Filed Pursuant to Rule 424(b)3
Registration No. 333-84420
[LOGO] LEGATO
April 16, 2002
TO THE STOCKHOLDERS OF LEGATO SYSTEMS, INC.
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Legato Systems, Inc., which will be held at 3210 Porter Drive, Palo Alto,
California on Tuesday, May 14, 2002, beginning at 11:00 a.m. Pacific Daylight
Saving Time. The purpose of the special meeting is to approve the adoption of a
merger agreement under which Legato would acquire all of the outstanding shares
of OTG Software, Inc. in a stock and cash transaction. We believe this
acquisition will allow us to accelerate our current ability to provide our
customers with the most scalable and secure management and applications
solutions available in the market today.
As a result of the merger, OTG stockholders will hold approximately 20.3% of
the Legato common stock outstanding immediately after the merger, based upon
shares of Legato common stock outstanding on April 12, 2002 and OTG common
stock outstanding on March 22, 2002. We have registered 25,078,509 shares of
our common stock in connection with the merger. Our common stock is traded on
the Nasdaq National Market under the symbol "LGTO" and the closing price on
April 10, 2002 was $7.86.
Details of the business to be conducted at the special meeting are given in
the attached notice of special meeting of stockholders and in the balance of
this document. It is important that your shares be represented and voted at the
meeting.
Whether or not you plan to attend the special 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
our special meeting. If you decide to attend our special 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 Legato. We look
forward to seeing you at the special meeting.
Sincerely,
/s/ David B. Wright
David B. Wright
Chairman of the Board
You should carefully read the "Risk Factors" section that begins at page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued in
connection with the merger or determined if this joint proxy
statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated April 16, 2002 and is first
being mailed to our stockholders on or about April 16, 2002.
LEGATO SYSTEMS, INC.
2350 West El Camino Real
Mountain View, California 94040
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 14, 2002
A special meeting of stockholders of Legato Systems, Inc. will be held at
3210 Porter Drive, Palo Alto, California on Tuesday, May 14, 2002 beginning at
11:00 a.m. Pacific Daylight Saving Time for the following purpose:
To approve the Agreement and Plan of Merger, dated as of February 20, 2002,
by and among Legato Systems, Inc., Orion Acquisition Sub Corp., a direct
wholly owned subsidiary of Legato Systems, Inc. and OTG Software, Inc.
The foregoing item of business is more fully described in this document.
Only stockholders of record at the close of business on April 12, 2002 are
entitled to notice of, and to vote at, the special meeting and at any
adjournments or postponements of the meeting. A list of those holders will be
available for inspection at Legato's offices located at 2350 West El Camino
Real, Mountain View, California 94040, during ordinary business hours for the
ten-day period prior to the special meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Noah D. Mesel
Mountain View, California Noah D. Mesel
April 16, 2002 Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL 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
SPECIAL MEETING. IF YOU DECIDE TO ATTEND THE SPECIAL MEETING AND WISH TO CHANGE
YOUR PROXY VOTE, YOU MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
This document incorporates important business and financial information that
is not included in or delivered with this document. This information is
available without charge upon oral or written request. To be sure that
documents arrive on time, you should make all requests for documents no later
than May 7, 2002. To request information, you should contact either:
Legato Systems, Inc. OTG Software, Inc.
2350 West El Camino Real 2600 Tower Oaks Boulevard
Mountain View, CA 94040 Rockville, MD 20852
(650) 210-7000 (240) 747-6400
Attention: Investor Relations Attention: Investor Relations
You should rely only on the information contained or incorporated by
reference in this document to vote on the proposals submitted at the Legato
special meeting. We have not authorized anyone to provide you with information
that is different from what is contained in this document. You should not
assume that the information contained in this document is accurate as of any
date other than the date of this document or, in the case of documents
incorporated by reference, the date of the referenced document, and neither the
mailing of this document to you nor the issuance of Legato common stock in
connection with the merger creates any implication to the contrary.
[LOGO] OTG Software, Inc.
MERGER PROPOSAL--YOUR VOTE IS VERY IMPORTANT
Dear Stockholders of OTG Software, Inc.:
The board of directors of OTG Software, Inc. has approved a merger
transaction with Legato Systems, Inc. in which OTG will be merged with a
wholly-owned subsidiary of Legato. Your board believes that the proposed merger
is in the best interests of OTG and its stockholders and will expand the market
opportunity for OTG's products as a part of a broader suite of software
products and services solutions. The proposed merger provides OTG stockholders
with the opportunity to participate in the growth of the combined businesses,
while receiving a cash payment.
We have scheduled a special stockholders' meeting on Tuesday, May 14, 2002,
beginning at 11:30 a.m., local time, at 3210 Porter Drive, Palo Alto,
California, to vote upon adoption of the merger agreement. To complete the
merger, we must obtain the approval of the holders of a majority of the
outstanding shares of OTG common stock. If the merger agreement is adopted, you
will receive 0.6876 of a share of Legato common stock and $2.50 in cash, for
each share of OTG common stock that you own and cash for any fractional share
of Legato common stock that you would otherwise be entitled to receive.
Legato common stock is quoted on the Nasdaq National Market under the
trading symbol "LGTO." We anticipate that Legato will issue approximately 23.1
million shares of Legato common stock in the merger, based upon 0.6876
multiplied by the number of shares of OTG common stock outstanding as of March
22, 2002, the record date for the special stockholders' meeting, excluding
shares of OTG common stock that may be issued prior to the closing of the
merger. These shares will represent approximately 20.3% of the total
outstanding shares of Legato common stock.
Please carefully consider all of the information incorporated by reference
or included in this document regarding OTG, Legato and the merger, including,
in particular, the discussion in the section entitled "Risk Factors" beginning
on page 10.
Your board of directors, with one director recused, has determined that the
merger and merger agreement are advisable and in the best interests of OTG and
its stockholders and unanimously recommends that you vote "FOR" adoption of the
merger agreement. Whether or not you plan to attend the special meeting, please
complete, sign, date and return your proxy card in the enclosed envelope. Your
vote is very important.
Sincerely,
/s/ Richard A. Kay
Richard A. Kay
Chairman, President and Chief
Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the merger described in this joint
proxy statement/prospectus or the Legato stock to be issued in connection
with the merger, or determined if this joint proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal
offense.
This joint proxy statement/prospectus is dated April 16, 2002 and is first
being mailed to stockholders on or about April 16, 2002.
OTG SOFTWARE, INC.
2600 Tower Oaks Blvd.
Rockville, MD 20852
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 14, 2002
A special meeting of stockholders of OTG Software, Inc. will be held at 3210
Porter Drive, Palo Alto, California 94040, on Tuesday, May 14, 2002, beginning
at 11:30 a.m., local time, for the following purposes:
1. To consider and vote on a proposal to adopt an Agreement and Plan of
Merger, dated as of February 20, 2002, by and among Legato Systems, Inc.,
Orion Acquisition Sub Corp. and OTG, and the merger, as described in this
document; and
2. To transact any other business which properly comes before the
special meeting or any adjournment or postponement of the special meeting.
Only stockholders of record at the close of business on March 22, 2002 are
entitled to notice of, and to vote at, the special meeting and any adjournment
or postponement of the meeting. On that date, there were 33,556,184 shares of
OTG common stock issued and outstanding and held by approximately 215 holders
of record.
We cannot complete the merger unless the holders of a majority of the shares
of OTG common stock outstanding on the record date affirmatively vote to adopt
the merger agreement. For more information about the merger, please review
carefully this document, including the merger agreement attached as Annex A.
OTG common stockholders have the right to dissent from the proposed merger
and to demand payment of the fair value of their shares in the event the merger
agreement is adopted and the merger is consummated. The right of OTG
stockholders to receive such payment is contingent upon strict compliance with
the requirements under Delaware law. The first step in perfecting the right to
dissent must be taken prior to the time the vote of the merger agreement is
taken at the special meeting. The text of the applicable Delaware statute is
attached as Annex D to this document.
By Order of the Board of Directors,
/s/ F. William Caple
F. William Caple
Secretary
Rockville, Maryland
April 16, 2002
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN THE ENCLOSED PROXY CARD AND
PROMPTLY MAIL IT IN THE ENCLOSED, POSTAGE-PAID ENVELOPE IN ORDER TO ASSURE
REPRESENTATION OF YOUR SHARES AT THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY
IN THE MANNER DESCRIBED IN THE ATTACHED JOINT PROXY STATEMENT/PROSPECTUS AT ANY
TIME BEFORE IT IS VOTED AT THE SPECIAL MEETING.
ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business and
financial information about Legato and OTG from other documents that are not
included in or delivered with this document. Please see "Where You Can Find
More Information" on page 63 of this document. You can obtain documents which
are incorporated by reference into this document without charge by requesting
them in writing or by telephone from the appropriate company at the following
addresses and telephone numbers:
Legato Systems, Inc. OTG Software, Inc.
2350 West El Camino Real 2600 Tower Oaks Boulevard
Mountain View, CA 94040 Rockville, MD 20852
(650) 210-7000 (240) 747-6400
Attention: Investor Relations Attention: Investor Relations
To be sure that your documents arrive on time, you should make all requests
for documents no later than May 7, 2002. You should rely only on the
information contained or incorporated by reference in this document to vote on
the OTG proposals. We have not authorized anyone to provide you with
information that is different from what is contained in this document. You
should not assume that the information contained in this document is accurate
as of any date other than the date of this document or, in the case of
documents incorporated by reference, the date of the referenced document, and
neither the mailing of this document to you nor the issuance of Legato common
stock in the merger shall create any implication to the contrary.
TABLE OF CONTENTS
Questions and Answers About The Merger................................................ ii
Summary............................................................................... 1
The Companies...................................................................... 1
Recommendation of the Boards of Directors.......................................... 2
Opinions of Financial Advisors..................................................... 2
Ownership of Legato After the Merger............................................... 2
United States Federal Income Tax Consequences...................................... 2
Special Meetings; Record Dates; Votes Required..................................... 3
Appraisal Rights................................................................... 3
Voting Agreement and Proxy......................................................... 3
Interests of OTG Directors and Officers in the Merger.............................. 3
Treatment of Stock Options......................................................... 4
Overview of the Merger Agreement................................................... 4
Regulatory Matters................................................................. 6
Accounting Treatment............................................................... 6
Market Price Information........................................................... 6
Selected Historical and Selected Pro Forma Financial Data.......................... 7
Unaudited Comparative Per Share Data............................................... 9
Risk Factors.......................................................................... 10
Risks Associated With the Merger................................................... 10
Risks Relating to the Combined Company Following the Merger........................ 12
The Special Meetings.................................................................. 22
Joint Proxy Statement/Prospectus................................................... 22
Date, Time and Place of the Meetings............................................... 22
Purpose of the Meetings............................................................ 22
Stockholder Record Date for the Special Meetings................................... 22
Vote Required...................................................................... 22
Vote Required for Authorization to Adjourn or Postpone the Legato Special Meetings. 23
Proxies............................................................................ 23
Solicitation of Proxies............................................................ 24
The Merger............................................................................ 25
General Description of the Merger.................................................. 25
Background of the Merger........................................................... 25
Legato's Reasons for the Merger.................................................... 29
Recommendation of Legato's Board of Directors...................................... 31
OTG's Reasons for the Merger....................................................... 31
Recommendation of OTG's Board of Directors......................................... 32
Opinion of JPMorgan H&Q............................................................ 32
Opinion of Goldman, Sachs & Co..................................................... 36
Interests of OTG Directors and Officers in the Merger............................. 42
Appraisal Rights.................................................................. 45
Material United States Federal Income Tax Consequences of the Merger.............. 46
Regulatory Matters................................................................ 48
Restrictions on Sales of Shares by Affiliates of OTG.............................. 49
Delisting and Deregistration of OTG Common Stock After the Merger................. 49
The Merger Agreement................................................................. 50
Effective Time.................................................................... 50
Conversion and Exchange of OTG Stock.............................................. 50
Exchange of Certificates.......................................................... 50
OTG Stock Options................................................................. 50
Representations and Warranties.................................................... 51
Covenants......................................................................... 51
Conditions to the Merger.......................................................... 56
Termination....................................................................... 57
Expenses.......................................................................... 59
Amendment, Extension and Waiver................................................... 59
Voting Agreement and Proxy........................................................ 59
Comparison of Rights of Legato Stockholders and OTG Stockholders..................... 60
Legal Matters........................................................................ 62
Experts.............................................................................. 62
Stockholder Proposals................................................................ 62
Where You Can Find More Information.................................................. 63
Statements Regarding Forward-Looking Information..................................... 65
Unaudited Pro Forma Combined Financial Information................................... F-1
Overview.......................................................................... F-1
Unaudited Pro Forma Combined Balance Sheet as of December 31, 2001................ F-2
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 2001............................................................... F-3
Notes to Unaudited Pro Forma Combined Financial Information....................... F-4
Annexes
Agreement and Plan of Merger, dated as of February 20, 2002, by and among Legato
Systems, Inc., Orion Acquisition Sub Corp. and OTG Software, Inc................... A-1
Opinion of JPMorgan H&Q.............................................................. B-1
Opinion of Goldman, Sachs & Co....................................................... C-1
Section 262 of the Delaware General Corporation Law.................................. D-1
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will happen in the merger?
