LEGATO SYSTEMS, INC.
3210 Porter Drive
Palo Alto, California 94304
April 8, 1999
TO THE STOCKHOLDERS OF LEGATO SYSTEMS, INC.
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Legato Systems, Inc. (the "Company"), which will be held at the Crowne Plaza
Hotel, 4290 El Camino Real, Palo Alto, California, on Thursday, May 13, 1999, at
9:00 a.m.
Details of the business to be conducted at the Annual Meeting are given in
the attached Proxy Statement and Notice of Annual Meeting of Stockholders.
It is important that your shares be represented and voted at the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. Returning the proxy does NOT deprive you of your right to attend the
Annual Meeting. If you decide to attend the Annual Meeting and wish to change
your proxy vote, you may do so automatically by voting in person at the meeting.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company. We look
forward to seeing you at the Annual Meeting.
Sincerely,
Louis C. Cole
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
LEGATO SYSTEMS, INC.
3210 Porter Drive
Palo Alto, California 94304
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held May 13, 1999
The Annual Meeting of Stockholders (the "Annual Meeting") of Legato
Systems, Inc. (the "Company") will be held at the Crowne Plaza Hotel, 4290 El
Camino Real, Palo Alto, California, on Thursday, May 13, 1999, at 9:00 a.m. for
the following purposes:
1. To elect six directors of the Board of Directors to serve until the
next Annual Meeting or until their successors have been duly elected
and qualified;
2. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of shares of Common Stock that the Company is
authorized to issue from 100,000,000 to 200,000,000;
3. To approve an amendment to the Company's 1995 Stock Option/Stock
Issuance Plan, including an increase to the number of shares available
for issuance thereunder, as set forth in the accompanying Proxy
Statement;
4. To approve an amendment to the Company's Employee Stock Purchase Plan,
including an increase to the number of shares available for issuance
thereunder, as set forth in the accompanying Proxy Statement;
5. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the fiscal year ending
December 31, 1999; and
6. To transact such other business as may properly come before the meeting
or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the attached
Proxy Statement.
Only stockholders of record at the close of business on March 31, 1999 are
entitled to notice of, and to vote at, the Annual Meeting and at any
adjournments or postponements thereof. A list of such stockholders will be
available for inspection at the Company's headquarters located at 3210 Porter
Drive, Palo Alto, California, during ordinary business hours for the ten-day
period prior to the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
Robert V. Gunderson, Jr.
Secretary
Palo Alto, California
April 8, 1999
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IMPORTANT
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WHETHER OR NOT YOU PLAN TO ATTEND the Annual Meeting, please COMPLETE, sign,
date and PROMPTLY return the ACCOMPANYING proxy in the ENCLOSED POSTAGE-PAID
envelope. you may revoke your proxy at any time prior to the annual meeting. If
you decide to attend the Annual Meeting and wish to change your proxy vote, you
may do so automatically by voting in person at the meeting.
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<PAGE>
LEGATO SYSTEMS, INC.
3210 Porter Drive
Palo Alto, California 94304
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
To be held May 13, 1999
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Legato Systems, Inc., a Delaware
corporation (the "Company"), for the Annual Meeting of Stockholders (the "Annual
Meeting") to be held at the Crowne Plaza Hotel, 4290 El Camino Real, Palo Alto,
California, on Thursday, May 13, 1999, at 9:00 a.m., and at any adjournment or
postponement of the Annual Meeting. These proxy materials were first mailed to
stockholders on or about April 8, 1999.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Stockholders. Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On March 31, 1999, the record date for determination of
stockholders entitled to vote at the Annual Meeting, there were _______ shares
of Common Stock outstanding. Each stockholder of record on March 31, 1999 is
entitled to one vote for each share of Common Stock held by such stockholder on
March 31, 1999. Shares of Common Stock may not be voted cumulatively. All votes
will be tabulated by the inspector of election appointed for the meeting, who
will separately tabulate affirmative and negative votes, abstentions and broker
non-votes.
Quorum Required
The Company's bylaws provide that the holders of a majority of the
Company's Common Stock issued and outstanding and entitled to vote at the Annual
Meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at the Annual Meeting. Abstentions and broker
non-votes will be counted as present for the purpose of determining the presence
of a quorum.
Votes Required
Proposal 1. Directors are elected by a plurality of the affirmative votes
cast by those shares present in person, or represented by proxy, and entitled to
vote at the Annual Meeting. The six nominees for director receiving the highest
number of affirmative votes will be elected. Abstentions and broker non-votes
will not be counted toward a nominee's total. Stockholders may not cumulate
votes in the election of directors.
Proposal 2. Approval of the adoption of the amendment to the Company's
Certificate of Incorporation requires the affirmative vote of a majority of the
Company's Common Stock issued and outstanding and entitled to vote at the Annual
Meeting. Abstentions and broker non-votes are not affirmative votes and,
therefore, will have the same effect as votes against the proposal.
Proposal 3. Approval of the adoption of the amendment to the Company's 1995
Stock Option/Stock Issuance Plan requires the affirmative vote of a majority of
those shares present in person or represented by proxy, and entitled to vote at
the Annual Meeting. Abstentions are not affirmative votes and, therefore, will
have the same effect as votes against the proposal. Broker non-votes will not be
treated as entitled to vote on the matter and thus, will not affect the outcome
of the voting on the proposal.
Proposal 4. Approval of the adoption of the amendment to the Company's
Employee Stock Purchase Plan requires the affirmative vote of a majority of
those shares present in person or represented by proxy, and entitled to vote at
the Annual Meeting. Abstentions are not affirmative votes and, therefore, will
have the same effect as votes against the proposal. Broker non-votes will not be
treated as entitled to vote on the matter and thus, will not affect the outcome
of the voting on the proposal.
Proposal 5. Ratification of the appointment of PricewaterhouseCoopers LLP
as the Company's independent public accountants for the fiscal year ending
December 31, 1999 requires the affirmative vote of a majority of those shares
present in person, or represented by proxy, and cast either affirmatively or
negatively at the Annual Meeting. Abstentions and broker non-votes will not be
counted as having been voted on the proposal.
Proxies
Whether or not you are able to attend the Company's Annual Meeting, you are
urged to complete and return the enclosed proxy, which is solicited by the
Company's Board of Directors and which will be voted as you direct on your proxy
when properly completed. In the event no directions are specified, such proxies
will be voted FOR the Nominees of the Board of Directors (as set forth in
Proposal No. 1), FOR Proposal Nos. 2, 3, 4 and 5 and in the discretion of the
proxy holders as to other matters that may properly come before the Annual
Meeting. You may also revoke or change your proxy at any time before the Annual
Meeting. To do this, send a written notice of revocation or another signed proxy
with a later date to the Secretary of the Company at the Company's principal
executive offices before the beginning of the Annual Meeting. You may also
automatically revoke your proxy by attending the Annual Meeting and voting in
person. All shares represented by a valid proxy received prior to the Annual
Meeting will be voted.
Solicitation of Proxies
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the proxy,
and any additional soliciting material furnished to stockholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation material to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram, or other means by directors, officers, employees or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. The Company has also retained Beacon Hill Partners, Inc.
("Beacon Hill") to assist in the solicitation of proxies. Beacon Hill will
receive a fee for such services of approximately $7,000 including out-of-pocket
expenses, which will be paid by the Company. Except as described above, the
Company does not presently intend to solicit proxies other than by mail.
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The directors who are being nominated for reelection to the Board of
Directors (the "Nominees"), their ages as of March 31, 1999, their positions and
offices held with the Company and certain biographical information are set forth
below. The proxy holders intend to vote all proxies received by them in the
accompanying form FOR the Nominees listed below unless otherwise instructed. In
the event any Nominee is unable or declines to serve as a director at the time
of the Annual Meeting, the proxies will be voted for any nominee who may be
designated by the present Board of Directors to fill the vacancy. As of the date
of this Proxy Statement, the Board of Directors is not aware of any Nominee who
is unable or will decline to serve as a director. The six (6) nominees receiving
the highest number of affirmative votes of the shares entitled to vote at the
Annual Meeting will be elected directors of the Company to serve until the next
Annual Meeting or until their successors have been duly elected and qualified.
<PAGE>
<TABLE>
Nominees Age Positions and Offices Held with the Company
- -------------------------------- ------- ----------------------------------------------------------------
<S> <C> <C>
Louis C. Cole (1) 55 Chairman of the Board, President and Chief Executive Officer
Eric A. Benhamou 43 Director
H. Raymond Bingham 54 Director
Kevin A. Fong (2)(3) 45 Director
David N. Strohm (3) 50 Director
Phillip E. White(2) 56 Director
<FN>
(1) Member of Stock Option Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
</FN>
</TABLE>
Mr. Cole joined the Company as President, Chief Executive Officer and a
Director in June 1989. Since April 1995, Mr. Cole has also served as Chairman of
the Board. Before joining the Company, from March 1987 until July 1988, Mr. Cole
served as Executive Vice President responsible for all operating divisions of
Novell, Inc., a publicly held manufacturer of computer networking and software
products. Mr. Cole currently serves as a director of Inference Corp., Qualix
Group, Inc. (doing business as FullTime Software, Inc.) and Rogue Wave Software,
Inc. all publicly held software companies. Mr. Cole holds a B.S. in mathematics
and education from Pennsylvania State University at Edinboro.
Mr. Benhamou has been a Director of the Company since March 1993. Mr.
Benhamou has been the Chief Executive Officer of 3Com Corporation ("3Com"), a
publicly held computer network products company, since September 1990, and has
been Chairman of the Board of 3Com since July 1994. He served as the President
of 3Com from April 1990 until August 1998. From April 1990 until September 1990,
Mr. Benhamou served as Chief Operating Officer of 3Com. Mr. Benhamou currently
serves as a director of Cypress Semiconductor, a publicly held semiconductor
company, and Netscape Communications, a publicly held Internet software company.
