,502 716
Furniture and equipment, net........................ 6,232 4,019
Capitalized software, net........................... 1,373 2,131
Goodwill, net....................................... 6,906 --
------- -------
Total assets.................................... $53,202 $46,449
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities................................. $ 5,708 $ 3,669
Shareholders' equity
Common stock (9,959,944 and 9,697,234 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively)................. 100 97
Additional paid-in capital........................ 30,295 29,131
Accumulated other comprehensive income............ 4 22
Retained earnings................................. 17,095 13,530
------- -------
Total shareholders' equity...................... 47,494 42,780
------- -------
Total liabilities and shareholders' equity...... $53,202 $46,449
======= =======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, Except share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Data recovery services and
products..................... $ 9,522 $ 7,601 $ 24,480 $ 22,041
Software...................... 2,525 1,470 5,042 5,003
---------- ----------- ---------- -----------
Total revenues.............. 12,047 9,071 29,522 27,044
Cost of revenues:
Data recovery services and
products..................... 2,319 1,626 6,264 4,380
Software...................... 515 304 939 905
---------- ----------- ---------- -----------
Total cost of revenues...... 2,834 1,930 7,203 5,285
---------- ----------- ---------- -----------
Gross margin.................... 9,213 7,141 22,319 21,759
Operating expenses:
Research and development...... 1,994 1,738 4,914 5,000
Sales and marketing........... 2,721 2,282 7,135 6,424
General and administrative.... 2,037 1,775 5,398 5,152
Amortization of goodwill...... 357 -- 357 --
---------- ----------- ---------- -----------
Total operating expenses.... 7,109 5,795 17,804 16,576
---------- ----------- ---------- -----------
Operating income................ 2,104 1,346 4,515 5,183
Interest and other income....... 303 569 823 1,220
---------- ----------- ---------- -----------
Income before income taxes...... 2,407 1,915 5,338 6,403
Provision for income taxes...... 819 613 1,773 2,049
---------- ----------- ---------- -----------
Net income.................. $ 1,588 $ 1,302 $ 3,565 $ 4,354
========== =========== ========== ===========
Basic net income per share...... $ 0.16 $ 0.13 $ 0.36 $ 0.44
Diluted net income per share.... $ 0.16 $ 0.13 $ 0.36 $ 0.43
Weighted average shares used in
computation of:
Basic net income per share...... 9,911,467 9,894,394 9,774,353 9,919,335
Diluted net income per share.... 9,965,732 10,006,938 9,810,036 10,072,004
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 3,565 $ 4,354
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 1,512 1,671
Amortization of capitalized software.................. 758 --
Amortization of goodwill.............................. 357 --
Changes in operating assets and liabilities:
Accounts receivable................................. (1,994) (134)
Other current assets................................ 228 (166)
Accounts payable and accrued expenses............... (387) (3,371)
--------- ---------
Net cash provided by operating activities......... 4,039 2,354
Cash flows from investing activities:
Acquisition of Mijenix Corporation.................... (6,564) --
Purchase of furniture and equipment................... (1,317) (1,886)
Net increase of short-term and long-term marketable
securities........................................... 684 2,773
--------- ---------
Net cash (used in) provided by investing
activities....................................... (7,197) 887
Cash flows from financing activities:
Repurchase of common stock............................ -- (2,232)
Proceeds from exercise of stock options and employee
stock purchase plan.................................. 167 433
--------- ---------
Net cash provided by (used in) financing
activities....................................... 167 (1,799)
--------- ---------
Net (decrease) increase in cash and cash equivalents.... (2,991) 1,442
Cash and cash equivalents, beginning of period.......... 14,724 17,315
--------- ---------
Cash and cash equivalents, end of period................ $ 11,733 $ 18,757
========= =========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
ONTRACK Data International, Inc. (the "Company") provides data recovery
services and products, utility software and other computer data related
services. The Company's headquarters are in Minneapolis, Minnesota, and it has
locations in Los Angeles, California; Washington, D.C.; New York, New York;
Boulder, Colorado; London, England; Stuttgart, Germany and Paris, France.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as permitted by
such rules and regulations. These financial statements and related notes should
be read in conjunction with the financial statements and notes thereto included
in the Company's audited consolidated financial statements for the year ended
December 31, 1998 contained in the Company's Annual Report on Form 10-K for
1998.
In the opinion of management, the interim financial statements reflect
adjustments, consisting of normal recurring accruals, which are necessary to
present fairly the Company's financial position, results of operations and cash
flow for the periods indicated. The results of operations for the third quarter
and nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
NET INCOME PER SHARE
Basic net income per share includes no dilution and is computed by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net income per share reflects
the potential dilution of securities that could share in the earnings of the
Company. The difference between the Company's basic and diluted net income per
share data as presented is due to the dilutive impact from stock options whose
exercise price was below the average common stock price for the respective
period presented.
COMPREHENSIVE INCOME
The components of comprehensive income for the third quarter and nine months
ended September 30, 1999 and 1998 are foreign currency translation adjustments.
Comprehensive income is not separately reported, as amounts were not
significant.
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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
LEGATO SYSTEMS, INC.
LASSO ACQUISITION CORP.
AND
ONTRACK DATA INTERNATIONAL, INC.
NOVEMBER 18, 1999
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TABLE OF CONTENTS
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ARTICLE I THE MERGER...................................................... 1
1.1 The Merger....................................................... 1
1.2 Closing; Effective Time.......................................... 2
1.3 Effect of the Merger............................................. 2
1.4 Articles of Incorporation; Bylaws................................ 2
1.5 Directors and Officers........................................... 2
1.6 Effect on Capital Stock.......................................... 2
1.7 Surrender of Certificates........................................ 4
1.8 No Further Ownership Rights in Target Capital Stock.............. 5
1.9 Lost, Stolen or Destroyed Certificates........................... 5
1.10 Tax Consequences................................................. 5
1.11 Return of Exchange Fund.......................................... 6
1.12 Taking of Necessary Action; Further Action....................... 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET....................... 6
2.1 Organization, Standing and Power................................. 6
2.2 Capital Structure................................................ 7
2.3 Authority........................................................ 8
2.4 SEC Documents; Financial Statements.............................. 9
2.5 Absence of Certain Changes....................................... 9
2.6 Absence of Undisclosed Liabilities............................... 10
2.7 Litigation....................................................... 10
2.8 Restrictions on Business Activities.............................. 10
2.9 Governmental Authorization....................................... 10
2.10 Title to Property................................................ 10
2.11 Intellectual Property............................................ 11
2.12 Environmental Matters............................................ 12
2.13 Taxes............................................................ 13
2.14 Employee Benefit Plans........................................... 15
2.15 Employees and Consultants........................................ 16
2.16 Related-Party Transactions....................................... 18
2.17 Insurance........................................................ 18
2.18 Compliance with Laws............................................. 18
2.19 Brokers' and Finders' Fees....................................... 18
2.20 Vote Required.................................................... 18
2.21 No Breach of Material Contracts.................................. 18
2.22 Registration Statement; Proxy Statement/Prospectus............... 19
2.23 Complete Copies of Materials..................................... 19
2.24 Opinion of Financial Advisor..................................... 19
2.25 Board Approval................................................... 19
2.26 Section 673 of Minnesota Law Not Applicable...................... 19
2.27 Representations Complete......................................... 19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB..... 20
3.1 Organization, Standing and Power................................. 20
3.2 Capital Structure................................................ 20
3.3 Authority........................................................ 21
3.4 SEC Documents; Financial Statements.............................. 22
3.5 Absence of Certain Changes....................................... 23
3.6 Absence of Undisclosed Liabilities............................... 23
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3.7 Intellectual Property............................................ 23
3.8 Environmental Matters............................................ 23
3.9 Employee Benefit Plans........................................... 23
3.10 Litigation....................................................... 23
3.11 Compliance with Laws............................................. 24
3.12 Proxy Statement.................................................. 24
3.13 Board Approval................................................... 24
3.14 Representations Complete......................................... 24
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................ 24
4.1 Conduct of Business of Target and Acquiror....................... 24
4.2 Conduct of Business of Target.................................... 25
4.3 Notices.......................................................... 27
ARTICLE V ADDITIONAL AGREEMENTS........................................... 27
5.1 No Solicitation.................................................. 27
5.2 Proxy Statement/Prospectus; Registration Statement............... 28