A:. OTG will merge into a wholly-owned subsidiary of Legato and will cease its
separate corporate existence.
. Shares of OTG common stock will be converted into the right to receive
shares of Legato common stock, based on the exchange ratio, and cash.
. Legato stockholders will continue to own their Legato common stock.
. Based upon the number of shares of Legato common stock and OTG common
stock outstanding as of their respective record dates of April 12, 2002
and March 22, 2002, Legato stockholders immediately following the merger
will hold approximately 79.7% and OTG stockholders immediately prior to
the merger will hold approximately 20.3% of Legato's common stock when the
merger is completed.
Q: What will OTG stockholders receive in the merger?
A: . If the merger is completed, OTG stockholders will receive 0.6876 of a
share of Legato common stock plus $2.50 in cash for each share of OTG
common stock that they own. OTG stockholders will receive a cash payment
for any fractional share of Legato common stock to which they would
otherwise be entitled.
For example, an OTG stockholder owning 100 shares of OTG common stock
will receive 68 shares of Legato common stock and a cash payment equal to
$250 (less any applicable withholding taxes) plus a cash payment of the
value of 0.76 of a share of Legato common stock.
. We urge you to obtain current market quotations for Legato common stock
and OTG common stock before making any decision on the merger agreement.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please respond by completing, signing and dating your proxy card
and returning it in the enclosed postage paid envelope as soon as possible
so that your shares may be represented at your special meeting. The boards
of directors of Legato and OTG recommend that their respective stockholders
vote in favor of the merger agreement.
If your shares are held in "street name" by your broker, you should follow
the directions provided by your broker. Your broker will vote your shares
only if you provide instructions on how you would like to vote your shares.
Q: What vote is required to approve the merger?
A: For Legato, the affirmative vote of a majority of the shares of Legato
common stock present and entitled to vote at the Legato special meeting is
required to approve the merger agreement, so long as a quorum is present.
For OTG, the affirmative vote of a majority of the outstanding shares of OTG
common stock as of the record date is required to adopt the merger agreement.
Q: What if I do not vote?
A: . Assuming there is a quorum at the Legato special meeting, a Legato
stockholder's failure to vote or an abstention will have no effect on the
outcome of the vote.
. If you are an OTG stockholder and fail to vote or abstain from voting, it
will have the same effect as a vote against the merger.
. If you are a stockholder of either Legato or OTG and return an executed
proxy card but do not indicate how you want to vote, your proxy will be
counted as a vote for the proposals at the applicable special meeting.
ii
Q: Can I change my vote after I have delivered my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at your
special meeting. You can do this in one of three ways:
. First, you can revoke your proxy.
. Second, you can submit a new proxy.
If you choose either of these two methods, you must submit your notice of
revocation or your new proxy to the secretary of Legato or OTG, as
appropriate, before the applicable special meeting. You can submit your
notice of revocation by U.S. mail or by facsimile. However, if you are
submitting a new proxy, the new proxy must be submitted by U.S. mail or
other delivery service. If your shares are held in an account at a brokerage
firm or bank, you must contact your brokerage firm or bank to change your
vote.
. Third, if you are a holder of record, you can attend your special meeting
and vote in person. Your attendance at the special meeting alone will not
revoke your proxy. Only your vote at the applicable special meeting will
revoke your proxy.
Q: Should OTG stockholders send in their OTG stock certificates now?
A: No. After the merger is completed, OTG stockholders will receive written
instructions from the exchange agent on how to exchange OTG stock
certificates for shares of Legato common stock and cash. Please do not send
in your OTG stock certificates with your proxy.
Q: Am I entitled to dissenter's appraisal rights?
A: OTG stockholders will be entitled to dissenters' appraisal rights in
connection with the merger provided that they comply with Delaware law. The
availability of dissenters' appraisal rights is discussed in more detail on
page 45. Legato stockholders are not entitled to dissenters' appraisal
rights in connection with the merger.
Q: When do you expect the merger to be completed?
A: Legato and OTG are working to complete the merger as quickly as possible.
Legato and OTG anticipate completing the merger shortly after the Legato
stockholders have approved and the OTG stockholders have adopted the merger
agreement. Legato and OTG hope to complete the merger on May 14, 2002.
Q: Who can help answer my questions?
A: If you have any questions about the merger or how to submit your proxy, or
if you need additional copies of this document or the enclosed proxy card,
you should contact:
if you are a Legato stockholder:
Investor Relations
Legato Systems, Inc.
2350 West El Camino Real
Mountain View, California 94040
Telephone: (650) 210-7000
if you are an OTG stockholder:
Investor Relations
OTG Software, Inc.
2600 Tower Oaks Blvd.
Rockville, Maryland 20852
Telephone: (240) 747-6400
iii
SUMMARY
This summary highlights selected information incorporated by reference and
contained in this document and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the other documents to which we have referred you,
including the merger agreement which is attached as Annex A and incorporated by
reference. You should also see "Where You Can Find More Information" beginning
on page 63. We have included page references parenthetically to direct you to
more complete descriptions of the topics presented in this summary. This
summary, the documents we incorporate by reference and the balance of this
document contain forward-looking statements about events that are not certain
to occur, and you should not place undue reliance on those statements. Please
carefully read the cautionary "Statements Regarding Forward-Looking
Information" on page 65.
The Companies
Legato Systems, Inc.
2350 West El Camino Real
Mountain View, California 94040
Telephone: (650) 210-7000
Legato develops, markets and supports software products and services for
information management of distributed, open systems environments. Information
management is understood to be protecting, recovering and avoiding failures of
data and applications to ensure that business-users can gain access to the
information that they need, when they need it. Distributed, open systems are
generally understood to be UNIX, Windows NT, Windows 2000 and Linux server
computer systems. Legato's software offering includes products for backup,
recovery and archive of data, products for managing the performance and
operation of application services and products for optimizing use of storage
devices and media including disk and tape. Legato's customers use its products
and services to safeguard and manage their information assets and associated
applications so that their businesses can continue to operate, and do so more
cost-effectively. You should not consider the information on Legato's web site
to be part of this document.
OTG Software, Inc.
2600 Tower Oaks Blvd.
Rockville, MD 20852
Telephone: (240) 747-6400
OTG is a provider of online data storage and data access software solutions
for business applications, email management and related services. OTG's
software enables enterprises to move, store, manage and access data and email
quickly and efficiently over a variety of network architectures, including the
Web and storage area networks. OTG's software supports many different types of
storage devices, is easy to install and use, and can manage storage systems
ranging in size from a single storage device to an enterprise-wide network
storage system. In addition, OTG's products can be run on Windows NT, Windows
2000, UNIX and Linux operating systems, as well as multiple storage
architectures including direct attached storage, network attached storage and
storage area networks. You should not consider the information on OTG's web
site to be part of this document.
1
Recommendation of the Boards of Directors (see pages 31 and 32)
To Legato Stockholders: Legato's board of directors has determined that the
merger is advisable, fair to and in the best interests of Legato's stockholders
and has unanimously voted, with one director absent, to approve the merger
agreement and unanimously recommends, with one director absent, that Legato's
stockholders vote FOR the approval of the merger agreement.
To OTG Stockholders: OTG's board of directors believes that the merger is
advisable, fair to and in the best interests of OTG's stockholders, and has
unanimously voted, with one director recused, to approve the merger agreement
and unanimously recommends, with one director recused, that OTG's stockholders
vote FOR the adoption of the merger agreement.
Opinions of Financial Advisors (see pages 32 and 36)
Opinion of Legato's Financial Advisor. In deciding to approve the merger,
Legato's board of directors considered the opinion of its financial advisor,
JPMorgan H&Q, that, as of the date of its opinion, and subject to and based on
the considerations referred to in its opinion, the consideration to be paid in
the merger was fair, from a financial point of view, to Legato. The fairness
opinion is not a recommendation to any stockholder to approve the merger. The
full text of this opinion is attached as Annex B to this document and
incorporated by reference herein. Legato urges its stockholders to read the
opinion carefully in its entirety to understand the procedures followed, the
assumptions made, the matters considered and the limitations on the review
undertaken by JPMorgan H&Q in providing its opinion. The opinion of JPMorgan
H&Q is directed to the Legato board of directors and does not constitute a
recommendation to any Legato stockholder as to any matter relating to the
merger.
Opinion of OTG's Financial Advisor. Goldman Sachs rendered its oral
opinion to OTG's board of directors, which was subsequently confirmed in
writing, to the effect that and based upon and subject to the factors and
assumptions set forth therein, the 0.6876 shares of common stock of Legato and
$2.50 in cash consideration to be received for each share of OTG common stock
in the merger was fair from a financial point of view to the holders of OTG
common stock.
The full text of the written opinion of Goldman Sachs, dated February 20,
2002, which sets forth assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached as Annex C to this document and is incorporated by
reference herein.
Goldman Sachs provided its opinion for the information and assistance of
OTG's board of directors in connection with its consideration of the merger.
The Goldman Sachs opinion is not a recommendation as to how any holder of OTG's
common stock should vote with respect to the merger. OTG stockholders are urged
to, and should, read such opinion in its entirety.
Ownership of Legato After the Merger
Legato expects to issue approximately 23.1 million shares of Legato common
stock to OTG stockholders in the merger. The aggregate market value of these
shares is approximately $252.4 million, based upon the average closing price
for shares of Legato common stock from February 17, 2002 to February 25, 2002,
five trading days surrounding the date that the merger was announced. In
addition, Legato would agree to pay an aggregate of approximately $83.9 million
in cash to OTG stockholders. This information is based on the number of shares
of Legato common stock and OTG common stock outstanding on their respective
record dates of April 12, 2002 and March 22, 2002 and does not take into
account shares which may be issued pursuant to stock options, warrants and
other convertible securities.
United States Federal Income Tax Consequences (see page 46)
It is a condition to the merger that Legato and OTG receive opinions of
their respective counsel that the merger will constitute a "reorganization" for
federal income tax purposes.
2
Assuming the merger qualifies as a "reorganization" and disregarding the
effect of any cash received in lieu of fractional shares of Legato common
stock, the federal income tax consequences to the OTG stockholders of the
receipt of Legato common stock and cash in the merger will generally be as
follows:
. An OTG stockholder will recognize gain (but not loss) limited to the
lesser of (a) the amount of cash received and (b) the amount by which the
fair market value of the Legato common stock and the cash received in the
merger exceeds the stockholder's adjusted tax basis in the OTG shares.
. An OTG stockholder's basis in the Legato shares received will equal the
stockholder's adjusted basis in the OTG shares increased by any taxable
gain recognized as a result of the merger and reduced by the amount of
cash received in the merger.
. An OTG stockholder's holding period of the Legato shares received will
include the holding period of the OTG shares surrendered.
Tax matters are extremely complicated, and the tax consequences of the
merger to OTG stockholders will depend on the facts of their own situation. OTG
stockholders should consult their own tax advisor to fully understand the tax
consequences of the merger to them.
Special Meetings; Record Dates; Votes Required (see page 22)
Legato. If you owned shares of Legato on April 12, 2002, the record date
for the Legato special meeting, you are entitled to receive this document and
to vote in connection with the merger. On that date, there were 90,447,735
shares of Legato common stock outstanding, approximately 798,520 of which, or
1%, were owned by Legato's directors and executive officers or their
affiliates. You can cast one vote for each share of Legato common stock you
own. Assuming a quorum is present, the affirmative vote of a majority of the
shares of Legato common stock voting at the special meeting is required to
approve the merger proposal and grant discretionary authority to Legato's board
of directors or its chairman to adjourn or postpone the special meeting to
solicit additional votes to approve the merger agreement.
OTG. The OTG special meeting is scheduled to be held at 11:30 a.m., local
time, on May 14, 2002 at 3210 Porter Drive, Palo Alto, California. The purpose
of the OTG special meeting is to vote on a proposal to adopt the merger
agreement. Only OTG stockholders of record at the close of business on March
22, 2002 are entitled to vote at the OTG special meeting. On that date, there
were 33,556,184 shares of OTG common stock outstanding, approximately
15,598,272 of which, or 47%, were owned by OTG's directors and executive
officers or their affiliates. You can cast one vote for each share of OTG
common stock you own. The affirmative vote of a majority of the outstanding
shares of OTG is required to adopt the merger agreement.