Mr. Benhamou holds a Diplome d'Ingenieur from Ecole Nationale Superieure d'Arts
et Metiers in Paris, France, and an M.S. in electrical engineering from Stanford
University.
Mr. Bingham has been a Director of the Company since December 1998. Mr.
Bingham has been Executive Vice President and Chief Financial Officer of Cadence
Design Systems ("Cadence"), a publicly held electronic design automation
software company, since 1993 and a director of Cadence since November 1997.
Prior to joining Cadence, Mr. Bingham served eight years as Executive Vice
President and Chief Financial Officer of Red Lion Hotels and Inns, an owner and
operator of a chain of hotels. Mr. Bingham currently serves as a director of
Sunstone Hotel Investors, Inc., a publicly held real estate investment trust,
and Integrated Measurement Systems, Inc., a publicly held hardware and software
company. Mr. Bingham holds a B.A. in economics from Weber State University and
an M.B.A. from Harvard University.
Mr. Fong has been a Director of the Company since December 1988. Mr. Fong
joined Mayfield Fund ("Mayfield"), a venture capital firm, in 1988 and has been
a general partner of several venture capital funds affiliated with Mayfield
since 1990. Mr. Fong currently serves as a director of Prism Solutions, Inc., a
publicly held data warehousing company, as well as several privately held
companies. Mr. Fong holds a B.S. in electrical engineering from the University
of California at Berkeley, and an M.S. in electrical engineering and an M.B.A.
from Stanford University.
Mr. Strohm has been a Director of the Company since December 1988. Mr.
Strohm joined Greylock Management Corporation ("Greylock"), a venture capital
management company, in 1980 and is a general partner of several venture capital
funds affiliated with Greylock. Mr. Strohm currently serves as a director of
Banyan Systems, Inc., a manufacturer of networking software products,
DoubleClick, Inc., a leading provider of comprehensive Internet advertising
solutions and ISS Group, Inc., a provider of Internet security software, all
publicly held, as well as several privately held technology companies. Mr.
Strohm holds a B.A. from Dartmouth College and an M.B.A. from Harvard
University.
Mr. White has been a Director of the Company since May 1995. Since August
1997, Mr. White has been providing marketing consulting services within the
high-tech industry. From January 1989 to August 1997, Mr. White served as
President, Chief Executive Officer and a director of Informix Corporation, a
publicly held database software company. From March 1986 to December 1988, Mr.
White served as President and Chief Operating Officer of Wyse Technology, Inc.,
a publicly held personal computer manufacturing company. Mr. White currently
serves as a director of Adaptec, Inc., a publicly held manufacturer and retailer
of peripheral adapters. In addition, Mr. White is a member of the Board of
Trustees of Illinois Wesleyan University. Mr. White holds a B.A. from Illinois
Wesleyan University and an M.B.A. from the University of Illinois, Urbana.
Board of Directors Meetings and Committees
During the fiscal year ended December 31, 1998, the Board of Directors held
five (5) meetings and acted by written consent in lieu of a meeting on one (1)
occasion. For the fiscal year, each of the directors during the term of their
tenure attended or participated in at least 75% of the aggregate of (i) the
total number of meetings or actions by written consent of the Board of Directors
and (ii) the total number of meetings held by all committees of the Board of
Directors on which each such director served. The Board of Directors has three
(3) standing committees: the Audit Committee, the Compensation Committee and the
Stock Option Committee.
During the fiscal year ended December 31, 1998, the Compensation Committee
of the Board of Directors held one (1) meeting and acted by written consent in
lieu of a meeting on one (1) occasion. The Compensation Committee reviews the
performance of the executive officers of the Company, establishes compensation
programs for the officers, and reviews the compensation programs for other key
employees, including salary and cash bonus levels and option grants under the
1995 Stock Option/Stock Issuance Plan. The members of the Compensation Committee
are Messrs. Fong and Strohm.
During the fiscal year ended December 31, 1998, the Stock Option Committee
of the Board of Directors acted by written consent in lieu of a meeting on 50
occasions. The Stock Option Committee approves stock option grants to employees
and consultants of the Company who are not officers up to a maximum number of
shares set by the Board of Directors. Mr. Cole was the sole member of the Stock
Option Committee during 1998.
During the fiscal year ended December 31, 1998, the Audit Committee of the
Board of Directors did not hold any meetings. The Audit Committee reviews, acts
on and reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of the Company's accountants, the
scope of the annual audits, fees to be paid to the Company's accountants, the
performance of the Company's accountants and the accounting practices of the
Company. The members of the Audit Committee are Messrs. Fong and White.
<PAGE>
Director Compensation
Except for grants of stock options, directors of the Company generally do
not receive compensation for services provided as a director. The Company also
does not pay compensation for committee participation or special assignments of
the Board of Directors.
Non-employee Board members are eligible for option grants pursuant to the
provisions of the Automatic Option Grant Program under the Company's 1995 Stock
Option/Stock Issuance Plan. Under the Automatic Option Grant Program, each
individual who first becomes a non-employee Board member after the date of the
Company's initial public offering will be granted an option to purchase 48,000
shares on the date such individual joins the Board, provided such individual has
not been in the prior employ of the Company. In addition, at each Annual Meeting
of Stockholders, each individual who has served as a non-employee Board member
for at least six months prior to such Annual Meeting will receive an additional
option grant to purchase 12,000 shares of Common Stock, whether or not such
individual has been in the prior employ of the Company. The option price for
each option grant under the Automatic Option Grant Program will be equal to the
fair market value per share of Common Stock on the automatic grant date and each
automatic option grant will be immediately exercisable for all of the option
shares. The shares purchasable under the option will be subject to repurchase at
the original exercise price in the event the optionee's Board service should
cease prior to vesting. With respect to each initial grant, the repurchase right
shall lapse and the optionee shall vest in four (4) equal annual installments
from the grant date. Each annual grant shall vest in two equal and successive
annual installments. Pursuant to the Automatic Option Grant Program, Messrs.
Benhamou, Fong, Strohm and White were each granted options to purchase 48,000
shares of Common Stock on July 5, 1995 at an exercise price of $4.75 per share,
12,000 shares on May 16, 1996 at an exercise price of $10.94 per share, 12,000
shares on May 15, 1997 at an exercise price of $8.94 per share and 12,000 shares
on May 14, 1998 at an exercise price of $30.47. Mr. Bingham, who joined the
Board on December 18, 1998, was granted an option to purchase 48,000 shares of
Common Stock at an exercise price of $55.06. Pursuant to the Automatic Option
Grant Program, each of Messrs. Benhamou, Fong, Strohm and White will be granted
options to purchase 12,000 shares of Common Stock on May 13, 1999.
Directors who are also employees of the Company are eligible to receive
options and be issued shares of Common Stock directly under the 1995 Stock
Option/Stock Issuance Plan and are also eligible to participate in the Company's
Employee Stock Purchase Plan and, if an executive officer of the Company, the
Executive Bonus Plan.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED HEREIN.
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 24, 1999, certain
information with respect to shares beneficially owned by (i) each person who is
known by the Company to be the beneficial owner of more than five percent of the
Company's outstanding shares of Common Stock, (ii) each of the Company's
directors and the executive officers named in the Summary Compensation Table and
(iii) all current directors and executive officers as a group. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within sixty (60) days of
the date as of which the information is provided; in computing the percentage
ownership of any person, the amount of shares is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason of
such acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date.
<TABLE>
Shares Beneficially Owned
as of February 24, 1999 (1) (2)
--------------------------------------------------------------
Beneficial Owner Number of Shares Percentage of Class
- --------------------------------------------------- --------------------------- -----------------------------
<S> <C> <C>
Putnam Investment Management................... 4,456,426 11.73%
One Post Office Square
Boston, MA 02109
Pilgrim Baxter & Associates.................... 2,725,531 7.17%
825 Duportail Rd.
Wayne, PA 19087
American Express Financial Corporation......... 2,325,802 6.12%
IDS Tower 10
Minneapolis, MN 55440
Louis C. Cole (3).............................. 1,834,732 4.79%
Nora M. Denzel (4)............................. 38,701 *
John Ferraro (5)............................... 67,495 *
Kent D. Smith (6).............................. 358,482 *
Stephen C. Wise (7)............................ 44,868 *
Eric A. Benhamou (8)........................... 160,000 *
H. Raymond Bingham (9)......................... 48,000 *
Kevin A. Fong (10)............................. 117,496 *
David N. Strohm (10)........................... 241,868 *
Phillip E. White (11).......................... 74,000 *
All current directors and executive officers as *
a group (11 persons) (12) ..................... 3,061,193 *
- -----------------------
<FN>
* Less than 1% of the outstanding shares of Common Stock.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. To the Company's knowledge, the entities named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) The number of shares of Common Stock deemed outstanding includes shares
issuable pursuant to stock options that may be exercised within sixty (60)
days after February 24, 1999.
(3) Includes options exercisable into 327,616 shares of Common Stock and
1,507,116 shares held by The Louis and Jolene Cole 1988 Revocable Trust,
dated November 7, 1988 (the "Cole Trust"), of which Mr. Cole is a trustee.
(4) Includes options exercisable into 36,797 shares of Common Stock.
(5) Includes options exercisable into 66,666 shares of Common Stock.
(6) Includes options exercisable into 328,482 shares of Common Stock.
(7) Includes options exercisable into 28,539 shares of Common Stock.
(8) Includes options exercisable into 144,000 shares of Common Stock.
(9) Includes options exercisable into 48,000 shares of Common Stock.
(10) Includes options exercisable into 84,000 shares of Common Stock.
(11) Includes options exercisable into 74,000 shares of Common Stock.
(12) Includes options exercisable into 1,274,498 shares of Common Stock.