5.3 Shareholders Meeting............................................. 29
5.4 Access to Information............................................ 29
5.5 Confidentiality.................................................. 29
5.6 Public Disclosure................................................ 29
5.7 Consents; Cooperation............................................ 30
5.8 Update Disclosure; Breaches...................................... 31
5.9 Stockholder Lists................................................ 31
5.10 Indemnification.................................................. 31
5.11 Irrevocable Proxies.............................................. 32
5.12 Legal Requirements............................................... 32
5.13 Tax-Free Reorganization.......................................... 32
5.14 Stock Options.................................................... 32
5.15 Listing of Additional Shares..................................... 33
5.16 Additional Agreements; Reasonable Efforts........................ 33
5.17 Employee Benefits................................................ 34
ARTICLE VI CONDITIONS TO THE MERGER....................................... 34
6.1 Conditions to Obligations of Each Party to Effect the Merger..... 34
6.2 Additional Conditions to the Obligations of Target............... 35
6.3 Additional Conditions to the Obligations of Acquiror............. 35
ARTICLE VII TERMINATION, EXPENSES, AMENDMENT AND WAIVER................... 37
7.1 Termination...................................................... 37
7.2 Effect of Termination............................................ 38
7.3 Expenses and Termination Fees.................................... 38
7.4 Amendment........................................................ 39
7.5 Extension; Waiver................................................ 39
ARTICLE IX GENERAL PROVISIONS............................................. 39
8.1 Notices.......................................................... 39
8.2 Interpretation................................................... 40
8.3 Counterparts..................................................... 40
8.4 Entire Agreement; No Third Party Beneficiaries................... 40
8.5 Severability..................................................... 41
8.6 Remedies Cumulative.............................................. 41
8.7 Governing Law.................................................... 41
8.8 Assignment....................................................... 41
8.9 Rules of Construction............................................ 41
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SCHEDULES
Target Disclosure Letter
Acquiror Disclosure Letter
Option Schedule
</TABLE>
EXHIBITS
Exhibit A Articles of Merger
Exhibit B Voting and Proxy Agreement
Exhibit C Employment and Non-Competition Agreement
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 18, 1999, by and among Legato Systems, Inc., a
Delaware corporation ("Acquiror"), Lasso Acquisition Corp., a Minnesota
corporation ("Merger Sub") and Ontrack Data International, Inc. a Minnesota
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 Target with and into Merger Sub (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)(D)
of the Code.
E. The parties intend for the Merger to be accounted for as a purchase.
F. 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 shareholders, 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.
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 and the Articles of
Merger attached hereto as Exhibit A (the "Articles of Merger") and the
applicable provisions of the Minnesota Business Corporation Act ("Minnesota
Law"), Target shall be merged with and into Merger Sub, the separate corporate
existence of Target shall cease and Merger Sub shall continue as the surviving
corporation under the name "Ontrack Products Division, Inc." Merger Sub as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
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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 Articles of Merger, together with
the required officers' certificates, with the Secretary of State of the State
of Minnesota, in accordance with the relevant provisions of Minnesota 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 Articles of Merger and the
applicable provisions of Minnesota 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 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
by Minnesota Law and such Articles of Incorporation except that as of the
Effective Time, Article I of the Articles of Incorporation shall be amended to
read: "The name of the corporation shall be Ontrack Products Division, 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 appointed. 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.
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 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) or any shares of Target Capital Stock to which
dissenters' rights have been exercised pursuant to Section 1.6(f)) will be
canceled and extinguished and be converted automatically into the right to
receive (i) .1491 of a share of Acquiror Common Stock (the "Common Exchange
Ratio") and (ii) two dollars ($2.00) in cash (the "Cash Consideration").
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At the Effective Time, and as more particularly set forth in Section 5.14,
each option to purchase Target Common Stock outstanding immediately prior to
the Effective Time will be canceled and extinguished and be converted
automatically into an option to purchase .1822 of a share of Acquiror Common
Stock (the "Option Exchange Ratio).
No adjustment shall be made in the number of shares of Acquiror Common Stock
issued in the Merger as a result of 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 Non-Qualified
Stock Option Plan and the 1996 Stock Incentive Plan (collectively, the
"Target Stock Option Plans") and all options to purchase Target Common
Stock then outstanding under the Target Stock Option Plan shall be assumed
by Acquiror in accordance with Section 5.14.
(d) Adjustments to Exchange Ratios. The Common Exchange Ratio, the amount
of Cash Consideration and the Option 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.
(e) 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 (10) 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.
(f) Dissenters' Rights. Notwithstanding any provisions of this Agreement
to the contrary, any Target Capital Stock outstanding immediately prior to
the Effective Time held by a holder who has demanded and perfected the
right, if any, to receive fair value for such Target Capital Stock
("Dissenting Shares") in accordance with the provisions of Sections
302A.471 and 302A.473 of the Minnesota Law and as of the Effective Time has
not withdrawn or lost such dissenter's rights shall not be converted into
or represent a right to receive the consideration pursuant to Section
1.6(a) (the "Merger Consideration"), but the shareholder shall only be
entitled to such rights as are granted by the Minnesota Law. If a holder of
Target Capital Stock who asserts dissenter's rights under the Minnesota Law
withdraws or loses such rights (through failure to perfect or otherwise),
then, as of the Effective Time or the occurrence of such event, whichever
last occurs, those shares (the "Unperfected Shares") shall be converted
into and represent only the right to receive the Merger Consideration as
provided in Section 1.6(a),
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without interest, upon the surrender of the certificate or certificates
representing those Unperfected Shares. Target shall give Acquiror (i)
prompt notice of any written notice of intent to demand fair value for any
Unperfected Shares, attempted withdrawals of such demands, the deposit of
any shares for which payment is demanded, and any other instruments served
pursuant to the Minnesota Law received by the Target relating to
dissenters' rights and (ii) the opportunity to participate in all
negotiations and proceedings with respect to the assertion of dissenters'
rights under the Minnesota Law. The Target shall not, except with the prior
written consent of Acquiror, voluntarily make any payment with respect to
any such demands for payment of fair value, offer to settle or settle any
such demands or approve any withdrawal of any such demands.
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 the Cash Consideration pursuant to Section 1.6(a), and cash in lieu
of fractional shares pursuant to Section 1.6(e) (such cash amounts and
certificates being hereinafter referred to as the "Exchange Fund").
(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, the Cash
Consideration 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, the Cash
Consideration 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 of the Cash Consideration and cash
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 shall have been so
converted and the right to receive the Cash Consideration and an amount in cash
in lieu of the issuance of any fractional shares in accordance with Section
1.6.
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(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), together with the Cash Consideration, 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), together with the Cash
Consideration, 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.
1.10 Tax Consequencess. It is intended by the parties hereto that the Merger
shall constitute a reorganization within the meaning of Section 368 of the
Code. 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. In the event the status of the Merger as a
reorganization under
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Sections 368(a)(1)(A) and 368(a)(2)(D) is challenged by the IRS on a basis of a
technical deficiency, this Agreement will be deemed amended to the extent the
amendment does not materially change the position of the parties as of the date
of its execution, to correct any such technical deficiency.
1.11 Return of Exchange Fund. Any portion of the Exchange Fund that remains
unclaimed by shareholders of Target for six (6) months after the Effective Time
shall be returned to Acquiror, upon demand, and any holder of Target Capital
Stock who has not theretofore complied with Section 1.7 shall thereafter look
only to Acquiror for issuance of the number of shares of Acquiror Common Stock
and the Cash Consideration to which such holder has become entitled, subject to
Section 1.7(f).
1.12 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 in the
disclosure letter delivered by Target to Acquiror prior to the execution and
delivery of this Agreement (the "Target Disclosure Letter"). 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
unless a cross-reference is made to another paragraph which such disclosure
also qualifies. 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. Each of Target and its subsidiaries 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 Articles of Incorporation and Bylaws or
other charter documents, as applicable, of Target and each of its subsidiaries,
each as amended to date. Target is not in violation of any of the provisions of
its Articles of Incorporation or Bylaws or equivalent organizational documents.