Appraisal Rights (see pages 45 and Annex D)
Under Delaware law, OTG stockholders are entitled to appraisal rights in
connection with the merger.
Voting Agreement and Proxy (see page 59)
Legato entered into a voting agreement with Richard A. Kay, chairman of the
board, chief executive officer and president of OTG, and entities for which he
is entitled to act, which requires Mr. Kay and the entities signing the voting
agreement to vote their shares of OTG common stock in favor of the adoption of
the merger agreement. As of the record date, these shares represent
approximately 32% of the outstanding shares of OTG common stock. Mr. Kay and
the entities signing the voting agreement also executed proxies with respect to
shares under the voting agreement. The proxies authorize Legato to vote the
shares in favor of the merger agreement and against any matter that could delay
the consummation of the merger.
Interests of OTG Directors and Officers in the Merger (see page 42)
Some of the directors and officers of OTG will receive benefits if the
merger is completed, which
3
result in those persons having interests in the merger that are different from,
or are in addition to, the interests of OTG's stockholders. Specifically, as a
result of, or in connection with, the merger:
. Mr. Kay entered into the voting agreement described above;
. Members of OTG management, including two members of the OTG board of
directors, will have rights to severance benefits and in some cases, bonus
payments and/or accelerated vesting of stock options;
. OTG directors and officers will have the right to continued
indemnification and insurance coverage for acts and omissions occurring
prior to the merger; and
. A financial institution affiliated with a board member of OTG will receive
a fee of $500,000 in connection with services rendered to OTG relating to
the merger (the board member recused himself from the OTG board
deliberations concerning the merger).
Treatment of Stock Options (see page 50)
When the merger is completed, each outstanding option to purchase a share of
OTG common stock will be assumed by Legato and will become exercisable for
$2.50 in cash and 0.6876 of a share of Legato common stock at an exercise price
equal to the exercise price of the option to purchase OTG common stock divided
by 0.6876.
Overview of the Merger Agreement (see pages 50-59 and Annex A)
Conditions to the Completion of the Merger. Each of Legato's and OTG's
obligation to complete the merger is subject to the satisfaction or waiver of a
number of conditions, including:
. the adoption of the merger agreement by the OTG stockholders and the
approval of the merger agreement by the Legato stockholders;
. no law, order or injunction preventing the completion of the merger may be
in effect;
. expiration or termination of the applicable waiting period under the U.S.
antitrust laws;
. the registration statement of which this document is a part must have
become effective; and
. all governmental and third party consents shall have been obtained, except
consents, which if not obtained would not have a material adverse effect
on the company surviving the merger.
In addition, Legato's obligation to complete the merger is subject to the
satisfaction or waiver of a number of additional conditions, including:
. OTG must have complied in all material respects with its obligations in
the merger agreement;
. OTG's representations and warranties in the merger agreement must be true
and correct when made and, except for representations and warranties that
speak only as of a specified date, at the effective time of the merger
except where the failure to be true and correct as of such date does not
constitute a material adverse effect on OTG;
. Legato must receive an opinion of its tax counsel to the effect that the
merger will qualify as a "reorganization" for federal income tax purposes;
and
. Less than 5% of OTG's outstanding shares may be dissenting shares.
In addition, OTG's obligation to complete the merger is subject to the
satisfaction or waiver of a number of additional conditions, including:
. Legato must have complied in all material respects with its obligations in
the merger agreement;
. Legato's representations and warranties in the merger agreement must be
true and correct when made and, except for representations and warranties
that speak only as of a specified date, at the effective time of the
merger, except where the failure to be true and correct as of such date
does not constitute a material adverse effect on Legato; and
. OTG must receive an opinion of its tax counsel to the effect that the
merger will qualify as a "reorganization" for federal income tax purposes.
4
Other than the conditions pertaining to the stockholder approvals and the
legality of the transaction, either of Legato or OTG could elect to waive
conditions to its own performance and complete the merger. However, neither
party will waive the receipt of the tax opinions from counsel. If either party
waives any other condition, it may be required to request new stockholder
approvals.
When we refer to a "material adverse effect," we mean an adverse effect on
or change with respect to the business, financial condition, assets, operations
or results of operations, or the ability to timely consummate the merger. The
term, however, does not include changes that result from general economic,
financial, regulatory or political conditions in the United States or
elsewhere, or conditions affecting the computer software industry generally.
The term also does not include changes that arise from the execution and
announcement of the merger or from a decline in the market price of either
company's stock.
Termination of the Merger Agreement. Legato and OTG can jointly agree to
terminate the merger agreement at any time. Either party may also terminate the
merger agreement if:
. the merger is not completed on or before July 15, 2002 (with that date
extended until September 16, 2002 if antitrust approvals have not been
obtained), but a party may not terminate if the failure to complete the
merger is the result of the failure by that party to fulfill any of its
obligations under the merger agreement;
. government actions prohibit the completion of the merger; or
. Legato's stockholders do not vote to approve or OTG's stockholders do not
vote to adopt the merger agreement at a duly held meeting of that
company's stockholders.
In addition, Legato may terminate the merger agreement if:
. OTG's board of directors fails to recommend adoption of the merger
agreement or effects a change in its recommendation of the merger
agreement; or
. OTG breaches its representations and warranties or covenants in the merger
agreement in a manner that would cause the conditions to Legato's
obligations to complete the merger not to be satisfied.
In addition, OTG may terminate the merger agreement if:
. OTG's board of directors decides to accept a superior proposal from a
third party so long as OTG has given Legato 48 hours notice and OTG has
paid Legato the termination fee; or
. Legato breaches its representations and warranties or covenants in the
merger agreement in a manner that would cause the conditions to OTG's
obligations to complete the merger not to be satisfied.
Termination Fees and Expenses. The merger agreement provides that OTG will
be required to pay a termination fee of $13.0 million to Legato if:
. OTG terminates the merger agreement to enter into an agreement which
provides for a superior proposal from a third party; or
. Legato terminates the merger agreement as a result of OTG's board of
directors changing its recommendation in favor of the merger agreement or
approving a competing transaction.
The merger agreement also provides that OTG will be required to pay Legato
the termination fee of $13.0 million, less any expense reimbursement previously
paid, if:
. OTG enters into an acquisition agreement with a third party within 12
months of termination of the merger agreement;
. prior to termination a specified competing transaction has been publicly
announced and not withdrawn; and
. the merger agreement was terminated:
. due to failure to obtain OTG stockholder approval; or
. by OTG under the provision of the merger agreement permitting
termination subsequent to July 15, 2002 and the OTG special meeting
has not been convened.
5
The merger agreement provides that the party whose stockholders did not
approve the merger will be required to reimburse the other party for up to $2.6
million of out-of-pocket fees and expenses incurred in connection with the
merger.
The merger agreement contains specific definitions of superior proposal and
competing transaction which affect the interpretation of the parties'
obligations.
"No Solicitation" Provision. The merger agreement contains detailed
provisions prohibiting OTG from seeking a competing takeover proposal, but
permitting discussions with respect to unsolicited proposals as described
beginning on page 54.
Regulatory Matters (see page 48)
Legato and OTG are not aware of any material governmental or regulatory
approvals required to complete the merger other than compliance with federal
securities laws.
Accounting Treatment
Legato will account for the merger under the purchase method of accounting
for business combinations.
Market Price Information
Shares of Legato's and OTG's common stock are traded on the Nasdaq National
Market. The following table sets forth the closing sales prices of the common
stock of Legato and OTG on, (a) February 20, 2002, the last trading day before
the public announcement of the execution and delivery of the merger agreement,
(b) April 10, 2002, a recent date prior to the printing of this document and
(c) on a pro forma equivalent share basis including $2.50 of value for the cash
component of the merger consideration in the pro forma amounts. The market
price of shares of Legato common stock and OTG common stock fluctuates. As a
result, you should obtain current market quotations before you vote at the
special meetings.
Legato OTG
------ -------
Exchange Ratio......................... -- 0.6876
Closing price on February 20, 2002..... $12.55 $ 9.20
Pro forma equivalent................... -- $ 11.13
Closing price on April 10, 2002........ $ 7.86 $ 7.76
Pro forma equivalent................... -- $ 7.84
6
SELECTED HISTORICAL AND SELECTED PRO FORMA FINANCIAL DATA
The following selected historical financial information of each of Legato
and OTG has been derived from their respective audited historical financial
statements and should be read in conjunction with those consolidated financial
statements and the related notes and their respective "Management's Discussion
and Analysis of Financial Condition and Results of Operations." See "Where You
Can Find More Information" and "Some Documents are Incorporated by Reference."
The consolidated financial statements for Legato and OTG for the three years
ended December 31, 1999, 2000 and 2001 are incorporated by reference in this
document. The consolidated financial statements for Legato and OTG for the two
years ended December 31, 1997 and 1998 are not included or incorporated by
reference in this document. Historical results are not necessarily indicative
of the results to be expected in any future period. The unaudited pro forma
combined balance sheet data gives effect to the merger as if it occurred on
December 31, 2001 and combines the consolidated balance sheets of Legato and
OTG as of December 31, 2001. The unaudited pro forma statement of operations
gives effect to the merger as if it had occurred on January 1, 2001 and
presents the results of operations of Legato and OTG for the year ended
December 31, 2001. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the merger had been consummated
at the beginning of the periods indicated, nor is it necessarily indicative of
future operating results or financial position.
Legato Summary Historical Consolidated Financial Information
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------------------------------
2001(2) 2000(2) 1999(2) 1998(1) 1997(1)
--------- -------- -------- -------- --------
Historical Consolidated Statement of Operations Data:
Revenue.............................................. $ 242,601 $231,395 $228,567 $167,907 $118,499
Gross profit......................................... 188,168 183,784 195,789 142,657 97,470
Income (loss) from operations........................ (124,713) (51,413) 2,991 27,815 21,589
Net income (loss).................................... (81,495) (35,249) 2,704 19,869 15,066
Basic net income (loss) per share.................... (0.92) (0.41) 0.03 0.26 0.21
Diluted net income (loss) per share.................. (0.92) (0.41) 0.03 0.24 0.19
Shares used in per share calculation:
--Basic.............................................. 88,842 86,727 82,420 76,762 72,849
--Diluted............................................ 88,842 86,727 89,351 83,074 78,886
As of December 31,
--------------------------------------------
2001(2) 2000(2) 1999(2) 1998(1) 1997(1)
-------- -------- -------- -------- --------
Historical Consolidated Balance Sheet Data:
Cash, cash equivalents and investments..... $145,695 $165,145 $169,928 $125,972 $ 87,433
Working capital............................ 167,281 161,762 152,514 119,717 87,848
Total assets............................... 355,261 414,864 422,894 207,224 141,908
Long-term obligations...................... 3,798 -- -- -- --
Stockholders' equity....................... 259,959 322,334 337,745 158,529 114,737
--------
(1) Selected financial data for the year-ended December 31, 1998 and 1997 was
derived by combining Legato's selected financial data for the year-ended
December 31, 1998 and 1997 with the financial data of Full Time, Inc., a
company that Legato acquired, for the twelve-months ended December 31, 1998
and 1997, respectively.
(2) As discussed in Note 5 of the Notes to Consolidated Financial Statements,
which are incorporated by reference, Legato's results for 2001, 2000 and
1999 include amounts related to purchase accounting adjustments, including
charges associated with the write-off of acquired in-process research and
development, amortization of acquired intangibles, and other acquisition
related charges, totaling $33.8 million, $38.1 million and $39.5 million in
2001, 2000 and 1999, respectively. Furthermore, the results for 2001
include a $48.9 million charge for the impairment of intangibles.
7
OTG Summary Historical Consolidated Financial Information(1)
(in thousands, except per share amounts)
Year ended December 31,
----------------------------------------------
2001(2) 2000(2) 1999 1998 1997
-------- -------- -------- -------- -------
Historical Consolidated Statement of Operations Data:
Revenue.............................................. $ 64,924 $ 52,358 $ 32,896 $ 22,499 $16,938
Gross profit......................................... 51,758 44,110 27,940 19,876 14,783
Income (loss) from operations........................ (12,580) 31 1,447 (467) 803
Net income (loss).................................... (7,550) 3,168 (693) (2,122) 632
Net loss per share--basic and diluted................ (0.24) -- -- -- --
Weighted average shares.............................. 32,053 -- -- -- --
As of December 31,
----------------------------------------------
2001(2) 2000(2) 1999 1998 1997
-------- -------- -------- -------- -------
Historical Consolidated Balance Sheet Data:
Cash, cash equivalents and investments............... $ 89,294 $102,197 $ 4,296 $ 959 $ 1,907
Working capital...................................... 96,061 107,061 (18,648) (5,528) (2,137)
Total assets......................................... 150,560 138,322 16,427 9,033 7,485
Long-term obligations................................ 1,278 266 3,613 16,496 370
Stockholders' equity (deficit)....................... 121,879 116,876 (20,112) (20,051) (991)
--------
(1) As discussed in Note 9 in Notes to Consolidated Financial Statements, which
are incorporated by reference, OTG was treated as a Subchapter S
corporation for income tax purposes prior to its initial public offering in
March 2000. Smart Storage, a company acquired by OTG, was subject to tax as
a C corporation for all periods presented.