</FN>
</TABLE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee" or the "Committee") has the exclusive authority to
establish the level of base salary payable to the Chief Executive Officer
("CEO") and certain other executive officers of the Company and to administer
the Company's 1995 Stock Option/Stock Issuance Plan and Employee Stock Purchase
Plan. In addition, the Committee has the responsibility for approving the
individual bonus programs to be in effect for the CEO and certain other
executive officers and other key employees each fiscal year.
For the 1998 fiscal year, the process utilized by the Committee in
determining executive officer compensation levels was based on the subjective
judgment of the Committee. Among the factors considered by the Committee were
the recommendations of the CEO with respect to the compensation of the Company's
key executive officers. However, the Committee made the final compensation
decisions concerning such officers.
General Compensation Policy. The Committee's fundamental policy is to offer
the Company's executive officers competitive compensation opportunities based
upon overall Company performance, their individual contribution to the financial
success of the Company and their personal performance. It is the Committee's
objective to have a substantial portion of each officer's compensation
contingent upon the Company's performance, as well as upon his or her own level
of performance. Accordingly, each executive officer's compensation package
consists of: (i) base salary, (ii) cash bonus awards and (iii) long-term
stock-based incentive awards.
Base Salary. The base salary for each executive officer is set on the basis
of general market levels and personal performance. Each individual's base pay is
positioned relative to the total compensation package, including cash incentives
and long-term incentives.
In preparing the performance graph for this Proxy Statement, the Company
has selected the Hambrecht & Quist Software Sector Index. The companies included
in the Company's informal survey are not necessarily those included in the
Hambrecht & Quist Software Sector Index, because they were determined not to be
competitive with the Company for executive talent or because compensation
information was not available.
Annual Cash Bonuses. Each executive officer has an established cash bonus
target. The annual pool of bonuses for executive officers is distributed on the
basis of the Company's achievement of the financial performance targets
established at the start of the fiscal year and personal objectives established
for each executive. Actual bonuses paid reflect an individual's accomplishment
of both corporate and functional objectives and are based on a percentage of the
individual's base salary. The corporate goals set for the 1998 bonuses are based
on the achievement of quarterly and annual revenue and income targets. During
1998, the Company achieved its quarterly and annual revenue and income targets.
Long-Term Incentive Compensation. During fiscal 1998, the Committee, in its
discretion, made option grants to Messrs. Louis C. Cole, James P. Chappell and
Kent D. Smith under the 1995 Stock Option/Stock Issuance Plan. Generally, a
significant grant is made in the year that an officer commences employment and
no grant is made in the second year. Thereafter, option grants may be made at
varying times and in varying amounts in the discretion of the Committee.
Generally, the size of each grant is set at a level that the Committee deems
appropriate to create a meaningful opportunity for stock ownership based upon
the individual's position with the Company, the individual's potential for
future responsibility and promotion, the individual's performance in the recent
period and the number of unvested options held by the individual at the time of
the new grant. The relative weight given to each of these factors will vary from
individual to individual at the Committee's discretion. Applying these
principles, a significant grant was made to Ms. Denzel and Mr. Ferraro in
connection with their commencement of employment in 1997 and no grant was made
in 1998. The grants made to Messrs. Cole, Chappell and Smith were made in
recognition of their years of service with the Company, their performance in the
recent period, and, in the case of Mr. Cole, in recognition of the small number
of unvested options held by him.
Each grant allows the officer to acquire shares of the Company's common
stock at a fixed price per share (the market price on the grant date) over a
specified period of time. The option vests in periodic installments over a two
to four year period, contingent upon the executive officer's continued
employment with the Company. The vesting schedule and the number of shares
granted are established to ensure a meaningful incentive in each year following
the year of grant. Accordingly, the option will provide a return to the
executive officer only if he or she remains in the Company's employ, and then
only if the market price of the Company's Common Stock appreciates over the
option term.
CEO Compensation. The annual base salary for Mr. Cole, the Company's
President and Chief Executive Officer, was increased by the Committee on January
27, 1998. The Committee's decision was made primarily on the basis of Mr. Cole's
personal performance of his duties.
The remaining components of the Chief Executive Officer's 1998 fiscal year
incentive compensation were entirely dependent upon the Company's financial
performance and provided no dollar guarantees. The bonus paid to the Chief
Executive Officer for the fiscal year was based on the same incentive plan for
all other officers. Specifically, a target incentive was established at the
beginning of the year using an agreed-upon formula based on Company revenue and
profit. Each year, the annual incentive plan is reevaluated with a new
achievement threshold and new targets for revenue and profit. The option grant
made to the Chief Executive Officer during the 1998 fiscal year was based on the
factors discussed above. The bonus award was intended to reflect his years of
service with the Company and to place a significant portion of Mr. Cole's total
compensation at risk, because the bonus will provide little or no compensation
unless Company performance achieves agreed-upon thresholds.
Tax Limitation. Under the Federal tax laws, a publicly-held company such as
the Company will not be allowed a federal income tax deduction for compensation
paid to certain executive officers to the extent that compensation exceeds $1
million per officer in any year. To qualify for an exemption from the $1 million
deduction limitation, the stockholders were asked to approve a limitation under
the Company's 1995 Stock Option/Stock Issuance Plan on the maximum number of
shares of Common Stock for which any one participant may be granted stock
options per calendar year. Because this limitation was adopted, any compensation
deemed paid to an executive officer when he exercises an outstanding option
under the 1995 Stock Option/Stock Issuance Plan with an exercise price equal to
the fair market value of the option shares on the grant date will qualify as
performance-based compensation that will not be subject to the $1 million
limitation. Since it is not expected that the cash compensation to be paid to
the Company's executive officers for the 1998 fiscal year will exceed the $1
million limit per officer, the Committee will defer any decision on whether to
limit the dollar amount of all other compensation payable to the Company's
executive officers to the $1 million cap.
Compensation Committee
Kevin A. Fong
David N. Strohm
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed
in September 1992, and the members of the Compensation Committee are Messrs.
Fong and Strohm. Neither of these individuals was at any time during 1998, or at
any other time, an officer or employee of the Company. No executive officer of
the Company serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return
on the Company's Common Stock between July 6, 1995 (the date the Company's
Common Stock commenced public trading) and December 31, 1998 with the cumulative
total return of (i) the CRSP Total Return Index for the Nasdaq Stock Market
(U.S. Companies) (the "Nasdaq Stock Market-U.S. Index") and (ii) the Hambrecht &
Quist Software Sector Index (the "H&Q Software Sector Index"), over the same
period. This graph assumes the investment of $100.00 on July 6, 1995 in the
Company's Common Stock, the Nasdaq Stock Market-U.S. Index and the H&Q Software
Sector Index, and assumes the reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data.
The Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's Common Stock. Information used in the graph was obtained from
Hambrecht & Quist LLC, a source believed to be reliable, but the Company is not
responsible for any errors or omissions in such information.
Comparison of Cumulative Total Return Among Legato Systems, Inc.,
the Nasdaq Stock Market-U.S. Index and the H&Q Software Sector Index
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7/6/95 12/31/95 6/30/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Legato Systems, Inc. $100.00 $114.81 $203.70 $241.67 $137.04 $325.93 $577.78 $976.85
- -------------------------------------------------------------------------------------------------------------------
Nasdaq Stock Market-U.S. Index $100.00 $112.33 $127.16 $138.14 $154.59 $169.47 $204.04 $238.23
- -------------------------------------------------------------------------------------------------------------------
H&Q Software Sector Index $100.00 $107.76 $128.23 $131.00 $141.98 $158.39 $213.13 $206.92
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company effected its initial public offering of Common Stock on July 5,
1995 at a price of $4.75 per share (as adjusted to reflect the 1996 Stock Split
and the 1998 Stock Split). The graph above, however, commences with the closing
price of $6.75 per share (as adjusted to reflect the 1996 Stock Split and the
1998 Stock Split) on July 6, 1995--the date the Company's Common Stock commenced
public trading.
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this Proxy
Statement or future filings made by the Company under those statutes, the
Compensation Committee Report and Stock Performance Graph shall not be deemed
filed with the Securities and Exchange Commission and shall not be deemed
incorporated by reference into any of those prior filings or into any future
filings made by the Company under those statutes.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers who were serving as such at the end of 1998
(collectively, the "Named Officers"), each of whose aggregate compensation for
1998 exceeded $100,000 for services rendered in all capacities to the Company
and its subsidiaries for that fiscal year.
<TABLE>
Summary Compensation Table
Long-Term
Compensation
Number of
Securities
Annual Compensation Underlying All Other
---------------------------------
Name and Principal Position Year Salary(1) Bonus Options Compensation(2)
<S> <C> <C> <C> <C> <C>
Louis C. Cole 1998 $240,170 $195,059 200,000 $ 626
Chairman of the Board, President 1997 $218,334 $107,625 100,000 $1,440
and Chief Executive Officer 1996 $200,004 $100,520 100,000 $2,864
Nora M. Denzel 1998 $181,996 $115,249 0 $ 626
Senior Vice President, 1997 $146,666(3) $ 84,000 300,000 $ 303
Product Operations 1996 - $ - - $ -
John Ferraro 1998 $161,333 $ 92,372 0 $ 626
Senior Vice President, 1997 $ 6,190(4) $ - 260,000 $ -
Worldwide Sales Operations 1996 - $ - - $ -
Kent D. Smith 1998 $211,260 $154,077 100,000 $ 626
Executive Vice President, 1997 $198,300 $ 86,721 50,000 $ 870
Chief Operations Officer 1996 $162,000 $ 73,301 40,000 $ 1,907
Stephen C. Wise 1998 $183,400 $ 102,375 0 $ 626
Senior Vice President, Finance, 1997 $165,831 $ 56,470 250,000(6) $ 558
Chief Financial Officer, 1996 $ 41,231(5) $ 13,000 200,000(6) $ 128
Asst Secretary
- --------
<FN>
(1) Salary includes amounts deferred under the Company's 401(k) Plan. (2)
Represents life insurance premiums paid by the Company. (3) Ms. Denzel commenced
employment on January 21, 1997. (4) Mr. Ferraro commenced employment on December
15, 1997. (5) Mr. Wise commenced employment on September 27, 1996.