Target is the owner of
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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
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
other than its subsidiaries.
2.2 Capital Structure. The authorized capital stock of Target consists of
25,000,000 shares of Common Stock, $.01 par value, and 1,000,000 shares of
Preferred Stock, $.01 par value, of which there were issued and outstanding as
of the date of this Agreement, 9,961,944 shares of Common Stock and no shares
of Preferred Stock. 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 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 Articles of Incorporation or Bylaws of Target or any agreement to
which Target is a party or by which it is bound. As of the date of this
Agreement, Target has reserved (i) 1,800,000 shares of Common Stock for
issuance to employees, directors and consultants pursuant to the Target Stock
Option Plans, of which 254,072 shares have been issued pursuant to option
exercises or direct stock purchases, and 1,501,117 shares are subject to
outstanding, unexercised options and (ii) 250,000 shares of Common Stock for
issuance to employees pursuant to the Target ESPP, of which 110,833 shares have
been issued and approximately 3,000 shares are subject to outstanding
subscription rights based on withholdings through November 15, 1999 and Target
stock price as of October 1, 1999. 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 shareholders and (ii) to Target's knowledge, among any of Target's
shareholders or between any of Target's shareholders and any third party,
except for the shareholders 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
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options, the Target shareholders, 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) commenced under the
Target ESPP on October 1, 1999 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.
2.3 Authority.
(a) Target has all requisite corporate power and authority to enter into this
Agreement, the Articles of Merger and the Option Agreement (collectively, the
"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 Target, subject only to the approval of the Merger by Target's
shareholders as contemplated by Section 6.1. 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 Articles 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 individually or in the
aggregate 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 Articles of Merger, together with the required officers'
certificates, as provided in Section 1.2; (ii) the filing of the Proxy
Statement (as defined is Section 2.23 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) the filing of a report on Form 8-K in
accordance with the Exchange Act; (iv) 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; (v) such filings as may be required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR");
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and (vi) such other consents, authorizations, filings, approvals and
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 any of the
transactions contemplated by this Agreement.
2.4 SEC Documents Financial Statements. Target has furnished 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, 1998, 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 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. As of their respective filing
dates, the Target SEC Documents complied in all material respects with the
requirements of the Exchange Act and the Securities Act, 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 shareholder'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 Regulations S-K and S-X of
the SEC).
2.5 Absence of Certain Changes. Since September 30, 1999, (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, 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; (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
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a party or by which it is bound; (vi) any amendment or change to the Articles
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, employees or consultants other than with respect to non-officer
employees and consultants only, any increases in the ordinary course of
business consistent with past practice; or (viii) any negotiation or agreement
by Target to do any of the things described in the preceding clauses (i)
through (vii) (other than negotiations with Acquiror and its representatives
regarding the transactions contemplated by this Agreement).
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 September 30, 1999 (the "Target Balance Sheet"), (ii) those
obligations or liabilities (including contractual obligations) 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.
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.
2.10 Title to Property. Target has good and marketable 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,
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pledges, charges or encumbrances of any kind or character, except (i) liens for
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. The plants,
property and equipment of Target that are used in the operations of its
business are in good operating condition and repair (normal wear and tear
excepted). All properties used in the operations of Target are reflected in the
Target Balance Sheet to the extent generally accepted accounting principles
require the same to be reflected. Except as set forth in the Target Disclosure
Letter, Target does not own or lease any real property. For purposes of this
Section 2.10, the term "property" or "properties" does not include Intellectual
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 that are
not part of any current product, service or Intellectual Property offering of
Target. No Target Intellectual Property 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 has been created by
persons who were employees of Target at the time of creation 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 or suggesting that or questioning whether 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 (but excluding
Intellectual Property licensed to Target only on a nonexclusive basis and
material to Target's business), the Target Disclosure Letter lists (by name,
number, jurisdiction, owner and, where applicable, the name and address of each
inventor) all patents and patent applications; all registered and unregistered
Marks; and all registered and, if material, unregistered copyrights and mask
works; and all other issuances,
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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 at the end of the full
possible term, including extensions and renewals) 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 Intellectual Property with respect
to which Target has exclusivity and that is not otherwise disclosed in
published patents or patent applications or registered copyrights ("Target
Confidential Information"). Except where failure to do so would not have a
Material Adverse Effect on Target, 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 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) 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 Confidentiality and Non-Compete Agreement (in the
case of an employee) or a consulting agreement providing for the valid
assignment to Target of all Target Intellectual Property created or developed
for the Target (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., 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.
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2.13 Taxes.
(a) All Tax returns, statements, reports, declarations and other forms and
documents (including without limitation estimated Tax returns and reports and
material information statements, returns and reports) required to be filed with
any Tax authority with respect to any Taxable period ending on or before the
Effective Time, by or on behalf of Target (collectively, "Tax Returns" and
individually a "Tax Return"), have been or will be completed and filed when due
(including any extensions of such due date) and all amounts shown due on such
Tax Returns on or before the Effective Time have been or will be paid on or
before such date. The Target September 30, 1999, balance sheet included in the
Financial Statements (the "Target Balance Sheet") (i) fully accrues for all
actual and contingent liabilities for Taxes with respect to all periods through
September 30, 1999, and Target has not and will not incur any Tax liability in
excess of the amount reflected on such Target Balance Sheet with respect to
such periods (excluding any amount thereof that reflects timing differences
between the recognition of income for purposes of GAAP and for Tax purposes),
and (ii) accrues in accordance with GAAP for all material liabilities for Taxes
payable after September 30, 1999, with respect to all transactions and events
occurring on or prior to such date. All information set forth in the notes to
the Target Financial Statements relating to Tax matters is true, complete (with
respect to such matters required under GAAP) and accurate in all material
respects. No material Tax liability since September 30, 1999, has been or will
be incurred by Target other than in the ordinary course of business, and
adequate provision has been made by Target for all Taxes since that date in
accordance with GAAP on at least a quarterly basis.
(b) Target has previously provided or made available to Acquiror true and
correct copies of all Tax Returns filed since January 1, 1995. Target has
withheld and paid to the applicable financial institution or Tax authority all
amounts required to be withheld. To the best knowledge of Target, Tax Returns
filed with respect to Taxable years of Target through the Taxable year ended
December 31, 1998 in the case of the United States, have been examined and
closed. Target (or any member of any affiliated or combined group of which
Target has been a member) has not granted any extension or waiver of the
limitation period applicable to any Tax Returns that is still in effect. There
is no material claim, audit, action, suit, proceeding, or (to the knowledge of
Target) investigation now pending or (to the knowledge of Target) threatened
against or with respect to Target in respect of any Tax or assessment. No
written notice of deficiency or similar document of any Tax authority has been
received by Target, and there are no liabilities for Taxes (including
liabilities for interest, additions to Tax and penalties thereon and related
expenses) with respect to the issues that have been raised (and are currently
pending) by any Tax authority that could, if determined adversely to Target,
materially and adversely affect the liability of Target for Taxes. There are no
liens for Taxes (other than for current Taxes not yet due and payable) upon the
assets of Target. Target has never been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code. Target is in full
compliance with all the terms and conditions of any Tax exemptions or other
Tax-sharing agreement or order of a foreign government and the consummation of
the Merger will not have any adverse effect on the continued validity and
effectiveness of any such Tax exemption or other Tax-sharing agreement or
order. Neither Target nor any person on behalf of Target has entered into or
will enter into any agreement or consent pursuant to the collapsible
corporation provisions of Section 341(f) of the Code (or any corresponding
provision of state, local or foreign income tax law) or agreed to have Section
341(f)(2) of the Code (or any
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corresponding provision of state, local or foreign income tax law) apply to any
disposition of any asset owned by Target. None of the assets of Target is
property that Target is required to treat as being owned by any other person
pursuant to the so-called "safe harbor lease" provisions of former Section
168(f)(8) of the Code. None of the assets of Target directly or indirectly
secures any debt the interest on which is tax-exempt under Section 103(a) of
the Code. None of the assets of Target is "tax-exempt use property" within the
meaning of Section 168(h) of the Code. Target has not made and will not make a
deemed dividend election under Treas. Reg. (S)1.1502-32(f)(2) or a consent
dividend election under Section 565 of the Code. Target has never been a party
(either as a distributing corporation as a corporation that has been
distributed) to any transaction intended to qualify under Section 355 of the
Code or any corresponding provision of state law. Target has not participated
in (and will not participate in) an international boycott within the meaning of
Section 999 of the Code. Target does not have and has not had a permanent
establishment in any foreign country, as defined in any applicable tax treaty
or convention between the United States of America and such foreign country and
Target has not engaged in a trade or business within any foreign country.