(2) As discussed in Note 4 in Notes to Consolidated Financial Statements, which
are incorporated by reference, OTG's results for 2001 and 2000 include
amounts related to purchase accounting adjustments, including charges
associated with the write-off of acquired in-process research and
development, amortization of acquired intangibles, other
acquisition-related charges, and their related tax effects totaling $6.3
million and $1.2 million in 2001 and 2000, respectively.
Selected Unaudited Pro Forma Combined Financial Information
(in thousands, except per share amounts)
The selected unaudited pro forma combined financial information is derived
from the unaudited pro forma combined financial information included elsewhere
in this document and should be read in conjunction with those statements and
the related notes. See "Unaudited Pro Forma Combined Financial Information."
Year Ended
December 31, 2001
-----------------
Unaudited Pro Forma Combined Statement of Operations Data:
Revenue................................................... $ 306,425
Gross profit.............................................. 238,974
Loss from operations...................................... (149,513)
Net loss.................................................. (102,248)
Net loss per share--basic and diluted..................... (0.91)
Weighted average shares................................... 111,915
As of
December 31, 2001
-----------------
Unaudited Pro Forma Combined Balance Sheet Data:
Cash, cash equivalents, and investments................... $ 151,629
Total assets.............................................. 612,602
Long term obligations..................................... 8,091
Stockholders' equity...................................... 469,809
8
Unaudited Comparative Per Share Data
Presented below is per share data regarding the net loss and book value of
Legato and OTG on both a historical and a pro forma basis, giving effect to the
merger and the conversion of OTG common stock into Legato common stock. The
unaudited pro forma consolidated per share information is derived from the
unaudited pro forma combined financial information included elsewhere in this
document. You should read the information below in conjunction with the
consolidated financial statements and accompanying notes of Legato and OTG,
which are incorporated by reference into this document, and with the unaudited
pro forma combined financial information included elsewhere in this document.
Neither Legato nor OTG has paid a dividend or currently intends to pay a
dividend on its respective common stock.
Year Ended
December 31,
2001
------------
Historical Legato:
Net loss per share--basic and diluted............ $(0.92)
Book value per share(1).......................... $ 2.90
Historical OTG:
Net loss per share--basic and diluted............ $(0.24)
Book value per share(1).......................... $ 3.67
Pro forma combined net loss per share:
Per Legato share--basic and diluted.............. $(0.91)
Per equivalent OTG share(2) --basic and diluted.. $(0.63)
Pro forma combined book value per share(3):
Per Legato share................................. $ 4.20
Per equivalent OTG share(2)...................... $ 2.89
--------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at December 31,
2001.
(2) The OTG equivalent pro forma combined per share amounts are calculated by
multiplying the combined pro forma per share amounts by the exchange ratio
of 0.6876 of a share of Legato common stock for each share of OTG common
stock.
(3) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common
stock outstanding at December 31, 2001.
9
RISK FACTORS
Before you vote on the merger agreement, you should carefully consider the
risks described below in addition to the other information included in or
referred to in this document, including the cautionary "Information Regarding
Forward-Looking Statements." Additional Risk Factors of Legato and OTG are
incorporated by reference from each of Legato's Annual Report on Form 10-K and
OTG's Annual Report on Form 10-K. The risks and uncertainties described below
are not the only ones facing Legato or OTG. Additional risks and uncertainties
not presently known to either Legato or OTG or that they believe are now
immaterial may also impair the combined company's businesses. If any of the
following risks actually occur, the combined company's business, financial
condition or results of operations could be materially adversely affected, the
value of Legato's common stock could decline and you may lose all or part of
your investment.
Risks Associated With the Merger
The market value of shares of Legato common stock that OTG stockholders
receive in the merger will vary as a result of the fixed exchange ratio and
stock price fluctuations.
Upon completion of the merger, each share of OTG common stock will be
converted into 0.6876 of a share of Legato common stock plus the right to
receive an amount in cash of $2.50 per share of OTG common stock. The ratio at
which the shares will be converted is fixed, and there will be no adjustment
for changes in the market price of either OTG common stock or Legato common
stock. Any changes in the price of Legato common stock will affect the value
that OTG stockholders receive in the merger. OTG's common stock and Legato's
common stock have historically experienced significant volatility, and the
value of the shares of Legato's common stock received in the merger may
decrease. Stock price changes may result from a variety of factors that are
beyond the control of OTG or Legato. Neither party is permitted to terminate
the merger agreement or resolicit the vote of its stockholders solely because
of changes in the market price of either party's common stock.
The prices of OTG common stock and Legato common stock at the closing of the
merger may vary from their respective prices on the date of this document and
on the date of the special meetings. Because the date the merger is completed
may be later than the date of the stockholders' meetings, the prices of OTG's
common stock and Legato's common stock on the date of the stockholders'
meetings may not be indicative of their respective prices on the date the
merger is completed.
Legato and OTG may not realize the intended benefits of the merger if the
combined company is unable to integrate OTG's operations, products and
personnel in a timely and efficient manner.
Achieving the benefits of the merger will depend in part on the integration
of Legato's and OTG's operations, products and personnel in a timely and
efficient manner. After the merger, the combined company will have to integrate
sales and product development, marketing and management processes, operations
and personnel. This integration may be difficult to achieve and execution may
be unpredictable because of inherent differences in Legato's and OTG's current
product development, management and marketing operations. Successful
integration of sales and product development, management and marketing
processes, operations and personnel of the combined company will require
coordination of teams currently pursuing different development and engineering
objectives. This, too, may be difficult and unpredictable because of possible
cultural conflicts between the companies, the different geographical locations
of the companies and different opinions on product and technology decisions. If
these issues interfere with Legato's successful integration of the OTG
business, the combined company may not realize the expected benefits of the
merger which could adversely affect the combined company's business.
The merger will result in significant costs to Legato and OTG, whether or not
the merger is completed.
The merger will result in significant costs to Legato and OTG. Many of these
costs will be incurred whether or not the merger is completed. In addition, if
the merger agreement is terminated by OTG under specified
10
circumstances, OTG may be obligated to pay Legato a $13.0 million termination
fee. Furthermore, OTG and Legato may be obligated under some circumstances to
reimburse the other company's costs up to a maximum of $2.6 million.
Some directors and officers of OTG have interests in the merger which differ
from other OTG stockholders.
Some of the directors and officers of OTG who have approved the merger
agreement and recommend that the OTG stockholders vote in favor of the merger
have employment or severance agreements or benefits arrangements, including the
vesting of stock options, or the continuation of indemnification arrangements,
that provide them with interests in the merger that differ from those of the
OTG stockholders. In evaluating the proposed transaction as well as the OTG
board's recommendation, the OTG stockholders should consider these interests.
For additional information, please see "The Merger--Interests of Directors and
Officers in the Merger."
Failure to complete the merger could cause Legato's or OTG's stock price to
decline.
If the merger is not completed, Legato's or OTG's stock price may decline to
the extent that the current market price reflects a market assumption that the
merger will be completed.
If the merger is not completed and if OTG's board of directors determines to
seek another business combination, OTG may be unable to find a partner willing
to pay an equivalent or more attractive price than that which Legato will pay
in the merger, which could further depress OTG's stock price.
The termination fee, the restrictions on solicitation contained in the merger
agreement, and the voting agreement may discourage other companies from
trying to acquire OTG.
Under the merger agreement, OTG is generally prohibited from entering into
or soliciting, initiating or encouraging any inquiries or proposals that may
lead to a proposal or offer for a merger or other business combination
transaction with any person other than Legato. OTG agreed to pay a termination
fee of $13.0 million to Legato in specified circumstances, including in
connection with a third party acquiring OTG. Furthermore, Richard A. Kay and
entities for which he is entitled to act, which beneficially own an aggregate
of approximately 32% of the OTG common stock outstanding on the record date,
have entered into a voting agreement with Legato whereby they have agreed to
vote their shares in favor of the adoption of the merger agreement. These
agreements could discourage other companies from trying to acquire OTG even
though those other companies might be willing to offer greater value to OTG
stockholders than Legato and OTG negotiated in the merger agreement.
Legato and OTG may waive one or more of the conditions to the merger without
resoliciting stockholder approval for the merger.
Some of the conditions to Legato's and OTG's obligations to complete the
merger may be waived, in whole or in part, to the extent permitted by
applicable laws, or by agreement of Legato and OTG. The board of directors of
Legato and OTG, as applicable, will evaluate the materiality of any waiver to
determine whether amendment of this document and resolicitation of proxies is
warranted. If the board of directors of Legato or OTG determines any waiver is
not sufficiently material to warrant resolicitation of stockholders, the
applicable company will have the discretion to complete the merger without
seeking further stockholder approval.
Sales of Legato's and OTG's products and services could decline if customer
relationships are disrupted by the merger.
The merger may have the effect of disrupting customer relationships.
Legato's and OTG's customers may not continue their current buying patterns
before or after the merger is completed. Customers may defer purchasing
decisions as they evaluate the likelihood of successful integration of Legato's
and OTG's products and the combined company's future product strategy. Legato's
or OTG's customers may instead purchase
11
products and services of competitors. Any significant delay or reduction in
orders for Legato's or OTG's products could cause sales of the combined
company's products to decline. In addition, a number of competitors of Legato
or OTG are also customers of either or both companies. These relationships may
be adversely affected by the merger.
The market price of Legato common stock could decline as a result of the
large number of shares that will become eligible for sale.
Legato expects to issue 23.1 million shares of its common stock in the
merger for the shares of OTG common stock and grant options to purchase 4.3
million additional shares of Legato common stock. Based on the foregoing,
approximately 12.4 million shares of Legato common stock issued in the merger
will be eligible for sale in the public market without restriction under the
Securities Act, and approximately 10.7 million shares of Legato common stock
issued in the merger will be eligible for sale subject to the volume, manner of
sale and other limitations of Rule 144 and Rule 145 under the Securities Act.
The market price of Legato common stock could decline as a result of these
sales or the perception that these sales could occur.
Risks Relating to the Combined Company Following the Merger
Integrating Legato's and OTG's operations may divert management's attention
away from its day-to-day operations.
Integration of Legato's and OTG's operations, products and personnel may
place a significant burden on management and its internal resources. The
diversion of management attention and any difficulties encountered in the
transition and integration process could harm the combined company's business.
Unexpected significant costs to integrate Legato and OTG into a single
business may negatively impact the financial condition of the combined
company and the market price of Legato's stock.
The combined company will incur costs from integrating OTG's operations,
products and personnel. These costs may be significant and may include expenses
and other liabilities for:
. employee redeployment, relocation or severance;
. conversion of information systems;
. combining teams and processes in various functional areas;
. reorganization or closures of facilities; and
. relocation or disposition of excess equipment.
The integration costs that Legato incurs may negatively impact the combined
company's results of operations and financial condition and the market price of
Legato's stock.
If the combined company fails to manage its growth effectively, its expenses
could increase and its management's time and attention could be diverted.
As the combined company continues to increase the scope of its operations,
it will need an effective planning and management process to successfully
implement its business strategy in the rapidly evolving enterprise storage
market. The combined company's business, results of operations and financial
condition would be substantially harmed if the combined company is unable to
manage its expanding operations effectively. The combined company may need to
continue to expand its sales and marketing, customer support and research and
development organizations. In addition, the combined company will need to train
and manage its work force. Past growth has placed, and any future growth will
continue to place, a significant strain on its management systems and resources.
12
OTG and Legato have recorded losses and may continue to experience losses.
For the year ended December 31, 2001, OTG incurred a net loss of $7.5
million and had an accumulated deficit of $28.2 million. For the year ended
December 31, 2001, Legato incurred a net loss of $81.5 million and had an
accumulated deficit of $70.7 million.
The combined company may incur losses in the future. These losses may be
substantial, and the combined company may never become profitable.
Because many of the technologies offered and customer demand in the
enterprise storage management market in which both companies operate are
relatively new, it may be difficult to evaluate business and prospects of the
combined company. You should consider the combined company's prospects in light
of the risks, expenses and difficulties frequently encountered by companies in
the rapidly changing enterprise storage market. These risks include the
combined company's ability to:
. maintain and increase product sales;
. maintain and improve relationships with OEMs and resellers;
. continue to expand the number of products and services it offers;
. control costs;
. expand the capacity of its internal systems; and
. continue to integrate product lines from previously acquired companies.