(6) The option for 200,000 shares granted to Mr. Wise in 1996 was canceled and
subsequently regranted on January 27, 1997.
</FN>
</TABLE>
The following table contains information concerning the stock option grants
made to each of the Named Officers for 1998. No stock appreciation rights were
granted to these individuals during such year.
<TABLE>
Option Grants in Last Fiscal Year
Individual Grants(1) Potential Realizable
------------------------------------------------------
Number of % of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees Price Expiration for Option Term(2)
Name Granted in 1998 Per Share Date 5% 10%
---- ------- ------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Louis C. Cole......... 200,000 11.50% $22.53 1/27/08 $2,833,988 $7,181,882
Nora M. Denzel........ 0 -- -- -- -- --
John Ferraro.......... 0 -- -- -- -- --
Kent D. Smith......... 100,000 5.75% $22.53 1/27/08 $1,416,994 $3,590,941
Stephen C. Wise....... 0 -- -- -- -- --
<FN>
(1) The options disclosed in the table were granted on January 27, 1998. The
exercise price for each option may be paid in cash, in shares of Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise. The plan administrator has the
discretionary authority to reprice the options through the cancellation of
those options and the grant of replacement options with an exercise price
based on the fair market value of the option shares on the regrant date. The
options have a maximum term of 10 years measured from the option grant date,
subject to earlier termination in the event of the optionee's cessation of
service with the Company. Except as otherwise noted, the options listed in
the table become exercisable for 50% of the shares after one year of service
from the designated vesting date and for 50% after 2 years from the
designated vesting date. Under each of the options, the option shares will
vest upon an acquisition of the Company by merger or asset sale, unless the
acquiring company assumes the options. Any options that are assumed or
replaced in the transaction and do not otherwise accelerate at that time
shall automatically accelerate (and any unvested option shares which do not
otherwise vest at that time shall automatically vest) in the event the
optionee's service terminates by reason of an involuntary or constructive
termination within 18 months following the transaction.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
</FN>
</TABLE>
The following table sets forth information concerning option exercises in
1998 and option holdings as of the end of the 1998 fiscal year with respect to
each of the Named Officers. No stock appreciation rights were outstanding at the
end of that year.
<TABLE>
<CAPTION>
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of
Value Realized Securities Underlying Value of Unexercised
Shares (Market Price at Unexercised Options in-the-Money Options
Acquired on Exercise Less at FY-End At FY-End(1)
Name Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Louis C. Cole...... 210,000 $7,141,314 218,032 299,168 $11,143,574 $16,507,001
Nora M. Denzel..... 112,499 $2,090,153 12,499 175,002 $656,726 $9,137,953
John Ferraro....... 0 -- 65,000 195,000 $3,180,970 $9,542,910
Kent D. Smith...... 68,500 $2,377,587 311,623 111,877 $18,638,231 $5,837,889
Stephen C. Wise.... 100,200 $1,878,014 12,409 137,391 $659,083 $7,266,180
<FN>
(1) Based on the fair market value of the Company's Common Stock at year-end
($65.94) per share less the exercise price payable for such shares.
</FN>
</TABLE>
Bonus Plan. In 1996, the Company instituted an executive bonus program
pursuant to which bonuses will be paid to executive officers based on individual
and Company performance targets. In addition, certain non-executive employees
will receive quarterly and annual bonuses if the Company meets its performance
targets. The Company's performance targets are based on meeting revenue and
income targets on a quarterly and annual basis.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
None of the Company's executive officers have employment or severance
agreements with the Company, and their employment may be terminated at any time
at the discretion of the Board of Directors.
The Compensation Committee has the authority under the 1995 Stock
Option/Stock Issuance Plan to accelerate the exercisability of outstanding
options, or to accelerate the vesting of the shares of Common Stock subject to
outstanding options, held by the Chief Executive Officer and the Company's other
executive officers. Such acceleration may be conditioned on the optionee's
termination of employment (whether involuntarily or through a forced
resignation) and may be conditioned upon the occurrence of a merger,
reorganization or consolidation or upon a hostile take-over of the Company
effected through a tender offer or through a change in the majority of the Board
as a result of one or more contested elections for Board membership.
<PAGE>
PROPOSAL NO. 2
AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION
The Board of Directors has determined that it is in the best interests of
the Company and its stockholders to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock of the
Company from 100,000,000 to 200,000,000 shares. Accordingly, the Board of
Directors has unanimously approved the proposed Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of the Company, in the form
attached hereto as Exhibit A (the "Certificate of Amendment"), and hereby
solicits the approval of the Company's stockholders of the Certificate of
Amendment. If the stockholders approve the Certificate of Amendment, the Board
of Directors currently intends to file the Certificate of Amendment with the
Secretary of State of the State of Delaware as soon as practicable following
such stockholder approval. If the Certificate of Amendment is not approved by
the stockholders, the existing Certificate of Incorporation will continue in
effect.
The objectives of the increase in the authorized number of shares of Common
Stock are to ensure that the Company has sufficient shares available for future
issuances. The Board of Directors believes that it is prudent to increase the
authorized number of shares of Common Stock to the proposed levels in order to
provide a reserve of shares available for issuance to meet business needs as
they arise. Such future activities may include, without limitation, financings,
establishing strategic relationships with corporate partners, providing equity
incentives to employees, officers or directors, or effecting stock splits or
dividends. The additional shares of Common Stock authorized may also be used to
acquire or invest in complementary businesses or products or to obtain the right
to use complementary technologies. Currently, the Company has plans to issue
additional shares of Common Stock for pending acquisitions.
On October 25, 1998, the Company entered into a definitive agreement to
acquire Qualix Group, Inc. (dba FullTime Software, Inc.), a developer of
distributed, enterprise-wide, cross-platform, adaptive computing solutions that
enable customers to proactively manage application service level availability.
The agreement provides for the issuance of 1,721,000 shares of the Company's
common stock in exchange for all the common stock and options of Qualix Group,
Inc. The transaction is expected to be completed during the second quarter of
1999, and is subject to the satisfaction of standard closing conditions,
including regulatory approval and the approval of Qualix Group, Inc.
stockholders. The transaction is expected to be accounted for as a pooling of
interests.
On January 28, 1999, the Company entered into a definitive agreement to
acquire Intelliguard Software, Inc., a developer of standards-based storage
management solutions for storage area networks. The agreement provides for the
issuance of 720,000 shares of the Company's common stock and the cash equivalent
of 180,000 shares of the Company's common stock at the closing price on the day
preceding the completion of the transaction for all of the outstanding stock and
stock rights of Intelliguard Software, Inc. The transaction is expected to be
completed during the second quarter of 1999, and is subject to the satisfaction
of standard closing conditions, including regulatory approval. The transaction
is expected to be accounted for as a business purchase combination.
The Company may continue to evaluate potential acquisitions of or
investments with third parties.
Possible Effects of the Proposed Amendment to the Certificate of Incorporation
If the stockholders approve the proposed Certificate of Amendment, the
Board of Directors may cause the issuance of additional shares of Common Stock
without further vote of the stockholders of the Company, except as provided
under Delaware corporate law or under the rules of any securities exchange on
which shares of Common Stock of the Company are then listed. Current holders of
Common Stock have no preemptive or similar rights, which means that current
stockholders do not have a prior right to purchase any new issue of Common Stock
of the Company in order to maintain their appropriate ownership thereof. The
issuance of additional shares of Common Stock would decrease the proportionate
equity interest of the Company's current stockholders and, depending upon the
price paid for such additional shares, could result in dilution to the Company's
current stockholders.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
<PAGE>
PROPOSAL NO. 3
AMENDMENT TO THE
1995 STOCK OPTION/STOCK ISSUANCE PLAN
The stockholders are being asked to approve an amendment to the Legato
Systems, Inc. 1995 Stock Option/Stock Issuance Plan (the "Option Plan"). The
Board of Directors ("Board") amended the Option Plan on March 26, 1999 to
increase the share reserve by 1,500,000 shares to an aggregate of 15,079,795
shares and to impose a limit on the number of shares by which the pool would
increase each year, as discussed below. The Board believes that option grants
and the stock issuances under the Option Plan play an important role in the
Company's efforts to attract, employ and retain employees, directors and
consultants of outstanding ability.
Pursuant to its authority to amend the Option Plan, the Board has
reserved the right to amend the Automatic Option Grant Program to reduce or
increase the size of grants made to outside Board members and to shorten or
lengthen the vesting period applicable to options granted under the Automatic
Option Grant Program, including both options already granted and those to be
granted in the future. The Company has been advised by its counsel that, in
accordance with recently issued accounting guidance, an unintended and
potentially adverse accounting treatment could result from vesting options
granted to outside Board members over a lengthy period. Accordingly, the Board
is reviewing the Automatic Option Grant Program in the interests of mitigating
adverse accounting treatment.
The Company established the Option Plan on May 2, 1995 as a successor
to the 1989 Stock Option and Restricted Stock Plan ("Predecessor Plan") to
provide a means whereby eligible individuals may be given an opportunity to
purchase shares of Common Stock. The Option Plan was approved by the
stockholders on June 9, 1995. The Plan was subsequently amended and restated on
March 13, 1998 to (a) increase the share reserve by 2,000,000 shares, (b) impose
a share limit on the annual increases to the share reserve, and (c) expand the
Board's authority to administer the Plan and to amend the Plan without
stockholder approval. The 1998 restatement was approved by the Company's
stockholders on May 14, 1998.
The principal terms and provisions of the Option Plan are summarized
below. The summary, however, is not intended to be a complete description of all
the terms of the Option Plan. A copy of the Option Plan will be furnished by the
Company to any stockholder upon written request to the Corporate Secretary at
the executive offices in Palo Alto, California.