Target has never elected to be treated as an S-corporation under Section 1362
of the Code or any corresponding provision of federal or state law. All
material elections with respect to Target's Taxes made during the fiscal years
ending December 31, 1996, 1997 and 1998 are reflected on the Target Tax Returns
for such periods, copies of which have been provided or made available to
Acquiror. After the date of this Agreement, no material election with respect
to Taxes will be made without the prior written consent of Acquiror, which
consent will not be unreasonably withheld or delayed. Target is not party to
any joint venture, partnership, or other arrangement or contract that could be
treated as a partnership for federal income tax purposes. Target is not
currently and never has been subject to the reporting requirements of Section
6038A of the Code. There is no agreement, contract or arrangement to which
Target is a party that could, individually or collectively, result in the
payment of any amount that would not be deductible by reason of Sections 280G
(as determined without regard to Section 280G(b)(4)), 162(a) (by reason of
being unreasonable in amount), 162 (b) through (p) or 404 of the Code. Target
is not a party to or bound by any Tax indemnity, Tax sharing or Tax allocation
agreement (whether written or unwritten or arising under operation of federal
law as a result of being a member of a group filing consolidated Tax returns,
under operation of certain state laws as a result of being a member of a
unitary group, or under comparable laws of other states or foreign
jurisdictions) that includes a party other than Target nor does Target owe any
amount under any such Agreement. Target is not, and has not been, a United
States real property holding corporation (as defined in Section 897(c)(2) of
the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of
the Code. Other than by reason of the Merger, Target has not been and will not
be required to include any material adjustment in Taxable income for any Tax
period (or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger.
(c) 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
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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 GAAP to be included
in, any of the Target Financial Statements.
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 Schedule 2.14
(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;
(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
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(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.
(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 except to the extent that failure to pay or
provide for such contributions, premiums or other payments would not have a
Material Adverse Effect. 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 list of any written and a description of any oral employment
agreements, consulting agreements or termination or severance agreements to
which Target is a party.
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(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 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.
(g) Target has not received or been notified of any written 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.
(i) Target has filed or will file 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.
(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 material breach of the terms, conditions or provisions of, or
constitute a default under, any Employee Obligation.
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2.16 Related-Party Transactions. No employee, officer, or director of Target
or member of his or her immediate family is indebted to Target, nor is Target
indebted (or committed to make loans or extend or guarantee credit) to any of
them. To Target's knowledge, none of such persons has any direct or indirect
ownership interest in any firm or corporation with which Target is affiliated
or with which Target has a business relationship, or any firm or corporation
that competes with Target, except to the extent that employees, officers, or
directors of Target and members of their immediate families own stock in
publicly traded companies that may compete with Target. No member of the
immediate family of any officer or director of Target is directly or indirectly
interested in any material contract with Target.
2.17 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.
2.18 Compliance with Laws. Target has complied with, is not in violation of,
and has not received any written 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.
2.19 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.
2.20 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
Shareholders 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.
2.21 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, to Target's knowledge, is not alleged to be in default in respect
of any material contract, except where the default would not and could not be
expected to have a Material Adverse Effect on Target. Each of the material
contracts is in full force and effect, unamended, 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 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.
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2.22 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 shareholders of
Target in connection with the meetings of Target's shareholders (the "Target
Shareholders Meeting") to be held in connection with the 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 shareholders, at the time of the Target Shareholders 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.
2.23 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.
2.24 Opinion of Financial Advisor. Target has been advised in writing by its
financial advisor, U.S. Bancorp Piper Jaffray, that in its opinion, as of the
date of this Agreement, the Merger is fair to the shareholders of Target from a
financial point of view.
2.25 Board Approval. The Board of Directors of Target has unanimously (i)
approved this Agreement and the Merger, (ii) determined that the Merger is in
the best interest of the shareholders of Target and is on terms that are fair
to such shareholders and (iii) recommended that the shareholders of Target
approve this Agreement and the Merger.
2.26 Section 673 of Minnesota Law Not Applicable. The Board of Directors of
Target has taken all actions so that the restrictions contained in Section
302A.673 of the Minnesota Law applicable to a "business combination" (as
defined in Section 302A.673) will not apply to the execution, delivery or
performance of this Agreement or the consummation of the Merger or the other
transactions contemplated by this Agreement.
2.27 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.
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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 in the
Disclosure Letter delivered by Acquiror to Target to prior to the execution and
delivery of this Agreement (the "Acquiror Disclosure Letter"). 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 unless a cross reference is made to another paragraph which such disclosure
also qualifies. 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, except where
required by local law, 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.
3.2 Capital Structure. The authorized capital stock of Acquiror consists of
200,000,000 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, 1999, 84,981,147 shares of Common Stock and no shares of
Preferred Stock. An aggregate of 30,000 shares of Acquiror's Series A Junior
Participating Preferred Stock ("Acquiror Junior Preferred Stock") were reserved
for future issuance pursuant to the Rights Agreement, dated May 23, 1997,
between Acquiror and Harris Trust and Savings Bank, as Rights Agent (the
"Acquiror Rights Agreement"). 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, 1999, upon (i) the exercise of options issued
under
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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,
1999, Acquiror had reserved (i) 16,460,793 shares of Common Stock for issuance
to employees, directors and independent contractors pursuant to the Acquiror
Stock Option Plan, of which approximately 12,687,995 shares have been issued
pursuant to option exercises, and approximately 12,662,858 shares are subject
to outstanding, unexercised options, and (ii) 8,400,000 shares of Common Stock
for issuance to employees pursuant to the Acquiror ESPP, of which 1,909,257
shares have been issued and as of September 30, 1999, approximately 6,490,743
shares are subject to outstanding subscriptions. 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, upon their issuance, be duly
authorized, validly issued, fully paid, and non-assessable, will not be subject
to any preemptive or other statutory right of shareholders; will be issued in
compliance with applicable U.S. Federal and state securities laws; will be free
of any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof; and will have the rights attached thereto
under the Acquiror Rights Agreement.
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 rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a benefit under,
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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 material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Acquiror or any of its subsidiaries or their properties or assets.
(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
and Merger Sub or the consummation by Acquiror and Merger Sub of the
transactions contemplated hereby or thereby, except for (i) the filing of the
Articles 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, and (vi) such other consents,
authorizations, filings, approvals and registrations that, if not obtained or
made, would not have a Material Adverse Effect on Acquiror or Merger Sub and
would not prevent, materially alter or delay any of the transactions
contemplated by this Agreement or the other Transaction Documents.
3.4 SEC Documents; Financial Statements. Acquiror has furnished 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, 1998, 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. As of their respective
filing dates, 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 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
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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 of the SEC).
3.5 Absence of Certain Changes. Since September 30, 1999 (the "Acquiror
Balance Sheet Date"), Acquiror has conducted its business in the ordinary
course consistent with past practice and there has not occurred 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 on
Acquiror.
3.6 Absence of Undisclosed Liabilities. Acquiror 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 September 30, 1999 (the "Acquiror Balance Sheet"), (ii) those
obligations or liabilities (including contractual obligations) incurred in the
ordinary course of business since the Acquiror Balance Sheet Date in amounts
consistent with prior periods, and (iii) those incurred in connection with the
execution of this Agreement.
3.7 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 3.7 are made only to Acquiror's knowledge.
3.8 Environmental Matters. Acquiror is and has at all times operated its
business in material compliance with all Environmental Laws and to Acquiror's
knowledge, no material expenditures are or will be required in order to comply
with such Environmental Laws.