If the combined company is unsuccessful in addressing these risks and
uncertainties, its business, results of operations and financial condition
could be materially and adversely affected.
If the combined company fails to compete effectively against other enterprise
storage management companies, its products could be rendered obsolete and its
operating results and financial condition would be harmed.
The enterprise storage management market is intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. Competitors vary in size and in the scope and breadth of the
products and services offered. The major competitors of the combined company
include: Computer Associates; EMC (Epoch), Hewlett Packard, IBM (Tivoli) and
Veritas. As the combined company enters new markets, it expects to encounter
new competitors. In addition, many of the existing competitors of the combined
company are broadening their platform coverage. The combined company expects
increased competition from systems and network management companies, especially
those that have historically focused on the mainframe market and are broadening
their focus to include the client/server computer market. In addition, since
there are relatively low barriers to entry in the software market, additional
competition from other established and emerging companies may arise.
Competition may also increase as a result of future software industry
consolidations. Increased competition could harm the combined company by
causing, among other things, price reductions, reduced gross margins and loss
of market share.
Many current and potential competitors have longer operating histories and
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base than
the combined company would have. As a result, current and potential competitors
can respond more quickly to new or emerging technologies and changes in
customer requirements. They can also devote greater resources to the
development, promotion, sale and support of their products. In addition,
current and potential competitors may establish cooperative relationships among
themselves or with third parties. If so, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, network operating system vendors could introduce new or upgrade
existing operating systems or
13
environments that include functionality offered by the combined company's
products. If so, the combined company's products could be rendered obsolete and
unmarketable. For all the foregoing reasons, the combined company may not be
able to compete successfully, which would seriously harm its business,
operating results and financial condition.
The combined company's revenues depend on growth in the enterprise storage
management market.
All of the business of the combined company is in the enterprise storage
management market. The enterprise storage management market is still an
emerging and dynamic market. The combined company's future financial
performance will depend in large part on continued growth in the number of
organizations adopting company-wide storage and management solutions for their
client/server computing environments. The market for enterprise storage
management may not continue to grow at historic rates or may shrink. If this
market fails to grow, grows more slowly than the combined company currently
anticipates or shrinks and the combined company is unable to capture market
share from its competitors, the business, operating results and financial
condition of the combined company would be seriously harmed.
The combined company will depend on key personnel, the loss of whom could
harm its business.
The successful integration of OTG with Legato after the merger will depend
in part on the retention of personnel critical to the business and operations
of the combined company due to, for example, unique technical skills or
management expertise. The combined company may be unable to retain OTG
management, technical, sales and customer support personnel who are critical to
the success of the integrated companies, resulting in disruption of operations,
loss of key information, expertise and know-how, unanticipated additional
recruitment and training costs and otherwise diminished benefits of the merger.
The combined company's future success is substantially dependent on the
continued service of its key senior management, technical and sales personnel
and in particular the combined company's chairman, president and chief
executive officer, David B. Wright, the combined company's senior vice
president and chief financial officer, Andrew J. Brown, and OTG's chairman,
chief executive officer and president, Richard A. Kay. The combined company
will not have key-person insurance on any of its employees. The loss of the
services of any member of its management team, or of any other key employees,
could divert management's time and attention, increase the combined company's
expenses and adversely affect its ability to conduct its business efficiently.
The combined company's future success also depends on the combined company's
continuing ability to attract, retain and motivate highly skilled employees.
Competition for employees in the combined company's industry is intense. The
combined company may be unable to retain key employees or attract, assimilate
or retain other highly qualified employees in the future. Legato and OTG have
experienced difficulty from time to time in attracting the personnel necessary
to support the growth of their business, and may experience similar
difficulties in the future.
Defects in the products of the combined company would harm its business.
Both Legato's and OTG's products are used to manage data critical to
end-users of their software. As a result, the licensing and support of products
the combined company offers may entail the risk of product liability claims.
Although Legato and OTG generally include provisions in their license
agreements that are intended to limit their liability, a successful product
liability claim brought against the combined company could seriously harm its
business, operating results and financial condition. The combined company's
success will depend on its products' management of data that is critical to
customers.
It may be difficult to predict the combined company's financial performance
because its quarterly operating results and its future stock price may
fluctuate.
The combined company's revenues and operating results may vary significantly
from quarter to quarter due to a variety of factors, many of which are beyond
the combined company's control. You should not rely on
14
period-to-period comparisons of Legato's or OTG's results of operations as an
indication of the combined company's future performance. The factors that may
affect the combined company's quarterly operating results include:
. The timing and magnitude of large orders;
. Timing of introduction of new products by competitors or by the combined
company;
. The rate of growth and adoption of UNIX and Linux, Windows NT, Windows
2000, Windows XP, and future windows-based operating systems;
. Conditions in the financial markets in general;
. Costs associated with litigation;
. Developments with respect to patents, copyrights or proprietary rights or
those of the combined company's competitors; and
. General business conditions and trends in the distributed computing
environment and software industry.
The combined company's results of operations may fall below the expectations
of market analysts and investors in some future periods. If this happens, the
market price of Legato's common stock may fall. The factors that may affect the
combined company's stock price include:
. Quarterly fluctuations in the combined company's financial results or
results of other enterprise storage management companies;
. Announcements that revenue or income are below analysts' expectations;
. Changes in analysts' estimates of the combined company's performance or
industry performance;
. Announcements of disappointing financial results from competitors,
strategic allies or major end users; and
. Acquisitions or dispositions of common stock by corporate officers or
members of the board of directors.
In addition, extreme price and volume fluctuations may occur in the stock
market, which may affect the market price for the securities of technology
companies without regard to their operating performance or any of the factors
listed above. These broad market fluctuations may seriously harm the market
price of Legato's common stock.
The combined company may be unable to reduce spending if its revenues are
lower than expected because its short-term expenses are fixed and future
revenues and operating results are difficult to forecast.
The combined company's current and future expense estimates are based, in
large part, on its estimates of future revenues and on its investment plans.
Most of the combined company's expenses will be fixed in the short term. The
combined company may be unable to reduce spending if its revenues are lower
than expected. Any significant shortfall in revenues in relation to the
combined company's expectations could materially and adversely affect its cash
flows.
If the combined company does not successfully develop its international
strategy, its revenues and cash flows and the growth of its business could be
harmed.
The growth and profitability of the combined company will require further
expansion of Legato's and OTG's international operations. To successfully
expand international operations, the combined company may need to expand
foreign operations, hire additional personnel and recruit additional
international resellers. This would require significant management attention
and financial resources and could seriously harm the combined company's
operating margins. If the combined company does not expand its international
operations in a timely
15
manner, its business, operating results and financial condition could be
seriously harmed. In addition, the combined company may fail to maintain or
increase international market demand for its products. Most of Legato's and
OTG's international sales are currently denominated in U.S. dollars. An
increase in the value of the U.S. dollar relative to foreign currencies could
make the combined company's products more expensive and, therefore, potentially
less competitive in those markets. In some markets, localization of products
and license documents is essential to achieve or increase market penetration.
The combined company may incur substantial costs and experience delays in
localizing its products and license language. The combined company also may
fail to generate significant revenue from localized products.
Additional risks inherent in the combined company's international business
activities generally include:
. Significant reliance on its distributors and other resellers who do not
offer its products exclusively;
. Unexpected changes in regulatory requirements;
. Tariffs and other trade barriers;
. Lack of acceptance of localized products, if any, in foreign countries;
. Longer negotiation and accounts receivable payment cycles;
. Difficulties in managing international operations;
. Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. The burdens of complying with a wide variety of multiple local country and
regional laws, including varying employment policies and regulations; and
. The risks related to the current weakness in some regions, including,
without limitation, Europe and Asia.
The occurrence of those factors could seriously harm the combined company's
international sales and, consequently, its business, operating results and
financial condition.
The combined company may not be able to protect its technology from
unauthorized use, which could diminish the value of its products and
services, weaken its competitive position and reduce its revenues.
The combined company's success will depend in large part upon proprietary
technology. To protect its proprietary rights, Legato and OTG currently rely on
a combination of patents, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions. Legato and OTG seek to
protect their software, documentation and other written materials under patent,
trade secret and copyright laws, which afford only limited protection. Despite
this limited protection, any issued patent may not provide the combined company
with any competitive advantages or may be challenged by third parties or the
patents of others may seriously impede its ability to do business. The combined
company may also develop proprietary products or technologies that cannot be
protected by patent law.
Despite Legato's and OTG's efforts to protect their proprietary rights, they
are aware that unauthorized parties have attempted to transfer licenses to
third parties, copy aspects of their products and attempted to obtain and use
information that they regard as proprietary. Policing unauthorized use and
transfer of products is difficult, and software piracy can be expected to be a
persistent problem. In licensing products, other than in enterprise license
transactions, both Legato and OTG rely on "shrink wrap" licenses that are not
signed by licensees. "Shrink wrap" licenses may be unenforceable under the laws
of some jurisdictions. In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as do the laws of the United
States. Such means of protecting proprietary rights may not be adequate.
Competitors may independently develop similar technology, duplicate the
combined company's products or design around patents issued to Legato or OTG or
other intellectual property rights of Legato or OTG.
From time to time, Legato and OTG have each received claims that they are
infringing third parties' intellectual property rights. In the future, the
combined company may be subject to claims of infringement by
16
third parties with respect to current or future products, trademarks or other
proprietary rights. Software product developers may increasingly be subject to
infringement claims as the number of products and competitors in the combined
company's industry segment grows and the functionality of products in different
industry segments overlaps. Any of those claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays
or require the combined company to enter into royalty or licensing agreements
with third parties. If royalty or licensing agreements, if required, are not
available on terms acceptable to the combined company, the combined company's
business, operating results and financial condition could be seriously harmed.
If the combined company fails to respond to rapid technological changes with
new product offerings, its operating results and financial condition would be
harmed.
The enterprise storage management market is characterized by rapid
technological change, changing customer needs, frequent new software product
introductions and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards could
render the combined company's existing products obsolete and unmarketable. To
be successful, the combined company will need to develop and introduce new
software products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of the combined company's customers. In addition to
integrating OTG if the merger is completed, the combined company will need to
continue to integrate into its product lines technologies acquired by Legato in
1998 and 1999, to develop the technologies acquired by Legato from Software
Clearing House, Inc. (also known as SCH Technologies) in July 2001 and to
integrate product lines and technologies acquired by OTG. The combined company
may fail to develop and market new products that respond to technological
changes or evolving industry standards, experience difficulties that could
delay or prevent the successful development, introduction and marketing of
these new products or fail to develop new products that adequately meet the
requirements of the marketplace or achieve market acceptance. If so, the
combined company's business, operating results and financial condition would be
seriously harmed.
Both Legato and OTG introduced several new products during 2001, and based
upon current plans, the combined company will introduce and market several more
potential new products in the next twelve months. Potential new products are
subject to significant technical risks, and the combined company may fail to
introduce potential new products on a timely basis or at all. In the past, both
Legato and OTG have experienced delays in the commencement of commercial
shipments of new products. Those delays caused customer frustrations and delay
of or loss of revenue. In addition, some competitors currently offer products
which may compete with these potential new products. If potential new products
are delayed or do not achieve market acceptance, the combined company's
business, operating results and financial condition would be seriously harmed.
In the past, both Legato and OTG have also experienced delays in purchases of
products by customers anticipating the launch of new products. The combined
company's business, operating results and financial condition would be
seriously harmed if customers defer material orders in anticipation of new
product introductions.
The software products of the combined company may contain undetected errors.
Software products as complex as those the combined company offers may
contain undetected errors or failures when first introduced or as new versions
are released. Both Legato and OTG have in the past discovered software errors
in new products after their introduction. As a result of those errors, Legato
and OTG experienced delays and/or lost revenue during the period required to
correct these shipments, despite testing by Legato and OTG and by their
respective customers. In addition, customers have in the past brought to both
Legato's and OTG's attention "bugs" in their software created by the customers'
unique operating environments. Although Legato and OTG have been able to fix
those software bugs in the past, the combined company may not always be able to
do so. These types of circumstances may result in the loss of or delay in
market acceptance of products or increase the need for additional customer
support personnel, which could seriously harm the combined company's business,
operating results and financial condition.
17
The combined company will rely on enterprise license transactions.