Structure. The Option Plan is divided into three separate components:
(i) the Discretionary Option Grant Program, under which eligible individuals
may, at the discretion of the plan administrator, be granted options to purchase
shares of Common Stock at an exercise price not less than 85% of the fair market
value on the grant date, (ii) the Stock Issuance Program, under which such
persons may, in the plan administrator's discretion, be issued shares of Common
Stock directly through the purchase of such shares at a price not less than
eighty-five percent (85%) of their fair market value at the time of their
issuance or as a bonus tied to the performance of services and (iii) the
Automatic Option Grant Program, under which option grants will automatically be
made at periodic intervals to eligible non-employee Board members to purchase
shares of Common Stock at an exercise price equal to the fair market value on
the grant date.
Administration. The Compensation Committee of the Board, which is
comprised of two (2) or more Board members, administers the Option Plan.
Committee members serve for such period of time as the Board may determine. No
Board member may serve on the Committee if he or she has received an option
grant or stock award under the Option Plan or under any other stock plan of the
Company or its parent or subsidiary corporations within the twelve (12) month
period preceding his or her appointment to the Committee, other than grants
under the Automatic Option Grant Program. The Option Plan may also be
administered by the Board and may be administered with respect to optionees who
are not executive officers subject to the short-swing profit rules of the
federal securities laws by the Board or a secondary committee comprised of one
or more Board members.
The Committee (or Board or secondary committee to the extent acting as
plan administrator) has full authority (subject to the express provisions of the
Option Plan) to determine the eligible individuals who are to receive grants
under the Option Plan, the number of shares to be covered by each granted
option, the date or dates on which the option is to become exercisable, the
maximum term for which the option is to remain outstanding, whether the granted
option will be an incentive stock option ("Incentive Option") that satisfies the
requirements of Section 422 of the Internal Revenue Code (the "Code") or a
non-statutory option not intended to meet such requirements and the remaining
provisions of the option grant.
Eligibility. Employees (including officers), consultants and
independent contractors who render services to the Company or its subsidiary
corporations (whether now existing or subsequently established) are eligible to
receive option grants under the Discretionary Option Grant Program and share
issuances under the Stock Issuance Program. A non-employee member of the Board
or of the board of directors of any parent or subsidiary corporation of the
Company is also eligible for option grants under the Discretionary Option Grant
Program and the Stock Issuance Program, providing he or she is not a member of
the Committee. A non-employee member of the Board is also eligible for option
grants under the Automatic Option Grant Program.
As of February 24, 1999, approximately 740 persons (including 6
executive officers) were eligible to participate in the Option Plan.
Securities Subject to Option Plan. The maximum number of shares of
Common Stock that may be issued over the term of the Option Plan shall not
exceed 15,079,795 shares, assuming approval of this Proposal No. 3. The number
of shares of Common Stock available for issuance under the Option Plan shall
automatically increase on the first trading day of each calendar year during the
term of the Option Plan, beginning January 1, 1997, by an amount equal to three
percent (3%) of the shares of Common Stock outstanding on December 31 of the
immediately preceding calendar year, not to exceed 1,500,000 shares in any
calendar year. Accordingly, the pool was increased by 1,016,302 shares effective
January 1, 1997, by 1,066,448 shares effective January 1, 1998 and by 1,128,813
shares effective January 1, 1999.
No one person participating in the Option Plan may receive options and
direct stock issuances for more than 400,000 shares of Common Stock per calendar
year, beginning with the 1995 calendar year; provided that for the calendar year
in which such person first commences services, the limit shall be 800,000
shares.
Should an option expire or terminate for any reason prior to exercise
in full, including options incorporated from the Predecessor Plan, the shares
subject to the portion of the option not so exercised will be available for
subsequent option grants under the Option Plan.
Discretionary Option Grant Program
Price and Exercisability. The option exercise price per share in the
case of an Incentive Option may not be less than one hundred percent (100%) of
the fair market value of the Common Stock on the grant date and, in the case of
a non-statutory option, eighty-five percent (85%) of the fair market value of
the Common Stock on the grant date. Options granted under the Discretionary
Option Grant Program become exercisable at such time or times and during such
period as the Committee may determine and set forth in the instrument evidencing
the option grant.
The exercise price may be paid in cash or in shares of Common Stock.
Options may also be exercised through a same-day sale program, pursuant to which
a designated brokerage firm is to effect the immediate sale of the shares
purchased under the option and pay over to the Company, out of the sale proceeds
on the settlement date, sufficient funds to cover the exercise price for the
purchased shares plus all applicable withholding taxes. The Committee may also
assist any optionee (including an officer or director) in the exercise of his or
her outstanding options by (a) authorizing a Company loan to the optionee or (b)
permitting the optionee to pay the exercise price in installments over a period
of years. The terms and conditions of any such loan or installment payment will
be established by the Committee in its sole discretion. The Committee has the
discretionary authority to reprice options through the cancellation of those
options and the grant of replacement options with an exercise price based on the
fair market value of the option shares on the regrant date.
No optionee is to have any stockholder rights with respect to the
option shares until the optionee has exercised the option, paid the exercise
price and become a holder of record of the shares. Options are not assignable or
transferable other than by will or the laws of descent and distribution, and
during the optionee's lifetime, the option may be exercised only by the
optionee.
Termination of Service. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the designated
post-service exercise period. Under no circumstances, however, may any option be
exercised after the specified expiration date of the option term. Each such
option will normally, during such limited period, be exercisable only to the
extent of the number of shares of Common Stock in which the optionee is vested
at the time of cessation of service. The Committee has complete discretion to
extend the period following the optionee's cessation of service during which his
or her outstanding options may be exercised and/or to accelerate the
exercisability of such options in whole or in part. Such discretion may be
exercised at any time while the options remain outstanding, whether before or
after the optionee's actual cessation of service.
The shares of Common Stock acquired upon the exercise of one or more
options may be subject to repurchase by the Company at the original exercise
price paid per share upon the optionee's cessation of service prior to vesting
in such shares. The Committee has complete discretion in establishing the
vesting schedule to be in effect for any such unvested shares and may cancel the
Company's outstanding repurchase rights with respect to those shares at any
time, thereby accelerating the vesting of the shares subject to the canceled
rights.
Incentive Options. Incentive Options may only be granted to individuals
who are employees of the Company or its parent or subsidiary corporation. During
any calendar year, the aggregate fair market value (determined as of the grant
date(s)) of the Common Stock for which one or more options granted to any
employee under the Option Plan (or any other option plan of the Company or its
parent or subsidiary corporations) may for the first time become exercisable as
incentive stock options under Section 422 of the Code shall not exceed $100,000.
Limited Stock Appreciation Rights. One or more officers of the Company
subject to the short-swing profit restrictions of the federal securities laws
may, at the discretion of the Committee, be granted limited stock appreciation
rights in connection with their option grants under the Option Plan. Any option
with such a limited stock appreciation right in effect for at least six (6)
months will automatically be canceled, to the extent exercisable for one or more
vested option shares, upon the successful completion of a hostile tender offer
for more than 50% of the Company's outstanding voting stock. In return, the
officer will be entitled to a cash distribution from the Company in an amount
per canceled option share equal to the excess of (i) the highest price per share
of Common Stock paid in the tender offer over (ii) the option exercise price.
Tandem Stock Appreciation Rights. The Committee is authorized to issue
tandem stock appreciation rights in connection with option grants under the
Discretionary Option Grant Program. Tandem stock appreciation rights provide the
holders with the right to surrender their options for an appreciation
distribution from the Company equal in amount to the excess of (a) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (b) the aggregate exercise price payable for such shares. Such
appreciation distribution may, at the discretion of the Committee, be made in
cash or in shares of Common Stock.
Automatic Option Grant Program
Under the Automatic Option Grant Program, non-employee Board members
will receive option grants at specified intervals over their period of Board
service. These special grants may be summarized as follows:
o Each individual who was a non-employee Board member on the date of
the initial public offering and each individual who becomes a non-employee Board
member after such date, whether through election by the stockholders or
appointment by the Board, will automatically be granted, at the time of the
offering, or if later, at the time of such initial election or appointment, a
non-statutory stock option to purchase 48,000 shares of Common Stock.
o On the date of each Annual Stockholders Meeting beginning with the
1996 Annual Meeting, each individual who is reelected as a non-employee Board
member will receive an additional grant of a non-statutory stock option under
the Option Plan to purchase 12,000 shares of Common Stock, provided such
individual has been a member of the Board for at least six months.
Each option grant under the Automatic Option Grant Program will be
subject to the following terms and conditions:
1. The option price per share will be equal to the fair market value
per share of Common Stock on the automatic grant date and each option is to have
a maximum term of ten years from the grant date.
2. Each automatic option grant will be immediately exercisable for all
of the option shares; the shares purchasable under the option shall be subject
to repurchase at the original exercise price in the event the optionee's Board
service should cease prior to vesting. With respect to each initial grant, the
repurchase right shall lapse and the optionee vest in four (4) equal annual
installments from the grant date. Each annual grant shall vest in two equal and
successive annual installments.
3. The option will remain exercisable for a 12-month period following
the optionee's termination of service as a Board member for any reason and may
be exercised following the Board member's death by the personal representatives
of the optionee's estate or the person to whom the grant is transferred by the
optionee's will or the laws of inheritance. In no event, however, may the option
be exercised after the expiration date of the option term. During the applicable
exercise period, the option may not be exercised for more than the number of
shares (if any) for which it is exercisable at the time of the optionee's
cessation of Board service.
4. The option shares will become fully vested in the event of a
Corporate Transaction (as defined below) or a Change in Control (as defined
below). The option shares will become fully vested in the event of the
optionee's cessation of Board service by reason of death or permanent
disability.