3.9 Employee Benefit Plans. With respect to each Acquiror Plan that is an
employee benefit plan (as defined in section 3(3) of ERISA), the requirements
of ERISA with respect 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.
3.10 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.
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3.11 Compliance with Laws. Each of Acquiror and its subsidiaries has complied
with, are not in violation of, and have 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.
3.12 Proxy Statement. The written information supplied by Acquiror and Merger
Sub expressly for the purpose of inclusion in the Proxy Statement shall not, on
the date the Proxy Statement is first mailed to Target's shareholders, at the
time of the Target Shareholders 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 Acquiror
or Merger Sub that should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy 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.
3.13 Board Approval. The Board of Directors of Acquiror and Merger Sub have
approved this Agreement and the Merger.
3.14 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.
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), 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 it or its subsidiaries, to
the end that its and its subsidiaries' goodwill and ongoing businesses shall be
unimpaired at the Effective Time in all material respects. Target and Acquiror
each agree to promptly notify each other of any event or
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occurrence not in the ordinary course of its or its subsidiaries' business, and
of any event that could have a Material Adverse Effect on Target and Acquiror,
respectively. Without limiting the foregoing, except as expressly contemplated
by this Agreement, 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 Articles 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) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) and (b) above, or any action that
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder in any material respect.
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,
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) 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;
(b) 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; provided, however, the foregoing
shall not effect any such rights or provisions existing as of the date of
this Agreement which are identified in the Target Disclosure Letter;
(c) 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 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; in
particular, Target shall not issue any securities in connection with the
earn-out provisions set forth in the Stock Purchase Agreement between
Target and Mijenix Corporation, dated July 7, 1999;
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(d) Intellectual Property. Transfer to or license any person or entity or
otherwise extend, amend or modify in any material respect any rights to
Intellectual Property, other than the grant of non-exclusive licenses in
the ordinary course of business and consistent with past practice;
(e) 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;
(f) 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;
(g) 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;
(h) Leases. Enter into any operating lease requiring payments in excess
of $100,000;
(i) 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;
(j) Capital Expenditures. Incur or commit to incur any capital
expenditures in excess of $200,000 in any one case, or $1,000,000 in the
aggregate;
(k) Insurance. Reduce in any material manner the amount of any insurance
coverage provided by existing insurance policies;
(l) Termination or Waiver. Terminate or waive any right of substantial
value, other than in the ordinary course of business;
(m) Employee Benefits; Severance. Take any of the following actions,
unless otherwise contemplated by this Agreement or required by obligations
of Target existing as of the date of this Agreement and as identified in
the Target Disclosure Letter: (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 practices, (ii) grant
any additional severance or termination pay to, or enter into any
employment or severance agreements with, any officer or employee, (iii)
enter into any collective bargaining agreement, or (iv) 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, other than discretionary bonus payments or profit
sharing with respect to 1999 services which will not in the aggregate
exceed $1,250,000 and shall be allocated and set by Michael Rogers. United
States employees of Target who are terminated as a direct result of the
Merger between the date of this Agreement and a date six months following
the Effective Date shall receive a lump sum severance payment in an amount
equal to two (2) weeks base salary plus one (1) week base salary for every
full year of employment with Target (including service with Mijenix);
European
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employees shall receive such severance payments as may be required by local
law, which shall not be less than the amount provided United States
employees;
(n) 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;
(o) 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 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;
(p) 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;
(q) Revaluation. Revalue any of its material 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; or
(r) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (q) above, or any action that
would make any of its representations or warranties in any material respect
contained in this Agreement untrue or incorrect or prevent it from
performing or cause it not to perform its covenants hereunder.
4.3 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.
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
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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"),
(ii) engage in negotiations or discussions concerning, or provide any non-
public information to any person or entity relating to, any Acquisition
Proposal, or (iii) agree to or recommend any Acquisition Proposal; provided,
however, 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, that such Board of Directors' fiduciary duties under applicable law
require it to do so, from (A) 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 or recommending an unsolicited, bona fide, written Acquisition Proposal
by such person or entity to the shareholders of Target, if and only to the
extent that (1) the Board of Directors of Target believes in its good faith
reasonable judgment (based upon and consistent with advice received in
consultation with independent financial and legal 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, 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 that such action is necessary for such Board of
Directors to comply with its fiduciary duties to shareholders under applicable
law and (2) prior to furnishing such non-public information to, or entering
into discussions or negotiations with, such person or entity, such Board of
Directors receives from such person or entity an executed confidentiality
agreement with terms no less favorable to such party than those contained in
the Nondisclosure Agreement dated October 29, 1999 between Acquiror and Target
(the "Nondisclosure 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; or (B) complying with Rules 14d-9 and 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
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) Target shall notify Acquiror immediately after receipt by Target (or
their 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. Such party shall
continue to keep the other party hereto 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
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approval of the Merger and the transactions contemplated hereby by the
shareholders 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 with applicable SEC
requirements and shall use all reasonable efforts to cause the Registration
Statement to become effective as soon thereafter as practicable. Subject to the
provisions of Section 5.1, the Proxy Statement shall include the unanimous
recommendation of the Board of Directors of Target in favor of the Merger;
provided that such recommendation may not be included or may be withdrawn if
previously included if Target's Board of Directors believes in good faith that
a Superior Proposal (as defined in Section 5.1) has been made and, shall
determine that to include such recommendation or not withdraw such
recommendation if previously included would constitute a breach of the Board of
Directors' fiduciary duty under applicable law.
5.3 Shareholders Meeting. Target shall promptly after the date hereof take
all actions necessary to call a meeting of its shareholders to be held for the
purpose of voting upon this Agreement and the Merger, which meeting shall be
held (to the extent permitted by law) within forty-five (45) days of the date
on which the Registration Statement is declared effective. Subject to Section
5.2, Target will, through its Board of Directors, unanimously recommend to its
shareholders approval of such matters. Target shall use all reasonable efforts
to solicit from its shareholders proxies in favor of or, subject to Section
5.1, 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 Nondisclosure Agreement dated October 29, 1999, which
Confidentiality Agreement 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
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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 all 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 all 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 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 neither Acquiror
nor Target shall have any obligation to litigate or contest any administrative
or judicial action or proceeding or any Order beyond the earlier of (i) June
30, 2000, 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, as a condition to any Approval, 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.
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5.8 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 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 in any material respect. The delivery of any
notice pursuant to this Section 5.8 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.
5.9 Stockholder Lists. 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.
5.10 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 Articles 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 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 $250,000 in the aggregate (i.e., for six years coverage)
for such coverage (or such coverage as is available for such $250,000).
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5.11 Irrevocable Proxies. Target shall use its best efforts, on behalf of
Acquiror and pursuant to the request of Acquiror, to cause Michael Rogers and
Gary Stevens to execute and deliver to Acquiror, a Voting and Proxy Agreement
in the form of Exhibit B attached hereto concurrently with the execution of
this Agreement.
5.12 Legal Requirements. Each of Acquiror 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.
5.13 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.
5.14 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. 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 Option Exchange Ratio, and rounded down
to the nearest whole number of shares of Acquiror Common Stock, (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 Option
Exchange Ratio, rounded up to the nearest whole cent, (iii) assumed options
which provided for acceleration of vesting upon a change in control of Target
shall be fully vested on and after the Effective Date and shall be exercisable
until the date 12 months following the later of (A) the Effective Date or
(B) cessation of the optionee's service (if such optionee commenced service
with Acquiror following the Closing), (iv) assumed options held by directors,
former directors and consultants to the directors shall be fully vested on and
after the Effective Date and shall be exercisable until the date 12 months
following the Effective Date, and (v) except as provided in the foregoing
clauses (iii) and (iv), no
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assumed option shall provide for an exercise period in excess of 12 months in
the event of the cessation of the optionee's service. 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 twenty (20)
business days after the Effective Time, Acquiror will issue to each person
whose option shall be assumed in accordance with this section 5.14, a document
in form and substance satisfactory to Target evidencing the foregoing
assumption of such option by Acquiror. Neither Acquiror nor Target shall be in
breach of this Agreement solely as a result of any optionholder failing to sign
an Assumption Agreement.