Legato has developed strategies to pursue larger enterprise license
transactions with corporate customers. However, the combined company may not
continue to successfully market its products through larger enterprise license
transactions. In addition, many of the large organizations that the combined
company will target as customers have lowered their rate of spending on
enterprise software. Failure to obtain customer orders would seriously harm the
combined company's business, operating results and financial condition. The
combined company's operating results will be sensitive to the timing of such
orders. Orders are difficult to manage and predict because:
. The sales cycle is typically lengthy, generally lasting three to nine
months, and varies substantially from transaction to transaction;
. Enterprise license transactions often include multiple elements such as
product licenses and service and support;
. Recognition of revenue from enterprise license transactions may vary from
transaction to transaction;
. These transactions typically involve significant technical evaluation and
commitment of capital and other resources;
. A growing number of direct-license customers are located outside the
United States, where the sales cycle can be lengthier than transactions
negotiated within the United States;
. Customers are being more deliberate about information technology spending
decisions due to the current state of the overall economy; and
. Customers' internal procedures frequently cause delays in orders. Those
internal procedures include approval of large capital expenditures,
implementation of new technologies within their networks, and testing new
technologies that affect key operations.
Due to the large size of enterprise transactions, if orders forecasted for a
specific transaction for a particular quarter are not realized in that quarter,
the combined company's operating results for that quarter may be seriously
harmed.
The combined company will rely on indirect sales channels.
The combined company will rely significantly on distributors, systems
integrators and value added resellers, or collectively, resellers, for the
marketing and distribution of its products. Legato's agreements with resellers
are generally not exclusive and in many cases may be terminated by either party
without cause. OTG's agreements generally have no minimum requirements and can
be terminated upon short notice. In addition, some of OTG's agreements with
indirect sales channel parties include payment terms extending up to 180 days.
Many resellers carry product lines that are competitive with those of the
combined company. These resellers may not give a high priority to the marketing
of the combined company's products. Rather, they may give a higher priority to
other products, including the products of competitors, or may not continue to
carry the combined company's products. Events or occurrences of this nature
could seriously harm the combined company's business, operating results and
financial condition. In addition, the combined company may not be able to
retain any of Legato's or OTG's current resellers or successfully recruit new
resellers. Changes in the combined company's distribution channels could
seriously harm its business, operating results and financial condition.
The combined company's strategy is also to increase the proportion of
customers licensed through OEMs. The combined company may fail to achieve this
strategy. The combined company is currently investing, and will continue to
invest, resources to develop this channel. These investments could seriously
harm operating margins. The combined company will depend on its OEMs' abilities
to develop new products, applications and product enhancements on a timely and
cost-effective basis that will meet changing customer needs and respond to
emerging industry standards and other technological changes. The combined
company's OEMs may not effectively meet these technological challenges. These
OEMs are not within the combined company's control,
18
may incorporate the technologies of other companies in addition to, or to the
exclusion of, its technologies, and are not obligated to purchase products from
the combined company. The combined company's OEMs may not continue to carry its
products. The inability to recruit, or the loss of, important OEMs could
seriously harm the combined company's business, operating results and financial
condition.
The combined company will depend on Legato's NetWorker product line.
Legato currently derives, and expects the combined company to continue to
derive, a substantial majority of its revenue from its NetWorker software
products and related services. A decline in the price of, or demand for,
NetWorker, or failure to build and sustain broad market acceptance of
NetWorker, would seriously harm the combined company's business, operating
results and financial condition. The combined company will not be able to
reasonably predict NetWorker's remaining life for several reasons, including:
. The effect of new products, applications or product enhancements;
. Technological changes in the network storage management environment in
which NetWorker operates; and
. Future competition.
Legato's investments in goodwill and intangibles resulting from Legato's
acquisitions could become impaired.
As a result of acquisitions in 1999 and in 2001, Legato recorded goodwill
and intangibles of $177.0 million of which $48.8 million was written off in the
fourth quarter of 2001 due to an impairment. As of December 31, 2001, Legato
had goodwill of $17.3 million and acquired intangibles of $14.3 million on its
Consolidated Balance Sheet. With the adoption of Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" in
the first quarter of 2002, goodwill will no longer be amortized. Legato expects
to amortize intangibles of $5.7 million in 2002, $5.7 million in 2003 and $3.2
million in 2004. With the acquisition of OTG, amortization of intangibles will
increase by approximately $7.2 million in 2002, $9.8 million in 2003, $9.3
million in 2004 through 2006 and $2.9 million in 2007. To the extent the
acquired technologies or combined company does not generate sufficient cash
flows to recover the net amount of the investment recorded, the investment
could be subsequently written-off. In that case, results of operations in any
given period could be negatively impacted, and the market price of the combined
company's stock could decline. Legato expects to record goodwill in connection
with the merger. If OTG's business fails to perform as expected, Legato could
be required to record an impairment charge under SFAS 142 with respect to the
goodwill recorded in connection with the merger.
The combined company's revenue recognition could be impacted by the
unauthorized actions of its personnel.
The combined company's recognition of revenue will depend on, among other
things, the terms negotiated in its contracts with customers. The combined
company's personnel may act outside of their authority and negotiate additional
terms without management's knowledge. If sales personnel have negotiated terms
that do not appear in the contract and of which management is unaware, whether
the additional terms are written or verbal, the combined company could be
prevented from recognizing revenue in accordance with its plans. Furthermore,
depending on when management learns of unauthorized actions and the size of
transactions involved, the combined company may have to restate its financial
statements for one or more previously reported periods, which could seriously
harm its operating results and financial condition, undermine investor
confidence and negatively affect the combined company's stock price.
The combined company may be unable to retain its sales personnel.
In the past, Legato experienced significant voluntary resignations in its
sales force, including some of its senior level sales employees, and the
combined company may experience such turnover again. The combined
19
company's future success depends on its ability to attract and retain highly
qualified sales personnel. Competition for sales personnel remains intense, and
the combined company may fail to retain its sales personnel or attract,
assimilate or retain other highly qualified sales personnel in the future. Any
further disruption to the combined company's sales force could seriously harm
its business, operating results and financial condition.
The combined company will be affected by general economic and market
conditions.
Segments of the computer industry have recently experienced significant
economic downturns characterized by decreased product demand, product
overcapacity, price erosion, work slowdowns and layoffs. These downturns appear
to coincide with the widely-reported weakness in the overall economy. The
combined company's operations may experience substantial fluctuations from
period-to-period as a consequence of industry trends, general economic
conditions affecting the timing of orders from major customers and other
factors affecting capital spending.
Delaware law contains anti-takeover provisions that could deter takeover
attempts that could be beneficial to the combined company's stockholders.
Provisions of Delaware law could make it more difficult for a third party to
acquire the combined company, even if doing so would be beneficial to its
stockholders. Section 203 of the Delaware General Corporation Law may make the
acquisition of the combined company and the removal of incumbent officers and
directors more difficult by prohibiting stockholders holding 15% or more of the
combined company's outstanding voting stock from acquiring the combined company
without the board of director's consent for at least three years from the date
they first hold 15% or more of the voting stock.
Both Legato and OTG are currently subject to litigation, and no estimate can
be made of the possible loss which the combined company may incur in the
resolution of those matters.
Beginning on January 20, 2000, a number of stockholder securities class
action complaints were filed in the U.S. District Court, Northern District of
California, against Legato and its directors and officers. On February 13,
2001, plaintiffs filed a second amended complaint, which generally alleges
that, between April 22, 1999 and May 17, 2000, defendants made false or
misleading statements of material fact about Legato's prospects and failed to
follow generally accepted accounting principles in violation of the federal
securities laws. The complaint seeks an unspecified amount in damages.
Defendants answered the complaint in April 2001 denying all allegations that
they violated the federal securities laws.
On April 13, 2000, a shareholder derivative action was filed in the Superior
Court of California, County of Santa Clara, against Legato's officers and
directors. Legato is named as a nominal defendant. On May 23, 2000, a
shareholder derivative action was filed in the Superior Court of California,
County of San Mateo, against Legato's officers and directors. Legato is named
as a nominal defendant. Both state derivative complaints generally claim that
Legato's officers and directors breached their fiduciary duties during period
covered by the federal suit, and seek unspecified damages and injunctive
relief. The state derivative matters have been consolidated in San Mateo county.
The Securities and Exchange Commission has entered a formal order of
investigation concerning Legato's restatement of financial results for the
first, second and third quarters of 1999, and Legato's revision of financial
results for the fourth quarter of 1999. Legato has been voluntarily cooperating
with the staff of the SEC in its investigation.
Legato and the individual defendants intend to defend all of these actions
vigorously. However, there can be no assurance that any of the matters
discussed above will be resolved without costly litigation, or in a manner that
is not materially adverse to the combined company's financial position, results
of operations or cash flows.
20
On or about July 26, 2001, a class action lawsuit was filed in the Southern
District of New York naming OTG, officers of OTG who signed the registration
statement in connection with OTG's initial public offering and the managing
underwriters of its initial public offering as defendants. The complaint
alleges that OTG's initial public offering registration statement and final
prospectus contained material misrepresentations and/or omissions, related in
part to additional, excessive and undisclosed commissions allegedly received by
its underwriters from investors to whom the underwriters allegedly improperly
allocated shares of the public offering. The complaint seeks relief in the form
of damages and/or rescission of the plaintiff's purchase transaction. The
complaint was subsequently amended and similar allegations were made with
respect to the public offering of shares of OTG common stock in November 2000.
Since this initial complaint was filed, two other complaints making similar or
identical allegations and seeking similar relief have been filed in that court
on September 5, 2001 and September 18, 2001.
These cases are at an early stage, and OTG has not formally responded to the
allegations. However, OTG intends to defend itself and its officers vigorously.
OTG's management believes that it is not possible at the current time to
estimate the amount of a probable loss, if any, that might result from this
matter and has not made a provision for this matter in its condensed
consolidated financial statements.
21
THE SPECIAL MEETINGS
Joint Proxy Statement/Prospectus
This document is being furnished to Legato stockholders in connection with
the solicitation of proxies by Legato's board of directors in connection with a
special meeting of Legato's stockholders which has been called to consider and
vote on approval of the merger agreement. This document is also furnished by
Legato to OTG stockholders as a prospectus with respect to the offer and sale
of the shares of Legato common stock which are issuable in connection with the
merger.
This document is being furnished to OTG stockholders in connection with the
solicitation of proxies by OTG's board of directors in connection with a
special meeting of OTG stockholders which has been called to consider and vote
on the adoption of the merger agreement.
Date, Time and Place of the Meetings
The special meetings are scheduled to be held as follows:
For Legato stockholders: For OTG stockholders:
May 14, 2002 May 14, 2002
11:00 a.m., local time 11:30 a.m., local time
3210 Porter Drive 3210 Porter Drive
Palo Alto, California Palo Alto, California
Purpose of the Meetings
Legato. The Legato special meeting is being held so that stockholders may
consider and vote on a proposal to approve the merger agreement.
OTG. The OTG special meeting is being held so that stockholders of OTG may
consider and vote upon a proposal to adopt the merger agreement.
Stockholder Record Date for the Special Meetings
Legato. Legato's board of directors has fixed the close of business on
April 12, 2002 as the record date for determining which Legato stockholders are
entitled to notice of and to vote at the Legato special meeting. On the record
date, there were 90,447,735 shares of Legato common stock outstanding, held by
approximately 337 holders of record.
OTG. The close of business on March 22, 2002 is the record date for
determining which OTG stockholders are entitled to notice of and to vote at the
OTG special meeting. On the record date, there were 33,556,184 shares of OTG
common stock outstanding, held by approximately 215 holders of record.
Vote Required
Legato. A majority of the shares of Legato common stock outstanding and
entitled to vote at the Legato meeting as of the Legato record date must be
represented, either in person or by proxy, to constitute a quorum at the Legato
special meeting. Assuming the presence of a quorum, the affirmative vote of the
holders of a majority of the votes cast is required to approve the merger
agreement. At the Legato special meeting, each share of Legato common stock is
entitled to one vote on all matters properly submitted to the Legato
stockholders.
22
The directors and executive officers of Legato beneficially owned
approximately 1% of the outstanding shares of Legato common stock, including
options exercisable within 60 days of the record date, and each of them has
indicated their intention to vote for approval of the merger agreement.
OTG. A majority of the shares of OTG common stock outstanding and entitled
to vote at the OTG special meeting as of the OTG record date must be
represented, either in person or by proxy, to constitute a quorum at the OTG
special meeting. The affirmative vote of the holders of a majority of the
shares of OTG's common stock outstanding as of the record date is required to
adopt the merger agreement. At the OTG special meeting, each share of OTG
common stock is entitled to one vote on all matters properly submitted to the
OTG stockholders.
The directors and executive officers of OTG beneficially owned approximately
47% of the outstanding shares of OTG common stock, including options
exercisable within 60 days of the record date, and each of them has indicated
their intention to vote in favor of adoption of the merger agreement.