5. Upon the occurrence of a hostile tender offer, the optionee shall
have a thirty (30) day period in which to surrender to the Company each
automatic option that has been in effect for at least six (6) months and the
optionee will in return be entitled to a cash distribution from the Company in
an amount per canceled option share (whether or not the optionee is otherwise
vested in those shares) equal to the excess of (i) the highest reported price
per share of Common Stock paid in the tender offer over (ii) the option exercise
price payable per share.
6. Option grants under the Automatic Option Grant Program will be made
in strict compliance with the express provisions of that program. The remaining
terms and conditions of the option will in general conform to the terms
described herein for option grants under the Discretionary Option Grant Program
and will be incorporated into the option agreement evidencing the automatic
grant.
Stock Issuance Program
Shares may be sold under the Stock Issuance Program at a price per
share not less than eighty-five percent (85%) of fair market value, payable in
cash or through a promissory note payable to the Company. Shares may also be
issued solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or
subject to a vesting schedule tied to the performance of service or the
attainment of performance goals. The Committee will, however, have the
discretionary authority at any time to accelerate the vesting of any and all
unvested shares outstanding under the Option Plan.
General Provisions
Acceleration of Options/Termination of Repurchase Rights. Upon the
occurrence of either of the following transactions (a "Corporate Transaction"):
(i) the sale, transfer, or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company, or
(ii) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from the
persons holding those immediately prior to such transaction, each outstanding
option under the Option Plan will, immediately prior to the effective date of
the Corporate Transaction, become fully exercisable for all of the shares at the
time subject to such option. However, an outstanding option shall not accelerate
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent) or to
be replaced with a comparable option to purchase shares of the capital stock of
the successor corporation (or parent), (ii) such option is to be replaced with a
cash incentive program of the successor corporation that preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Committee at the time of the option grant.
Immediately following the consummation of the Corporate Transaction, all
outstanding options will terminate and cease to be exercisable, except to the
extent assumed by the successor corporation.
Also upon a Corporate Transaction, the Company's outstanding repurchase
rights applicable to options granted under the Discretionary Option Grant
Program or shares issued under the Stock Issuance Program will terminate
automatically unless assigned to the successor corporation.
Any options that are assumed or replaced in the Corporate Transaction
and do not otherwise accelerate at that time shall automatically accelerate (and
any of the Company's outstanding repurchase rights that do not otherwise
terminate at the time of the Corporate Transaction shall automatically terminate
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full) in the event the optionee's service should
subsequently terminate by reason of an involuntary termination within eighteen
(18) months following the effective date of such Corporate Transaction. Any
options so accelerated shall remain exercisable for fully-vested shares until
the earlier of (i) the expiration of the option term or (ii) the expiration of
the one (1)-year period measured from the effective date of the involuntary
termination
Upon the occurrence of the following transactions ("Change in
Control"):
(i) any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) acquires beneficial ownership of more than
fifty percent (50%) of the Company's outstanding voting stock without the
Board's recommendation, or
(ii) there is a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases by reason of a proxy contest, to be comprised of individuals who
(a) have been Board members continuously since the beginning of such period or
(b) have been elected or nominated for selection as Board members by a majority
of the continuing Board members,then the Committee has the discretion to
accelerate outstanding options and terminate the Company's outstanding
repurchase rights.
The Committee also has the discretion to accelerate outstanding options
and/or terminate the Company's outstanding repurchase rights upon a Corporate
Transaction or Change in Control, which acceleration or termination may or may
not be conditioned upon the subsequent termination of the optionee's service
within a specified period following the transaction. The acceleration of options
in the event of a Corporate Transaction or Change in Control may be seen as an
anti-takeover provision and may have the effect of discouraging a merger
proposal, a takeover attempt, or other efforts to gain control of the Company.
Valuation. For purposes of establishing the option price and for all
other valuation purposes under the Option Plan, the fair market value of a share
of Common Stock on any relevant date will be the closing price per share of
Common Stock on that date, as such price is reported on the Nasdaq National
Market. The market value of the Common Stock as reported on the Nasdaq Stock
Market as of February 24, 1999 was $45.50 per share.
Changes in Capitalization. In the event any change is made to the
Common Stock issuable under the Option Plan by reason of any stock split, stock
dividend, combination of shares, exchange of shares, or other change affecting
the outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Option Plan, (ii) the maximum
number and/or class of securities for which any one person may be granted
options and direct stock issuances per calendar year, (iii) the maximum number
and/or class of securities for which the share reserve is to increase
automatically each year, (iv) the number and/or class of securities for which
automatic option grants are to be subsequently made per director under the
Automatic Option Grant Program and (v) the number and/or class of securities and
the exercise price per share in effect under each outstanding option (including
any option incorporated from the Predecessor Plan) in order to prevent the
dilution or enlargement of benefits thereunder.
Each outstanding option that is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities that would otherwise have been issued, in consummation
of such Corporate Transaction, to the option holder had the option been
exercised immediately prior to the Corporate Transaction. Appropriate
adjustments will also be made to the option price payable per share and to the
class and number of securities available for future issuance under the Option
Plan on both an aggregate and a per-participant basis.
Option Plan Amendments. The Board may amend or modify the Option Plan
in any and all respects whatsoever. The approval ofthe Company's stockholders
will be obtained to the extent required by applicable law.
Unless sooner terminated by the Board, the Option Plan will in all
events terminate on April 30, 2005. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.
As of February 24, 1999, options covering 6,039,523 shares were
outstanding under the Option Plan, 2,373,152 shares remained available for
future option grant, without giving effect to the increase which is the subject
of this Proposal No. 3, and 5,167,120 shares have been issued under the Option
Plan. The expiration dates for all such options range from January 31, 2002 to
February 22, 2009.
New Plan Benefits and Option Grant Table
Because the Option Plan is discretionary, benefits to be received by
individual optionees are not determinable. However, each of Messrs. Benhamou,
Fong, Strohm, and White will receive an option grant to purchase 12,000 shares
under the Automatic Option Grant Program on the date of the Annual Meeting with
an exercise price per share equal to the closing price per share of Common Stock
on the date of the Annual Meeting. The table below shows, as to each of the
executive officers named in the Summary Compensation Table and the various
indicated groups, (i) the number of shares of Common Stock for which options
have been granted under the Option Plan, for the one (1)-year period ending
December 31, 1998 plus the period through February 24, 1999 and (ii) the
weighted average exercise price per share. No direct stock issuances have been
made under the Option Plan to date.
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Exercise
Number Of Option Price Of
Name And Position Shares Granted Options
<S> <C> <C>
Louis C. Cole...................................................... 350,000 $30.66
Chairman of the Board, President and Chief Executive Officer
Nora M. Denzel..................................................... 50,000 $41.50
Senior Vice President, Product Operations
John Ferraro....................................................... 0 --
Senior Vice President, Worldwide Sales Operations
Kent D. Smith...................................................... 100,000 $22.53
Executive Vice President, Chief Operating Officer
Stephen C. Wise.................................................... 40,000 $41.50
Senior Vice President, Chief Financial Officer
All current executive officers as a group (6 persons).............. 579,800 $31.20
All current directors (other than executive officers) as a
group (5 persons) ............................................ 96,000 $42.77
All employees, including current officers who are not executive
officers, as a group (740 persons)............................ 2,311,400 $34.74
</TABLE>
Federal Income Tax Consequences of Options Granted under the Option Plan
Options granted under the Option Plan may be either incentive stock
options that satisfy the requirements of Section 422 of the Code or
non-statutory options that are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the
optionee at the time of the option grant, and no taxable income is generally
recognized at the time the option is exercised. However, the excess of the fair
market value of the purchased shares on the exercise date over the exercise
price paid for the shares generally is includable in alternative minimum taxable
income. The optionee will recognize taxable income in the year in which the
purchased shares are sold or otherwise made the subject of disposition.
For federal tax purposes, dispositions are divided into two categories:
(i) qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will
recognize long-term capital gain in an amount equal to the excess of (i) the
amount realized upon the sale or other disposition of the purchased shares over
(ii) the exercise price paid for such shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of those
shares on the date the option was exercised over (ii) the exercise price paid
for the shares will be taxable as ordinary income. Any additional gain
recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction for the
taxable year in which such disposition occurs equal to the excess of (i) the
fair market value of such shares on the date the option was exercised over (ii)
the exercise price paid for the shares. In no other instance will the Company be
allowed a deduction with respect to the optionee's disposition of the purchased
shares. The Company anticipates that any compensation deemed paid by the Company
upon one or more disqualifying dispositions of incentive stock option shares by
the Company's executive officers will remain deductible by the Company and will
not have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company.
Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee will be required to satisfy
the tax withholding requirements applicable to such income.
Special provisions of the Internal Revenue Code apply to the
acquisition of Common Stock under a non-statutory option if the purchased shares
are subject to repurchase by the Company. These special provisions may be
summarized as follows:
(i)......If the shares acquired upon exercise of the non-statutory
option are subject to repurchase by the Company at the original exercise price
in the event of the optionee's termination of service prior to vesting in such
shares, the optionee will not recognize any taxable income at the time of
exercise but will have to report as ordinary income, as and when the Company's
repurchase right lapses, an amount equal to the excess of (a) the fair market
value of the shares on the date such repurchase right lapses with respect to
such shares over (b) the exercise price paid for the shares.
(ii).....The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year of exercise of
the non-statutory option an amount equal to the excess of (a) the fair market
value of the purchased shares on the exercise date (determined as if the shares
were not subject to the Company's repurchase right) over (b) the exercise price
paid for such shares. If the Section 83(b) election is made, the optionee will
not recognize any additional income as and when the repurchase right lapses.
The Company will be entitled to a business expense deduction equal to
the amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of non-statutory options with exercise prices equal to
the fair market value of the option shares on the grant date will remain
deductible by the Company and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.
Stock Issuances. The tax principles applicable to direct stock
issuances under the Option Plan will be substantially the same as those
summarized above for the exercise of non-statutory option grants.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT
TO THE 1995 STOCK OPTION/STOCK ISSUANCE PLAN.