(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
5.14. Within five (5) business days after the Effective Time, Acquiror shall
file a registration statement on Form S-8 (or any successor or other
appropriate forms) which will register the shares of Acquiror Common Stock
subject to assumed options to the extent permitted by Federal securities laws
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 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 start date of the first offering period thereunder
beginning at least thirty (30) days after the Effective Time.
5.15 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.
5.16 Additional Agreements; Reasonable Efforts. 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 shareholders
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.
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5.17 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, as soon as practicable
after the Effective Time of the Merger. For purposes of satisfying the terms
and conditions of such programs, to the extent permitted by Acquiror's benefit
programs and applicable law, Acquiror shall use reasonable efforts to give full
credit for eligibility or vesting for each participant's period of service with
Target. To the extent permitted by such plans, Acquiror shall waive any pre-
existing condition exclusion and actively-at-work requirements under its
medical or dental plans.
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) Shareholder 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
Shareholders 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) 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.
(d) 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 shareholders shall make) reasonable
representations related thereto.
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(e) 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.
6.2 Additional Conditions to the 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, Warranties and Covenants. Except as disclosed in the
Acquiror Disclosure Letter, (i) the representations and warranties of
Acquiror in this Agreement shall be true and correct in all material
respects (except for such representations and warranties that are qualified
by their terms by a reference to materiality, which representations and
warranties as so qualified shall be true in all respects) on and as of the
Effective Time as though such representations and warranties were made on
and as of such time, and (ii) Acquiror shall have performed and complied in
all material respects with all covenants, obligations and conditions of
this Agreement required to be performed and complied with by them as of the
Effective Time.
(b) Certificate of Acquiror. Target shall have been provided with a
certificate executed on behalf of Acquiror by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Acquiror under this
Agreement are true and complete in all material respects (except for
such representations and warranties that are qualified by their terms
by a reference to materiality, which representations and warranties as
so qualified shall be true in all respects); and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Acquiror on or before such date have been so performed
in all material respects.
(c) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of Acquiror and its subsidiaries, taken
as a whole.
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, Warranties and Covenants. Except as disclosed in the
Acquiror Disclosure Letter (i) the representations and warranties of Target
in this Agreement shall be true and correct in all material respects
(except for such representations and warranties that are qualified by their
terms by a reference to materiality, which representations and warranties
as so qualified shall be true in all respects) on and as of the Effective
Time as though such representations and warranties were made on and as of
such time, and (ii) Target shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it as of the
Effective Time.
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(b) Certificate of Target. Acquiror shall have been provided with a
certificate executed on behalf of Target by its President and Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Target under this
Agreement are true and complete in all material respects (except for
such representations and warranties that are qualified by their terms
by a reference to materiality, which representations and warranties as
so qualified shall be true in all respects); and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Target on or before such date have been so performed in
all material respects.
(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) Injunctions or Restraints on Merger and Conduct of Business. No
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or
regulatory restraint provision limiting or restricting Acquiror's conduct
or operation of the business of Target and its subsidiaries, following the
Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending.
(e) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of Target and its subsidiaries, taken
as a whole.
(f) Resignation of Directors. The directors of Target in office
immediately prior to the Effective Time shall have resigned as directors of
Target effective as of the Effective Time.
(g) Employment and Non-Competition Agreements. The employees of Target
set forth on Schedule 6.3(g) shall have entered into an Employment and Non-
Competition Agreement in the form attached hereto as Exhibit C.
(h) Election under Section 338(h)(10) of the Code. Target and Jennifer
Kronenberg shall have filed a joint election under Section 338(h)(10) of
the Code with respect to Target's purchase from Jennifer Kronenberg of all
outstanding stock of Mijenix Corporation, a Wisconsin corporation, pursuant
to the Stock Purchase Agreement by and among Target, Jennifer Kronenberg
and Mijenix Corporation, dated as of July 7, 1999.
(i) Termination of Target 401(k) Plan. Target shall have terminated its
401(k) Plan.
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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
shareholders 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 June 30, 2000 (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 Shareholders' Meeting
(including any adjournment or postponement), the requisite vote of the
shareholders 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 Shareholder 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 recommendation of this Agreement or the Merger;
(ii) the Board of Directors of Target fails to reaffirm its recommendation
of this Agreement or the Merger 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 shareholders 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 tender or
exchange offer; or (v) for any other reason Target fails to call and hold
the Target Shareholders' Meeting within forty-five days after the
Registration Statement is declared effective under the Securities Act if
such date is on or before the Outside Date; or
(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 6.2(a) or (b) (in the case of termination by Target)
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or 6.3(a) or (b) (in the case of termination by Acquiror) 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.
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.
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 $5,000,000 in immediately
available funds within five business days after the termination of this
Agreement by Acquiror pursuant to Section 7.1(e).
(c) Acquiror shall pay Target's out-of-pocket expenses incurred in connection
with this Agreement (and the transactions contemplated hereby), including
without limitations the fees and expenses of financial advisors, accountants
and legal counsel and printing and filing fees (collectively, "Termination
Expenses"), in immediately available funds within five (5) business days
following termination of this Agreement by Target pursuant to Section 7.1(f)
after a willful breach by
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Acquiror of this Agreement and Target shall pay Acquiror's Termination Expenses
in immediately available funds within five (5) business days following
termination of this Agreement by Acquiror pursuant to Section 7.1(f) after a
willful breach by Target of this Agreement.
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 shareholders 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 material term
of the Articles 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:
Ontrack Data International, Inc.
9023 Columbine Road
Eden Prarie, MN 55347
Attention: Michael Rogers
Facsimile No.: (612) 949-4170
Telephone No.: (612) 937-1107
with a copy to:
Lindquist & Vennum PLLP
4200 IDS Center
Minneapolis, Minnesota 55402
Attention: John R. Houston
Facsimile No.: (612) 371-3207
Telephone No.: (612) 371-3211
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. In this Agreement, any reference to a party's "knowledge" means
such party's actual knowledge after due and diligent inquiry of officers,
directors and other employees of such party and its subsidiaries reasonably
believed 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
November 18, 1999. 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.
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
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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 Shareholders and optionholders
to receive the consideration set forth in Article I of this Agreement and the
provisions of Sections 5.14 and 5.17.
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
Delaware, 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 Delaware 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 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.
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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.
ONTRACK DATA INTERNATIONAL, INC.
By: /s/ Michael W. Rogers, CEO
_________________________________
Name and Title
LEGATO SYSTEMS, INC.
By: /s/ Louis C. Cole, CEO
_________________________________
Name and Title
LASSO ACQUISITION CORP.
By: /s/ Louis C. Cole, Director
_________________________________
Name and Title
SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION
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APPENDIX B
U.S. Bancorp Piper Jaffray
222 South Ninth Street
Minneapolis, MN 55402
612-312-6000
November 18, 1999
Personal and Confidential
Board of Directors
Ontrack Data International, Inc.
9023 Columbine Road
Eden Prairie, MN 55347
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of common stock (the "Common Stock") of Ontrack Data
International, Inc. (the "Company") of the consideration to be received by
holders of Common Stock, pursuant to an Agreement and Plan of Reorganization
(the "Agreement") to be entered into among the Company, Legato Systems Inc.
(the "Parent") and Lasso Acquisition Corp. (the "Purchaser"), a wholly owned
subsidiary of the Parent. The Agreement provides for the merger (the "Merger")
of the Company with and into the Purchaser, and in connection therewith each
share of Common Stock will be converted and exchanged for (i) 0.1491 of a share
of common stock of the Parent ("Parent Common Stock"), subject to adjustment as
set forth in the Agreement, and (ii) US$2.00 in cash. The Merger and the
transactions contemplated therein are collectively referred to as the
"Transaction." The terms and conditions of the Transaction are more fully set
forth in the Agreement.
U. S. Bancorp Piper Jaffray Inc. ("U.S. Bancorp Piper Jaffray"), as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
underwriting and secondary distributions of securities, private placements and
valuations for estate, corporate and other purposes. We have acted as financial
advisor to the Company in connection with the Agreement and will receive a fee
for services which is contingent upon consummation of the Transaction. We will
also receive a fee for providing this opinion. This opinion fee is not
contingent upon the consummation of the Transaction. The Company has also
agreed to indemnify us against certain liabilities in connection with our
services. U. S. Bancorp Piper Jaffray acted as a financial advisor to the
Company in connection with its acquisition of Mijenix Corporation in July 1999.