Legato entered into a voting agreement with Mr. Kay and entities for which
he is entitled to act, that require these OTG stockholders to vote their shares
of OTG common stock in favor of the adoption of the merger agreement. As of the
record date, these stockholders owned shares representing approximately 32% of
the outstanding shares of OTG common stock. Mr. Kay and the entities signing
the voting agreement also executed proxies with respect to shares under the
voting agreement. The proxies authorize Legato to vote the shares in favor of
the merger agreement and against any matter that could delay consummation of
the merger.
Vote Required for Authorization to Adjourn or Postpone the Legato Special
Meeting
A majority of the shares of Legato common stock outstanding and entitled to
vote at the meeting must be represented either in person or by proxy, to
constitute a quorum at the Legato special meeting. The affirmative vote of the
holders of a majority of the shares of Legato common stock voting is required
to grant Legato's board of directors or its chairman, in their discretion, the
authority to adjourn or postpone the special meeting if necessary to further
solicit proxies if there are not sufficient votes at the time of the meeting to
approve the merger agreement.
The Legato board of directors unanimously recommends, with one director
absent, that the stockholders of Legato vote to "GRANT" authorization of the
Legato board of directors or its chairman, in their discretion, to adjourn or
postpone the special meeting if necessary to solicit further proxies.
Proxies
All shares of Legato common stock represented by properly executed proxy
cards received before or at the Legato special meeting and all shares of OTG
common stock represented by properly executed proxy cards received before or at
the OTG special meeting will, unless the proxies are revoked, be voted in
accordance with the instructions indicated on those proxy cards.
Legato. If no instructions are indicated on a properly executed proxy card,
shares of Legato common stock will be voted for the approval of the merger
agreement and will grant the proxies power to vote for an adjournment or
postponement of the meeting to solicit additional votes.
OTG. If no instructions are indicated on a properly executed proxy card,
shares of OTG common stock will be voted for the adoption of the merger
agreement and if OTG deems it appropriate will be voted in favor of an
adjournment or postponement to solicit additional votes.
You are urged to mark the box on the proxy card to indicate how to vote your
shares. If a properly executed proxy card is returned and the stockholder has
abstained from voting on one or more of the proposals, the Legato
23
common stock or OTG common stock represented by the proxy will be considered
present at the special meetings for purposes of determining a quorum, but will
not be considered to have been voted on the abstained proposals.
If your shares are held in an account at a brokerage firm or bank, you must
instruct them on how to vote your shares. If an executed proxy card is returned
by a broker or bank holding shares which indicates that the broker or bank does
not have discretionary authority to vote on the proposals, the shares will be
considered present at the meeting for purposes of determining the presence of a
quorum, but will not be considered to have been voted on the proposals. Your
broker or bank will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
Abstentions and broker non-votes will have no effect on any of the proposals
at the Legato special meeting. Abstentions, failures to send in a proxy or
attend the special meeting and broker non-votes will have the effect of a vote
against the proposal to adopt the merger agreement at the OTG special meeting.
You may revoke your proxy at any time before it is voted by:
. notifying in writing:
. if you are a Legato stockholder, the Secretary of Legato Systems, Inc.
at 2350 West El Camino Real, Mountain View, California 94040; or
. if you are an OTG stockholder, the Secretary of OTG Software, Inc. at
2600 Tower Oaks Boulevard, Rockville, Maryland 20852;
. granting a subsequently dated proxy; or
. if you are a holder of record, appearing in person and voting at the
special meeting.
Your attendance at the special meeting will not, in and of itself, revoke
your proxy.
Solicitation of Proxies
Legato and OTG will each pay one-half of the expenses incurred in connection
with the printing and mailing of this document. Legato and OTG will also
request banks, brokers and other intermediaries holding shares of Legato or OTG
common stock beneficially owned by others to send this document to, and obtain
proxies from, the beneficial owners and will, upon request, reimburse the
holders for their reasonable expenses in so doing. Solicitation of proxies by
mail may be supplemented by telephone, telegram and other electronic means,
advertisements and personal solicitation by the directors, officers or
employees of Legato and OTG. No additional compensation will be paid to
directors, officers or employees for those solicitation efforts. Legato has
also retained Georgeson Shareholder to assist in the solicitation of proxies.
Georgeson Shareholder will receive a fee for such services of approximately
$20,000, including out-of-pocket expenses, which will be paid by Legato. OTG
has retained MacKenzie Partners, Inc. to assist in the solicitation of proxies.
MacKenzie will receive a fee for such services of approximately $13,000,
including out of pocket expenses which will be paid by OTG. Except as described
above, neither Legato nor OTG presently intends to solicit proxies other than
by mail.
You should not send in any stock certificates with your proxy card. If you
are an OTG stockholder, a transmittal letter with instructions for the
surrender of your OTG stock certificates will be mailed to you as soon as
practicable after completion of the merger.
24
THE MERGER
The following disclosure describes material aspects of the proposed merger.
While we believe that the description covers the material terms of the merger,
this summary may not contain all of the information that is important to you.
You should read this entire document, including the annexes, carefully for a
more complete understanding of the merger and the terms of the merger agreement.
General Description of the Merger
At the effective time of the merger, OTG will be merged with and into Orion
Acquisition Sub Corp., a wholly-owned subsidiary of Legato. Orion Acquisition
Sub Corp. will be the surviving corporation and will continue as a wholly-owned
subsidiary of Legato. As a result of the merger, each share of OTG common stock
outstanding at the effective time of the merger will be converted automatically
into 0.6876 of a share of Legato common stock with cash paid for any fractional
share, and $2.50 in cash.
Based on the number of shares of Legato common stock and OTG common stock
outstanding as of the record date and the exchange ratio, approximately 23.1
million shares of Legato common stock will be issuable pursuant to the merger
agreement, representing approximately 20.3% of the total Legato common stock
expected to be outstanding after the merger. When the merger is completed, each
outstanding option to purchase OTG common stock will be assumed by Legato and
will become exercisable for $2.50 in cash and 0.6876 of a share of Legato
common stock at an exercise price equal to the exercise price of the option to
purchase OTG common stock divided by 0.6876. Based on the number of OTG stock
options as of April 10, 2002 and the exchange ratio, Legato will assume options
to purchase 4.3 million additional shares of Legato common stock. This
information does not take into account shares which may be issued pursuant to
stock options, warrants and other convertible securities.
Background of the Merger
Legato and OTG have had a commercial relationship for a number of years. At
the beginning of 1999, Legato and OTG entered into a three year original
equipment manufacturer, or OEM, software license agreement which contemplated
that Legato would market OTG's DiskXtender solution as its NetWorker HSM, or
storage management solution, for the Windows NT operating platform. The
agreement was amended in September 1999 and January 2000 to expand and
strengthen the relationship. In connection with performing their obligations
under the software license agreement, Legato and OTG held several corporate and
field level cross-training, marketing and development activities during 1999,
2000 and 2001. Legato paid royalties to OTG under the OEM license agreement in
the amount of $100,000, $170,000 and $150,000 during 1999, 2000 and 2001,
respectively.
Beginning in 2001, in view of trends in the market for enterprise storage
management software toward industry consolidation, OTG management, in
consultation with the OTG board of directors, took a number of steps to
strengthen its competitive position and expand its depth of products and
services, including the acquisitions of UniTree and SmartStorage. OTG
management also considered expanding its relationship with a number of
companies, including Legato.
During the summer of 2001, members of Legato and OTG management held
discussions about expanding their contractual relationship, including through a
potential business combination. John Burton, a member of the OTG board and
managing director of Updata Capital Inc., which serves as a financial advisor
to Legato, facilitated these discussions. However, the talks ended without
action. During the summer and fall of 2001, OTG management held discussions
with other industry participants about expanding their relationships, including
through a potential business combination.
At its October 18, 2001 meeting, the OTG board of directors reviewed the
proposed engagement of Goldman Sachs to assist OTG in considering possible
strategic relationships and authorized management to retain Goldman Sachs.
Goldman Sachs' knowledge of OTG, as well as its reputation, background and
experience
25
in the industry and in mergers and acquisitions generally were important
factors in the board's decision to engage Goldman Sachs. On October 20, 2001,
OTG formally engaged Goldman Sachs.
In late October 2001, management of OTG began meeting with representatives
of Goldman Sachs to review information about OTG's business and financial
condition, as well as a list of parties with whom OTG might seek a potential
business combination or other strategic relationship. Between November 2001 and
January 2002, management and representatives of Goldman Sachs contacted a
number of industry participants regarding a potential strategic combination
with OTG, had preliminary discussions with several of these companies, and
engaged in due diligence reviews with four of these companies, including Legato.
On December 4, 2001, OTG held a regular meeting of its board of directors.
Richard A. Kay, OTG's chairman of the board, president and chief executive
officer, described a term sheet he had received on December 3, 2001 from a
potential acquiror. After discussion, the OTG board determined not to proceed
with that proposal under those terms.
During the last week of December 2001, David B. Wright, Legato's chairman of
the board, president and chief executive officer, and Mr. Kay discussed ways in
which Legato and OTG could potentially expand their existing contractual
relationship. During these discussions, Mr. Kay provided a high level overview
of OTG's storage management and data access solutions.
During the first week of January 2002, Jim Chappell, Legato's senior vice
president business process and development, called Mr. Burton to set up
meetings on January 9 and 10, 2002 to discuss new ways in which Legato and OTG
could potentially work together.
On January 8, 2002, OTG received a revised term sheet from the other
potential acquiror that had submitted a term sheet in December 2001.
On January 9, 2002, Legato and OTG executed a confidentiality agreement in
favor of OTG prior to beginning their meetings. Representatives of Legato and
OTG attended the meetings on January 9 and 10, 2002. At these meetings, the
parties discussed the technologies, operations and business strategies of
Legato and OTG.
On January 15, 2002, Legato delivered to OTG a preliminary, non-binding
proposal for a possible acquisition of OTG by Legato for a combination of cash
and shares of Legato common stock. During a telephone call between Mr. Wright
and Mr. Kay later that day, they discussed the stock consideration payable in
the merger.
On January 16, 2002, representatives of Legato and representatives of OTG
met at Legato's Mountain View offices to discuss the operations and business
strategies of Legato and OTG and to discuss a possible acquisition transaction
with OTG.
On January 17, 2002, the other potential acquiror that had submitted term
sheets advised OTG that it would not proceed with a transaction at that time.
On January 20, 2002, during a special meeting of the Legato board of
directors, the board discussed the possible acquisition of OTG. Legato's senior
management team reported to Legato's board of directors regarding the business
of OTG. Legato's management reported that OTG's archive data access solutions
would enhance Legato's network storage management software products.
Representatives of JPMorgan H&Q gave an overview of their analysis of the
acquisition and the potential terms of the transaction. Legato's board of
directors directed management to conduct further due diligence and have further
discussions and negotiations with OTG. Legato's board of directors discussed
the general economic terms of the potential acquisition and authorized
management to proceed with negotiations and due diligence.
26
The next day, Mr. Wright called Mr. Kay. The parties agreed to schedule
subsequent meetings with several senior executives of each company. Following
this phone conversation, Legato submitted a draft exclusivity letter and a
non-binding term sheet to OTG providing for consideration payable in cash and
shares of Legato common stock. Legato and OTG determined that the stage of
their discussions justified commencing mutual due diligence and the negotiation
of definitive documentation.
On January 22, 2002, a regular meeting of the board of directors of OTG was
held. OTG's senior management and representatives of Goldman Sachs and Hale and
Dorr LLP, counsel to OTG, also attended. Representatives of Hale and Dorr
discussed the legal standards for directors considering transactions similar to
the proposed business combination and other related matters. At the meeting,
Mr. Burton then reviewed with the other OTG board members his relationship with
Legato, including Legato's engagement of Updata Capital, Inc. as a financial
advisor to Legato in contexts other than this merger. Mr. Burton also noted
that under the arrangement with Legato, Updata would not receive a fee in
connection with any transaction involving OTG. Following a discussion among the
OTG board members, Mr. Burton recused himself from any further proceedings
concerning a potential business combination with Legato (all subsequent
references in this section to the OTG board of directors exclude Mr. Burton).
After Mr. Burton left the board meeting, Mr. Kay described the term sheet
which Legato had presented. Representatives of Goldman Sachs then discussed its
activities on behalf of OTG since its engagement and provided a financial
analysis of OTG, Legato and Legato's proposed transaction and also reviewed
information regarding other possible strategic partners. The OTG board
discussed the proposed transaction and authorized OTG management to enter into
further non-binding negotiations with Legato. The OTG board also discussed
possible compensation for Updata Capital for its contributions in connection
with the proposed transaction.