<PAGE>
PROPOSAL NO. 4
AMENDMENT TO THE
EMPLOYEE STOCK PURCHASE PLAN
General
The Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board on May 2, 1995 and approved by the stockholders on June 9, 1995. The
Purchase Plan was amended on March 26, 1999 to increase the share reserve by
1,000,000 shares to 2,600,000 shares. The stockholders are being asked to
approve the amendment to the Purchase Plan.
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to meet the requirements of an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code (the "Code"). The
Company has been advised by its counsel that it should reserve a sufficient
number of shares under its Purchase Plan to last through the end of each
twenty-four month offering period beginning prior to the 2001 Annual Stockholder
Meeting. In accordance with recently issued accounting guidance, an insufficient
number of shares reserved at the beginning of an offering period may result in
an unintended and potentially adverse accounting treatment. Accordingly, the
Board is recommending an increase to the number of shares available under the
Purchase Plan.
The Plan was previously amended on March 7, 1996 to eliminate the
service requirement for participating in the Plan. The stockholders approved the
amendment of the Plan at the 1996 Annual Meeting on May 16, 1996. The following
summary of certain Purchase Plan provisions is qualified, in its entirety, by
reference to the Purchase Plan. Copies of the Purchase Plan document may be
obtained by a stockholder upon written request to the Secretary of the Company
at the executive offices in Palo Alto, California.
In addition to the Purchase Plan, the Company maintains the
International Employee Stock Purchase Plan ("International Plan") pursuant to
which eligible non-U.S. citizens and U.S. citizens working abroad who are not
paid in U.S. currency, and who are employed by the Company or any participating
subsidiary or parent corporation on a regularly-scheduled basis of more than
twenty (20) hours per week for more than five (5) months per calendar year may
purchase Common Stock pursuant to payroll deductions.
Purpose
The purpose of the Purchase Plan is to provide employees of the Company
and designated parent or subsidiary corporations (collectively, "Participating
Companies") an opportunity to participate in the ownership of the Company by
purchasing Common Stock of the Company through payroll deductions. The Company
is the only Participating Company in the Purchase Plan.
The Purchase Plan is intended to benefit the Company as well as its
stockholders and employees. The Purchase Plan gives employees an opportunity to
purchase shares of Common Stock at a favorable price. The Company believes that
the stockholders will correspondingly benefit from the increased interest on the
part of participating employees in the profitability of the Company. Finally,
the Company will benefit from the periodic investments of equity capital
provided by participants in the Purchase Plan.
Administration
The Purchase Plan is administered by a committee appointed by the Board
(the "Committee"). Administration of the Purchase Plan with respect to officers
subject to Section 16 of the 1934 Act shall be by members who are "disinterested
persons" as that term is defined in Rule 16b-3 under the Act to the extent
necessary to satisfy such rule. All costs and expenses incurred in plan
administration will be paid by the Company without charge to participants. All
cash proceeds received by the Company from payroll deductions under the Purchase
Plan shall be held in a non-interest bearing trust account.
Shares and Terms
The stock issuable under the Purchase Plan is the Company's authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock that may be issued in the aggregate under the Purchase Plan and the
International Plan is 1,600,000, adjusted as described in the "Adjustment"
section of this description, assuming the approval of this Proposal No. 4.
Common Stock subject to a terminated purchase right shall be available for
purchase pursuant to purchase rights subsequently granted.
Adjustments
If any change in the Common Stock occurs (through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
combination of shares, exchange of shares, change of corporate structure or
otherwise), by the Company, appropriate adjustments shall be made to the class
and maximum number of shares subject to the Purchase Plan, to the class and
maximum number of shares purchasable by each participant per purchase period,
and the class and number of shares and purchase price per share subject to
outstanding purchase rights in order to prevent the dilution or enlargement of
benefits thereunder.
Eligibility
Generally, any individual who is customarily employed by one or more
Participating Companies more than 20 hours per week and for more than five
months per calendar year is eligible to participate in the Purchase Plan. From
time to time, prior to commencement of an offering period, the Committee may
impose an eligibility service requirement, which may be as long as ninety (90)
days, or may provide for no eligibility service period. Approximately 740
employees (including 6 officers) were eligible to participate in the Purchase
Plan as of February 24, 1999.
Offering Periods
The Purchase Plan is implemented by offering periods which generally
have a duration of twenty-four months; each offering period is comprised of a
series of one or more successive purchase periods, which generally will have a
duration of six (6) months, although the Committee may provide for a longer or
shorter period. The current offering period commenced on August 1, 1997 and will
end on the last business day in July 1999; and the next offering period will
commence on August 1, 1999 and will end on July 31, 2001, unless terminated
earlier. The Committee may in its discretion, vary the beginning date and ending
date of the offering periods and the purchase periods prior to their
commencement, provided no offering period shall exceed twenty-seven (27) months
in length.
The participant will have a separate purchase right for each offering
period in which he or she participates. The purchase right will be granted on
the first day of the offering period and will be automatically exercised in
successive installments on the last day of each purchase period within the
offering period.
Purchase Price
The purchase price per share under the Purchase Plan is 85% of the
lower of (i) the fair market value of a share of Common Stock on the first day
of the applicable offering period or, if later, the participant's entry date
into the offering period, or (ii) the fair market value of a share of Common
Stock on the purchase date. Generally, the fair market value of the Common Stock
on a given date is the closing sale price of the Company's Common Stock, as
reported on the Nasdaq National Market System. The closing price of the Common
Stock as reported on the Nasdaq Stock Market on February 24, 1999, was $45.50
per share.
Limitations
The plan imposes certain limitations upon a participant's rights to
acquire Common Stock, including the following:
1. No purchase right shall be granted to any person who
immediately thereafter would own, directly or indirectly, stock
possessing five percent (5%) or more of the total combined voting power
or value of all classes of stock of the Company or any of its
subsidiary corporations.
2. In no event shall a participant be permitted to
purchase more than 2,000 shares on any one purchase date.
3. The right to purchase Common Stock under the Purchase Plan
(or any other employee stock purchase plan that the Company or any of
its subsidiaries may establish) in an offering intended to qualify
under Section 423 of the Code may not accrue at a rate that exceeds
$25,000 in fair market value of such Common Stock (determined at the
time such purchase right is granted) for any calendar year in which
such purchase right is outstanding.
Payment of Purchase Price; Payroll Deductions
Payment for shares by participants shall be in such manner and at such
time as the Committee shall determine. Generally, the purchase price is
accumulated by after-tax payroll deductions during the purchase period. The
deductions may not exceed 10% of a participant's cash compensation paid during a
purchase period. Compensation for this purpose will include elective
contributions that are not includeable in income under Code Sections 125,
401(k), 401(h) or 403(b) and all bonuses, overtime, commissions, and other
amounts to the extent paid in cash.
The participant will receive a purchase right to purchase up to the
number of shares of the Company's Common Stock determined by dividing such
participant's payroll deductions accumulated prior to the exercise date by the
applicable purchase price (subject to the "Limitations" section). No fractional
shares shall be purchased. Any payroll deductions accumulated in a participant's
account that are not sufficient to purchase a full share will be retained in the
participant's account for the subsequent purchase period. No interest shall
accrue on the payroll deductions of a participant in the Purchase Plan.
Termination and Change to Payroll Deductions
A purchase right shall terminate at the end of the offering period or
earlier if (i) the participant terminates employment and any payroll deductions
which the participant may have made with respect to a terminated purchase right
will be refunded or (ii) the participant elects to withdraw from the Purchase
Plan. Any payroll deductions which the participant may have made with respect to
a terminated purchase right under clause (ii) will be refunded unless the
participant elects to have the funds applied to the purchase of shares on the
next purchase date.
Unless a participant has irrevocably elected otherwise, he or she may
decrease his or her deductions once during a purchase period.
Purchase rights are not assignable or transferable except with respect
to a designated beneficiary.
Amendment and Termination
The Purchase Plan shall continue in effect until the earlier of (i) the
last business day in July 2005, (ii) the date on which all shares available for
issuance under the Purchase Plan shall have been issued or (iii) pursuant to a
Corporate Transaction, unless earlier terminated by the Board in its discretion.
The Board may at any time alter, amend, suspend or discontinue the
Purchase Plan with respect to any shares not subject to purchase rights,
provided that, without the approval of the stockholders, no such action may (i)
alter the purchase price formula so as to reduce the purchase price payable for
shares under the Purchase Plan, (ii) materially increase the number of shares
issuable under the Purchase Plan or the maximum number of shares purchasable per
participant, or (iii) materially increase the benefits accruing to participants
under the Purchase Plan or materially modify the eligibility requirements.
In addition, the Company has specifically reserved the right,
exercisable in the sole discretion of the Board, to terminate the Purchase Plan
immediately following any six-month purchase period. If such right is exercised
by the Board, then the Purchase Plan will terminate in its entirety and no
further purchase rights will be granted or exercised, and no further payroll
deductions shall thereafter be collected under the Purchase Plan.
Corporate Transaction
In the event of a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction or the sale, transfer or other disposition of all or substantially
all of the assets of the Company in complete liquidation or dissolution of the
Company (a "Corporate Transaction"), each purchase right under the Purchase
Plan, will automatically be exercised immediately before consummation of the
Corporate Transaction as if such date were the last purchase date of the
offering period. The purchase price per shall be equal to eighty-five percent
(85%) of the lower of the fair market value per share of Common Stock on the
start date of the offering period (or on the participant's entry date, if later)
or the fair market value per share of Common Stock immediately prior to the
effective date of such Corporate Transaction. Any payroll deductions not applied
to such purchase shall be promptly refunded to the participant.