In the ordinary course of our business, we and our affiliates may actively
trade securities of the Company and the Parent for our own account or the
account of our customers and, accordingly, we may at any time hold a long or
short position in such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. We
have reviewed the draft of the Agreement received by us on November 16, 1999.
We also have reviewed financial and other information that was publicly
available or furnished to us by the Company and Parent, including
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information provided during discussions with the management of each company. In
addition, we have compared certain financial data of the Company and Parent
with various other companies whose securities are traded in public markets,
reviewed prices and premiums paid in certain other business combinations and
conducted other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by the Company and the
Parent or otherwise made available to us and have not assumed responsibility
independently to verify such information. We have further relied upon the
assurances of the Company's and the Parent's management that the information
provided has been prepared on a reasonable basis in accordance with industry
practice, and, with respect to financial planning data, reflects the best
currently available estimates and judgment of the Company's and the Parent's
management and that they are not aware of any information or facts that would
make the information provided to us incomplete or misleading. We have assumed
that the Transaction will qualify as a reorganization under Section 368 of the
United States Internal Revenue Code. Without limiting the generality of the
foregoing, for the purpose of this opinion, we have assumed that neither the
Company nor the Parent is party to any pending transaction, including external
financing, recapitalizations, acquisitions or merger discussions, other than
the Transaction or in the ordinary course of business. In arriving at our
opinion, we have assumed that all the necessary regulatory approvals and
consents required for the transaction will be obtained in a manner that will
not change the purchase price for the Company.
In arriving at our opinion, we have not performed any appraisals or
valuations of any specific assets or liabilities of the Company, and have not
been furnished with any such appraisals or valuations. We express no opinion
regarding the liquidation value of any entity. Without limiting the generality
of the foregoing, we have undertaken no independent analysis of any pending or
threatened litigation, possible unasserted claims or other contingent
liabilities, to which the Company, the Parent or any of their respective
affiliates is a party or may be subject and, at the Company's direction and
with its consent, our opinion makes no assumption concerning, and therefore
does not consider, the possible assertions of claims, outcomes or damages
arising out of any such matters.
This opinion is necessarily based upon the information available to us and
facts and circumstances as they exist and are subject to evaluation on the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We are not expressing any opinion
herein as to the price at which shares of Common Stock or Parent Common Stock
have traded or may trade at any future time. We have not undertaken to reaffirm
or revise this opinion or otherwise comment upon any events occurring after the
date hereof and do not have any obligation to update, revise or reaffirm this
opinion.
This opinion is directed to the Board of Directors of the Company and is not
intended to be and does not constitute a recommendation to any stockholder of
the company. We were not requested to opine as to, and this opinion does not
address, the basic business decision to proceed with or effect the Transaction.
Except with respect to the use of this opinion in connection with the
prospectus/proxy statement relating to the Merger, this opinion shall not be
published or otherwise used, nor shall any public references to us be made,
without our prior written approval.
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Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that the consideration to be received
in the Transaction pursuant to the Agreement for the Common Stock of the
Company is fair, from a financial point of view, to the holders of Common Stock
of the Company (other than Parent and its affiliates) as of the date hereof.
Sincerely,
/s/ U.S. Bancorp Piper Jaffray Inc.
U. S. Bancorp Piper Jaffray Inc.
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APPENDIX C
MINNESOTA DISSENTERS' RIGHTS STATUTE
(S)302A.471. Rights of dissenting shareholders
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares; or
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting
rights; except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a constituent corporation, except as provided
in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of
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the shareholder and discloses the name and address of each beneficial owner on
whose behalf the shareholder dissents. In that event, the rights of the
dissenter shall be determined as if the shares as to which the shareholder has
dissented and the other shares were registered in the names of different
shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the
corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
Subd. 3. Rights not to apply. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for the
determination of shareholders entitled to receive notice of and to vote on an
action described in subdivision 1, only shareholders as of the date fixed, and
beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at
law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
(S)302A.473. Procedures for asserting dissenters' rights
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a corporation
immediately before the effective date of the corporate action referred to in
section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by the
shareholders, a shareholder who is entitled to dissent under section 302A.471
and who wishes to exercise dissenters'
C-2
<PAGE>
rights must file with the corporation before the vote on the proposed action a
written notice of intent to demand the fair value of the shares owned by the
shareholder and must not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was
required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person
who was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
C-3
<PAGE>
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision
4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, see fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable.
C-4
<PAGE>
These fees and expenses may also be assessed against a person who has acted
arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and
may be awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
C-5
<PAGE>
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.
2.6(13) Agreement and Plan of Reorganization By and Among Legato
Systems, Inc., Sundance Acquisition Corp., Vinca Corporation,
the Canopy Group, Inc. (as Stockholders' Representative), and
the Undersigned Stockholders of Vinca Corporation, dated June
7, 1999.
2.7(14) Agreement and Plan of Reorganization By and Among Legato
Systems, Inc., Lasso Acquisition Corp., and Ontrack Data
International, Inc., dated November 18, 1999.
3.1(6)(9)(15) 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.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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.
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 Robins, Kaplan, Miller & Ciresi, L.L.P. 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) 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 PricewaterhouseCoopers LLP, Independent Accountants.
23.4 Consent of Deloitte & Touche LLP, Independent Auditors.
23.5 Consent of Arthur Anderson LLP, Independent Accountants.
23.6 Consent of Robins, Kaplan, Miller & Ciresi, L.L.P. (included as
part of Exhibit 8.2 and incorporated herein by reference).
23.7 Consent of Grant Thornton LLP, Independent Accountants.
23.8 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1(11) Financial Data Schedule.
27.2(11) Financial Data Schedule.
27.3(11) Financial Data Schedule.
99.1 Form of Proxy of ONTRACK Data International, Inc..
</TABLE>
II-2
<PAGE>
- --------
(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.
(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 Current Report on Form 10-
K/A, dated December 1, 1999.
(12) Incorporated by reference to the registrant's Registration Statement on
Form S-4, filed on March 15, 1999 (File No. 333-74433).
(13) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated July 30, 1999.
(14) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated November 18, 1999.
(15) Incorporated by reference to the registrant's definitive Proxy Statement
for the Annual Meeting of Stockholders, dated April 8, 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.
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.
II-3
<PAGE>
(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 21st day of December, 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 December 21, 1999
______________________________________ Officer (Principal
Louis C. Cole Executive
Officer) and Chairman
/s/ Stephen C. Wise Vice President, Finance December 21, 1999
______________________________________ and Administration and
Stephen C. Wise Chief Financial Officer
(Principal Financial
Officer)
/s/ Eric A. Benhamou Director December 21, 1999
______________________________________
Eric A. Benhamou
/s/ Kevin A. Fong Director December 21, 1999
______________________________________
Kevin A. Fong
/s/ David N. Strohm Director December 21, 1999
______________________________________
David N. Strohm
/s/ Philip E. White Director December 21, 1999
______________________________________
Philip E. White
/s/ H. Raymond Bingham Director December 21, 1999
______________________________________
H. Raymond Bingham
</TABLE>
II-5
<PAGE>
EXHIBIT 5.1
[LOGO OF GUNDERSON DETTMER]
December 21, 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 December 21, 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
1,625,452 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 Franklin & Hachigian,
LLP
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGAN, LLP
<PAGE>
EXHIBIT 8.1
[Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP Letterhead]
December 21, 1999
Legato Systems, Inc.
3210 Porter Drive
Palo Alto, CA 9430
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, Lasso Acquisition Corp.,
a Minnesota corporation ("Merger Sub"), and Ontrack Data International, Inc., a
Minnesota corporation ("Target"), dated November 18, 1999. Pursuant to the
Agreement, Target will merge with and into Merger Sub (the "Merger"), and
Merger Sub will be the surviving entity.
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 (or will examine on or prior to the Effective Time) 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;
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; 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;
<PAGE>
Legato Systems, Inc.