The grant of purchase rights under the Purchase Plan will in no way
affect the right of the Company to adjust, reclassify, reorganize, or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
Proration of Purchase Rights
If the total number of shares of Common Stock for which purchase rights
are to be granted on any date exceeds the number of shares then remaining
available under the Purchase Plan, the Committee shall make a pro rata
allocation of the shares remaining. The Committee shall give written notice to
all affected participants.
Federal Income Tax Consequences
The following is a general description of certain federal income tax
consequences of the Purchase Plan. This description does not purport to be
complete.
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under a plan which so qualifies, no taxable
income will be reportable by a participant, and no deductions will be allowable
to the Company, by reason of the grant or exercise of the purchase rights issued
thereunder. A participant will, however, recognize taxable income in the year in
which the purchased shares are sold or otherwise made the subject of
disposition.
A sale or other disposition of the purchased shares will be a
disqualifying disposition if made before the later of two years after the start
of the purchase period in which such shares were acquired or one year after the
shares are purchased. If the participant makes a disqualifying disposition of
the purchased shares, then the Company will be entitled to an income tax
deduction, for the taxable year in which such disposition occurs, equal to the
amount by which the fair market value of such shares on the date of purchase
exceeded the purchase price. In no other instance will the Company be allowed a
deduction with respect to the participant's disposition of the purchased shares.
Any additional gain or loss recognized upon the disposition of the
shares will be a capital gain, which will be long-term if the shares have been
held for more than one (1) year following the date of purchase under the
Purchase Plan.
The foregoing is only a summary of the federal income taxation
consequences to the participant and the Company with respect to the shares
purchased under the Purchase Plan. Reference should be made to the applicable
provisions of the Code. In addition, the summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city, state
or foreign country in which the participant may reside.
New Purchase Plan Benefits
Since purchase rights are subject to discretion, including an
employee's decision not to participate in the Purchase Plan, awards under the
Purchase Plan for the current fiscal year are not determinable. However, in the
purchase period that ended on January 31, 1999, each of the Named Officers
purchased the following:
Shares acquired under the
Name Purchase Plan Purchase Price per share
Louis C. Cole 0 --
John Ferraro 502 $20.03
Nora M. Denzel 1,202 $10.57
Kent D. Smith 0 --
Stephen C. Wise 1,172 $10.57
In addition, Ms. Denzel and Mr. Wise have the rights to purchase a maximum
of 2,000 shares of Common Stock at a price that will not exceed $10.57 per share
on July 31, 1999. Mr. Ferraro has the right to purchase a maximum of 2,000
shares of Common Stock at a price that will not exceed $20.03 per share on July
31, 1999. Mr. Cole was not eligible to participate in the Purchase Plan during
the 1998 fiscal year since he directly owned five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Company. Mr.
Smith elected not to participate in the Purchase Plan during the current fiscal
year.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN.
<PAGE>
PROPOSAL NO. 5
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Company is asking the stockholders to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the fiscal year ending December 31, 1999. The affirmative vote of the holders of
a majority of shares present or represented by proxy and voting at the Annual
Meeting will be required to ratify the appointment of PricewaterhouseCoopers
LLP.
In the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the appointment is ratified,
the Board of Directors, in its discretion, may direct the appointment of a
different independent accounting firm at any time during the year if the Board
of Directors feels that such a change would be in the Company's and its
stockholders' best interests.
PricewaterhouseCoopers LLP has audited the Company's financial statements
since 1989. Its representatives are expected to be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
SELECTION OF PRICEWATERHOUSECOOPERS LLP TO SERVE AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than 10% of the Company's outstanding Common
Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, which require them to file reports
with respect to their ownership of the Company's Common Stock and their
transactions in such Common Stock. Based upon (i) the copies of Section 16(a)
reports that the Company received from such persons for their 1998 fiscal year
transactions in the Common Stock and their Common Stock holdings and (ii) the
written representations received from one or more of such persons that no annual
Form 5 reports were required to be filed by them for the 1998 fiscal year, the
Company believes that all reporting requirements under Section 16(a) for such
fiscal year were met in a timely manner by its executive officers, Board members
and greater than ten-percent stockholders, except that Kent Smith filed a Form 5
one day late.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 1998, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULE AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO LEGATO
SYSTEMS, INC., 3210 PORTER DRIVE, PALO ALTO, CALIFORNIA 94304, ATTN: EDMOND MOK,
CORPORATE FINANCE.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Stockholder proposals that are intended to be presented at the 2000 Annual
Meeting that are eligible for inclusion in the Company's proxy statement and
related proxy materials for that meeting under the applicable rules of the
Securities and Exchange Commission must be received by the Company not later
than December 7, 1999, in order to be included. Such stockholder proposals
should be addressed to Legato Systems, Inc., 3210 Porter Drive, Palo Alto,
California 94304, Attn: Edmond Mok, Corporate Finance.
OTHER MATTERS
The Board knows of no other matters to be presented for stockholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in accordance
with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
Robert V. Gunderson, Jr.
Secretary
Palo Alto, California
April 8, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING.
IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY
VOTE, YOU MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
THANK YOU FOR YOUR ATTENTION TO THIS MATTER. YOUR PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE ANNUAL MEETING.
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
LEGATO SYSTEMS, INC.
Legato Systems, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors adopted a resolution setting forth a
proposed amendment to the Amended and Restated Certificate of Incorporation of
said Corporation and declaring said amendment advisable and directing that said
amendment be submitted to the stockholders of said Corporation entitled to vote
in respect thereof for their approval. The resolution setting forth said
amendment is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation
of the Corporation be amended by replacing the first paragraph of Article
IV thereof so that such paragraph shall be and read as follows:
"This corporation is authorized to issue two classes of stock to
be designated common stock ("Common Stock") and preferred stock
("Preferred Stock"). The number of shares of Common Stock authorized
to be issued is Two Hundred Million (200,000,000), par value $0.0001
per share, and the number of shares of Preferred Stock authorized to
be issued is Five Million (5,000,000), par value $0.0001 per share. "
SECOND: That thereafter said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law by obtaining a
majority vote of the Common Stock in favor of said amendment in the manner set
forth in Section 222 of the General Corporation Law.
IN WITNESS WHEREOF, this Certificate of Amendment of the Amended and
Restated Certificate of Incorporation has been signed by the President and the
Secretary of the Corporation this day of May, 1999.
LEGATO SYSTEMS, INC.
By:
Louis C. Cole, President
ATTEST:
By:
Robert V. Gunderson, Jr., Secretary
<PAGE>
PROXY PROXY
LEGATO SYSTEMS, INC.
3210 Porter Drive, Palo Alto, CA 94304
This Proxy is Solicited on Behalf of the
Board of Directors of Legato Systems, Inc.
for the Annual Meeting of Stockholders to be held May 13, 1999
The undersigned holder of Common Stock, par value $.0001, of Legato
Systems, Inc. (the "Company") hereby appoints Louis C. Cole and Stephen C. Wise,
or either of them, proxies for the undersigned, each with full power of
substitution, to represent and to vote as specified in this Proxy all Common
Stock of the Company that the undersigned stockholder would be entitled to vote
if personally present at the Annual Meeting of Stockholders (the "Annual
Meeting") to be held on Thursday May 13th, 1999 at 9:00 a.m. local time, at the
Crowne Plaza Hotel, 4290 El Camino Real, Palo Alto, California, and at any
adjournments or postponements of the Annual Meeting. The undersigned stockholder
hereby revokes any proxy or proxies heretofore executed for such matters.
This proxy, when properly executed, will be voted in the manner as
directed herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS, FOR PROPOSALS 2, 3 4 AND
5, AND IN THE DISCRETION OF THE PROXIES AS TO ANY OTHER MATTERS THAT MAY
PROPERLY COME BEFORE THE MEETING. The undersigned stockholder may revoke this
proxy at any time before it is voted by delivering to the Corporate Secretary of
the Company either a written revocation of the proxy or a duly executed proxy
bearing a later date, or by appearing at the Annual Meeting and voting in
person.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE DIRECTORS
AND "FOR" PROPOSALS 2, 3, 4 AND 5.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE
ENCLOSED RETURN ENVELOPE. If you receive more than one proxy card, please sign
and return ALL cards in the enclosed envelope.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
(Reverse)
LEGATO SYSTEMS, INC.
Please mark votes
as in this example
<TABLE>
<S> <C> <C>
1. To elect the following directors to serve for a term 3. To approve the amendment to FOR AGAINST ABSTAIN
ending upon the 2000 Annual Meeting of Stockholders or the Company's 1995 Stock
until their successors are elected and qualified: Option/Stock Issuance Plan,
to increase the number of
Nominees: Louis C. Cole, Eric A. Benhamou, H. Raymond shares available as set
Bingham, Kevin A. Fong, David N. Strohm and Phillip E. White forth in the accompanying
Proxy Statement.
FOR WITHHELD For all nominees, except 4. To approve the amendment to FOR AGAINST ABSTAIN
for nominees written below. the Employee Stock Purchase
Plan, to increase the number
of shares available as set
forth in the accompanying
Proxy Statement.
-----------------------
Nominee exception(s).
2. To approve the amendment to the Company's Certificate 5. To ratify the appointment of FOR AGAINST ABSTAIN
of Incorporation as set forth in the PricewaterhouseCoopers LLP as
accompanying Proxy Statement. the Company's independent
accountants for the fiscal
FOR AGAINST ABSTAIN year ending December 31,
1999.
</TABLE>
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Annual Meeting.
The undersigned acknowledges receipt of the accompanying Notice of Annual
Meeting of Stockholders and Proxy Statement.
Signature: Signature (if held jointly): Date:
, 1999
Please date and sign exactly as your name(s) is (are) shown on the share
certificate(s) to which the Proxy applies. When shares are held as
joint-tenants, both should sign. When signing as an executor, administrator,
trustee, guardian, attorney-in fact or other fiduciary, please give full title
as such. When signing as a corporation, please sign in full corporate name by
President or other authorized officer. When signing as a partnership, please
sign in partnership name by an authorized person.