December 21, 1999
Page 2
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 Minnesota. 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, Merger Sub will hold "substantially all" of Target's
properties within the meaning of Section 368(a)(2)(D) 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. (S)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
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(d)
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.
<PAGE>
Legato Systems, Inc.
December 21, 1999
Page 3
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.
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,
/s/ Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
GUNDERSON DETTMER STOUGH VILLENEUVE
FRANKLIN & HACHIGIAN, LLP
<PAGE>
Exhibit 8.2
[Robins, Kaplan, Miller & Ciresi, L.L.P. letterhead]
December 21, 1999
ONTRACK Data International, Inc.
9023 Columbine Road
Eden Prairie, MN 55347
Re: Agreement and Plan of Reorganization, dated as of November 18, 1999
(the "Agreement"), by and among Legato Systems, Inc. ("Acquiror");
Lasso Acquisition Corp. ("Merger Sub"); and ONTRACK Data International,
Inc. ("Target")
Ladies and Gentlemen:
We have acted as counsel to Target in connection with a proposed transaction
(the "Merger") in which Target will merge with and into Merger Sub, and
Target's shareholders will receive Acquiror voting stock and cash in exchange
for their Target stock. Capitalized terms in this opinion letter have the same
meaning as defined in the Agreement unless otherwise indicated.
You have requested our opinion concerning certain federal income tax
consequences related to the Merger. In giving this opinion, we have reviewed
the Agreement and other documents that have been prepared in connection with
the Merger (the "Transaction Documents"), including the Registration Statement
referred to in Section 5.2 of the Agreement and such other documents as we have
deemed necessary or appropriate. In addition, we have been provided with and
relied upon Tax Certificates executed by Acquiror, Merger Sub, Target and the
principal shareholders of Target.
In the process of rendering this opinion, we have assumed without any
independent investigation or review that:
1. Documents submitted to us as originals and the signatures on such
documents are authentic, and documents submitted to us as copies conform to
the original documents;
2. There will be due execution and delivery of all Transaction Documents
where due execution and delivery are a prerequisite to the effectiveness of
the documents;
3. Any representation or statement made "to the best of knowledge" or
similarly qualified in the Tax Certificates or other Transaction Documents
is correct notwithstanding the qualification, and any statements made in
the Tax Certificates or other Transaction Documents were true, correct and
complete statements when made and will be true, correct and complete as of
the Closing Date of the Merger;
4. If a representation in the Tax Certificates states that an individual
or entity is not a party to, or does not have, or is not aware of, any
plan, intention, understanding or agreement, we assume that there is in
fact no plan, intention, understanding or agreement;
5. The Merger will be consummated as described in the Agreement;
6. All of the covenants and undertakings in the Transaction Documents
will be carried out without waiver or breach of any material provision
thereof;
7. All agreements expressed in the Transaction Documents will be
effective under applicable law;
8. After the Merger, Merger Sub will hold "substantially all" of its and
Target's properties within the meaning of Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
promulgated thereunder and will continue Target's historic business or use
a significant portion of its historic assets in a business;
<PAGE>
ONTRACK Data International, Inc.
December 21, 1999
Page 2
9. 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
10. Counsel for Acquiror will, pursuant to Section 6.1(d) of the
Agreement, 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.
To the extent that any of the assumptions material to this opinion and upon
which we have relied are not complete, correct and true in all material
respects at all relevant times, our opinion would be adversely affected and
should not be relied upon.
On the basis of the forgoing, and subject to the assumptions, exceptions,
limitations and qualifications set forth herein, we are of the opinion that
under existing law for federal income tax purposes the merger of Target into
Merger Sub will constitute a reorganization within the meaning of Section
368(a) of the Code.
This opinion is limited to the effect of the income tax laws of the United
States, and we express no opinion as to the laws of any state or any other
jurisdiction other than the United States. This opinion represents our best
legal judgment, but it has no binding effect or official status of any kind,
and no assurance can be given that contrary positions will not be taken by the
Internal Revenue Service or a court. Our opinion is limited to the specific
conclusions set forth above, and no other opinions are expressed or implied.
The references to Code sections and other authority above are not intended to
be complete citations of all relevant authority. Changes to the Code,
regulations, the rulings thereunder, or changes by the courts in the
interpretation of the authorities relied upon may be applied retroactively and
may adversely affect the conclusions reached in this opinion. We undertake no
responsibility to advise any parties to the transaction of any changes or new
developments in the application or interpretation of the federal income tax
laws.
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,
/s/ Robins, Kaplan, Miller & Ciresi,
LLP
ROBINS, KAPLAN, MILLER & CIRESI, LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Legato Systems, Inc. of our report dated February 4, 1998 relating to the
financial statements of ONTRACK Data International, Inc., which appear in such
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
December 20, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of Legato Systems, Inc. of our report dated January 18,
1999 except as to note 5 which is as of April 19, 1999, note 11 which is as of
August 13, 1999 and the pooling of interests with Qualix Group, Inc. which is
as of November 30, 1999 relating to the financial statements and financial
statement schedule, which appear in Legato Systems, Inc.'s Annual Report on
Form 10-K/A for the year ended December 31, 1998. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 20, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this registration statement
of Legato Systems, Inc. on Form S-4 of our report dated July 24, 1997 on the
consolidated financial statements and financial statement schedule of Qualix
Group, Inc. as of June 30, 1997 and for the year then ended, appearing in the
annual report on Form 10-K/A of Legato Systems, Inc. for the year ended
December 31, 1998, and to the reference to us under the heading "Experts" in
the proxy statement/prospectus, which is part of this registration statement.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
December 20, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated March 2, 1999
related to the financial statements of Vinca Corporation as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 included in Legato Systems, Inc.'s Form 8-K/A dated October 11, 1999.
/s/ Arthur Andersen LLP
Salt Lake City, Utah
December 20, 1999
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 3, 1999, accompanying the
consolidated financial statements of ONTRACK Data International, Inc. and
subsidiaries for the year ended December 31, 1998, included in this
Registration Statement of Legato Systems, Inc. on Form S-4. We consent to the
use of the aforementioned report and to the use of our name as it appears under
the caption "Experts."
/s/ Grant Thornton, LLP
Minneapolis, Minnesota
December 20, 1999
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of Legato Systems, Inc. of our report dated April 20,
1999 relating to the financial statements of Intelliguard Software, Inc., which
appears in Legato Systems, Inc.'s Report on Form 8-K/A dated May 28, 1999. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 20, 1999
<PAGE>
EXHIBIT 99.1
- -------
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ONTRACK DATA INTERNATIONAL, INC.
9023 COLUMBINE ROAD, EDEN PRAIRIE, MINNESOTA 55347
PROXY
The undersigned, a shareholder of ONTRACK Data International, Inc. (the
"Company"), hereby appoints John M. Bujan and Thomas P. Skiba, and each of
them, as proxies, with full power of substitution, to vote on behalf of the
undersigned the number of shares which the undersigned is then entitled to
vote, at the Special Meeting of the Shareholders of ONTRACK Data
International, Inc. to be held at [ ], on [Weekday],
January [ ], 2000, at [ ] [a.m./p.m.], and any adjournments or postponements
thereof, upon any and all matters which may properly be brought before the
meeting or any adjournments thereof, with all the powers which the undersigned
would possess if personally present.
The undersigned hereby revokes all previous proxies relating to the shares
covered hereby and acknowledges receipt of the Notice and Proxy Statement
relating to the Special Meeting.
It will be voted on the matters set forth on the reverse side of this form
as directed by the shareholder, but if no direction is made in the space
provided, it will be voted FOR proposal (1).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
(CONTINUED ON OTHER SIDE)
<PAGE>
Please mark
your votes
as indicated in [X]
this
example
FOR AGAINST ABSTAIN
[_] [_] [_]
1. Proposal to approve an Agreement and Plan of Reorganization pursuant to
which Ontrack would be merged with a subsidiary of Legato Systems, Inc.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournments or
postponements thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below:
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Signature(s) ____________________________ Date _____________________________,
Stockholder must sign exactly as the name appears at left. When signed as a
corporate officer, executor, administrator, trustee, guardian, etc., please
give full title as such. Both joint tenants must sign.