On January 23, 2002, Brobeck, Phleger & Harrison LLP, counsel for Legato,
delivered draft agreements to Hale and Dorr, including a revised letter
providing for a period of exclusive negotiations. Between January 23, 2002 and
January 25, 2002, representatives of Legato and OTG and each party's advisors
negotiated the terms of these agreements.
On January 25, 2002, OTG executed a letter agreement providing for exclusive
negotiations through February 8, 2002 with Legato concerning a possible
acquisition, and a confidentiality agreement with respect to Legato in
connection with OTG's due diligence review of Legato.
On January 26, 2002, Mr. Wright and Mr. Kay met in Rockville, Maryland to
discuss operational and business strategy issues.
On January 28, 2002, Brobeck delivered a revised draft merger agreement to
Hale and Dorr. Between January 28, 2002 and execution of the merger agreement,
representatives of each of Legato and OTG, their respective financial advisors
and legal counsel held a series of discussions to negotiate the terms and
conditions of the definitive merger agreement and related documentation.
Throughout this period, senior management of both companies held numerous
discussions regarding business, financial, operational and technical issues
involved in combining the companies and their legal, financial and accounting
advisors conducted a review of the other party's business, financial condition
and operations.
On February 1, 2002, Legato's board of directors held a special meeting. The
discussion focused on outstanding due diligence issues with respect to OTG and
the strategic fit of Legato and OTG. Legato's management, legal advisors and
financial advisors each reported on their due diligence reviews of OTG.
Representatives of JPMorgan H&Q gave an overview on their proposed methodology
for the exchange ratio calculation. Representatives of Brobeck gave a detailed
overview of the merger agreement and reviewed director fiduciary duties in an
acquisition transaction. Legato's board of directors directed management to
continue to pursue negotiations with OTG. By letter dated February 1, 2002,
Legato retained JPMorgan H&Q to act as financial advisor in connection with the
transaction.
27
The same day, the OTG board held a special meeting by conference call.
During the meeting, members of management and representatives of Goldman Sachs
and Hale and Dorr updated the OTG board of directors on the status of
negotiations. Copies of the then current drafts of documents for the merger
were delivered to the OTG board of directors in advance of the meeting.
On February 3, 2002, Mr. Kay and Mr. Wright met and discussed aspects of the
transaction. Throughout this period, negotiations and due diligence review
continued.
The Legato board held a special meeting on February 8, 2002, to review the
status of the negotiations with OTG, the principal terms of the transaction and
the results to date of the additional business, legal and financial due
diligence analysis of OTG. The board again reviewed the economic terms of the
proposed acquisition and directed management to continue negotiations.
Between February 11 and February 19, 2002 a series of phone conversations
took place between Mr. Wright and Mr. Kay and Legato and OTG's respective
financial advisors concerning the calculation of the exchange ratio, including
the relative ownership percentages of current OTG and Legato stockholders in
the combined company.
On February 17, 2002, the OTG board of directors held a special meeting to
consider the terms of the proposed transaction with Legato. All board members
attended in person (other than Mr. Burton, who had recused himself). Copies of
the then current drafts of documents for the merger were delivered to the OTG
board of directors in advance of the meeting. Representatives of management,
Goldman Sachs and Hale and Dorr also participated. Members of OTG management
described their perspectives on the transaction and reported on the status of
the merger negotiations with Legato. Representatives of Hale and Dorr
summarized the board's fiduciary duties in connection with the proposed
transaction, discussed results of due diligence, reviewed stockholder class
action lawsuits pending against Legato and reviewed the significant terms of
the merger agreement and the voting agreement. The employment agreements
required by Legato for specified OTG executives were also discussed.
Representatives of Goldman Sachs then presented financial analyses with respect
to the proposed business combination with Legato. The OTG board asked questions
and discussed with management and their advisors the relative merits and the
timing and legal issues surrounding the proposed transaction with Legato.
On February 18, 2002, a special meeting of Legato's board of directors was
held. All board members, other than one, attended in person or telephonically.
Also present were representatives of JPMorgan H&Q and representatives of
Brobeck. Legato's management discussed the strategic benefits of the proposed
transaction. The JPMorgan H&Q representatives made a presentation to the board
regarding the financial analyses it had performed in connection with its
opinion, and rendered its opinion that, subject to the matters referred to in
its written opinion, the consideration to be paid pursuant to the merger was
fair, from a financial point of view, to Legato. The Brobeck representatives
reviewed key terms of the merger agreement and the voting agreement. The
Brobeck representatives also gave a summary of their due diligence review and
outlined the board's fiduciary duties in connection with the merger. The board
had a lengthy discussion of the merger agreement and merger, during which the
board asked management and the representatives of Brobeck and JPMorgan H&Q
detailed questions. Following the discussion, the Legato board of directors,
with one director absent, unanimously approved the terms of the merger,
including the issuance of Legato common stock in the merger, and the voting and
affiliate agreements, and authorized management to continue to negotiate the
final terms of the merger agreement and related agreements.
On February 18 and 19, 2002, Legato executives and their financial advisors
again met with OTG to discuss the final terms of the business combination,
including the final calculation of the exchange ratio, as well as the basic
terms of the key employee employment agreements. The exchange ratio and cash
consideration were finally determined based on arms-length bargaining.
28
On the evening of February 19, 2002, the OTG board of directors held a
special meeting to consider the terms of the proposed transaction with Legato.
The meeting continued early into the morning of February 20, 2002. All board
members attended in person or telephonically (other than Mr. Burton, who had
recused himself).
. Representatives of Hale and Dorr provided an update on the status of
negotiations as well as other matters discussed at the prior board
meeting, including certain open issues. Among other things,
representatives of Hale and Dorr described a term of the merger agreement
requested by Mr. Kay which provided that, in the aggregate, the per share
consideration to be received by Mr. Kay and entities affiliated with him
is the same as the per share consideration to be received by the other
holders of OTG common stock, while providing for a different allocation of
cash and shares of Legato common stock among those holders.
. Representatives of Goldman Sachs then provided an update to financial
analyses with respect to the proposed business combination with Legato.
Following this presentation, Goldman Sachs delivered its oral opinion to
the effect that, based upon and subject to certain assumptions set forth
in the opinion, the 0.6876 shares of Legato common stock and $2.50 in cash
consideration to be received for each share of OTG common stock pursuant
to the merger agreement is fair to the holders of OTG common stock from a
financial point of view. This opinion was confirmed in a letter, dated
February 20, 2002, subsequently delivered by Goldman Sachs, a copy of
which is attached to this document as Annex C.
Following the presentations and further discussions, and subject to
satisfactory resolution of remaining issues, the OTG board unanimously, with
Mr. Burton recused, determined that the merger agreement, and the transactions
contemplated thereby, were advisable, fair to and in the best interests of, OTG
and its stockholders, unanimously adopted and approved the merger agreement and
the transactions contemplated thereby, and unanimously recommended that
stockholders of OTG approve the merger. In addition, following a discussion of
Updata's contribution to the transaction, the OTG board approved a payment of
$500,000 to Updata, including expenses, payable upon completion of the merger.
Following final negotiations, the merger agreement, the voting agreement and
other ancillary documents were executed on behalf of Legato and OTG during the
night of February 20, 2002. On February 21, 2002, prior to the opening of the
Nasdaq National Market, Legato and OTG issued a joint press release announcing
the execution of the merger agreement by Legato and OTG.
Legato's Reasons for the Merger
Legato's board of directors unanimously, with one director absent,
determined that the merger agreement and the merger are advisable and are fair
to and in the best interests of Legato and its stockholders. Legato's board of
directors made its determinations with respect to the merger and recommends
that Legato stockholders vote for the approval of the merger agreement for the
reasons set forth below:
. Legato's management made a presentation to Legato's board of directors
outlining its expectation that Legato's enterprise storage management
product offerings would be enhanced by adding OTG's application focused
storage products;
. Legato's management expects to sell OTG's products and services through
Legato's substantially larger sales network and large customer base;
. Legato's management expects to sell Legato's own products and services to
OTG's middle market customers and in OTG's healthcare and government
vertical markets;
. Legato's management believes that OTG will enhance Legato's products and
services with added features and increased applications to better meet the
needs of Legato's existing and future customer base;
. the perceived value of OTG's business to Legato relative to the value of
the merger consideration;
. opportunity to focus both companies' resources on one common storage
solution;
29
. the presentation made by JPMorgan H&Q, including its opinion, that as of
February 20, 2002, and subject to assumptions made, matters considered and
limitations on the review set forth in its opinion, the consideration to
be paid in the merger was fair to Legato from a financial point of view as
of that date (See "--Opinion of JPMorgan H&Q"); and
. the Legato board of director's belief that the merger consideration was
fair relative to its own assessment of Legato's current and expected
future financial condition, earnings, business opportunities, strategies
and competitive position.
Legato's board of directors reviewed a number of factors in evaluating the
merger, including, but not limited to, the following:
. information concerning Legato's and OTG's respective businesses,
customers, prospects, strategic business plans, financial performance and
condition, results of operations, technology positions, management and
competitive positions;
. the due diligence investigation of OTG conducted by Legato's management
and financial and legal advisors;
. Legato management's view of the positive results of combining the
operations and businesses of Legato and OTG;
. the current financial market conditions and historical stock market
prices, volatility and trading information of OTG and Legato; and
. the impact of the merger on Legato's customers and employees.
During the course of its deliberations concerning the merger, the Legato
board of directors also identified and considered a variety of potentially
negative factors that could materialize as a result of the merger, including
the following:
. the risk that the potential benefits sought in the merger might not be
realized;
. the management time associated with integrating Legato and OTG, with
headquarters on opposite coasts;
. sales channel conflicts over common territories, value added reseller
customer ownership and discounting;
. the financial reporting effects of combining future sales and revenue of
Legato and OTG;
. the possibility that the merger might not be completed;
. risks related to retaining key OTG employees;
. quarterly visibility with respect to backlog and pipeline;
. the effect of the public announcement of the merger on OTG's business,
including its employees and customers; and
. the risk factors described in OTG's filings with the SEC.
This discussion of information and factors considered and given weight by
Legato's board of directors is not intended to be exhaustive. The Legato board
of directors concluded that these factors were outweighed by the potential
benefits to be gained by the merger. In view of the variety of factors
considered in connection with its evaluation of the merger, Legato's board of
directors did not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determinations and recommendations. In addition, individual members of our
board of directors may have given different weights to different factors.
30
Recommendation of Legato's Board Of Directors
After careful consideration, the Legato board of directors, with one
director absent, on February 18, 2002, unanimously determined that the terms of
the merger agreement and the merger are advisable, and in the best interest of,
Legato and its stockholders and approved the merger agreement and the merger.
Legato's board of directors recommends that the stockholders of Legato vote
"FOR" the approval of the merger agreement.
OTG's Reasons for the Merger
The OTG board of directors determined that the merger is advisable, fair to
OTG's stockholders and in their best interests, and, with one director recused,
unanimously recommended the adoption of the merger agreement. In reaching its
determination to approve the merger, the merger agreement and the related
transactions, the OTG board of directors consulted with OTG's management, as
well as its financial and legal advisors, and considered, among others, the
following information and potential material factors:
. the possible benefits to be realized from a merger with Legato, including
the opportunity for the combined businesses of OTG and Legato to help
expand the market opportunity for OTG's current products, to offer a
broader suite of products and services encompassing software products and
professional services solutions;
. the opportunity for OTG's stockholders to receive a cash payment for their
shares while continuing to participate in the potential future growth and
success of OTG and Legato and the possible synergies to be realized from
the merger through their receipt of shares of Legato common stock in the
merger;
. the expectation that the stock portion of the consideration to be received
by OTG stockholders in the merger would be tax-free to those stockholders
for U.S. federal income tax purposes;
. the historical market prices and recent trading activity of shares of OTG
common stock and Legato common stock, including the fact that the offer
price per share of OTG common stock represented a premium to the average
closing prices of OTG common stock over various periods prior to February
19, 2002;
. the strategic viability and economic terms of possible alternatives to the
transaction with Legato, including continuing as an independent entity and
entering into strategic financing or business arrangements with other
industry participants or entering into a combination with another company
in the content management storage market or a related market;
. the potential impact of the merger on strategic partners, customers and
employees of OTG and the combined company;
. the likely reaction to the merger in the financial markets;
. the opinion of Goldman Sachs, OTG's financial advisor, to the effect that,
and based upon and subject to certain assumptions set forth in the
opinion, the 0.6876 shares of Legato common stock and $2.50 in cash
consideration to be received for each share of OTG common stock pursuant
to the merger agreement is fair to holders of OTG common stock from a
financial point of view;
. the terms of the merger agreement, including those relating to the board
recommendation, the holding of the OTG stockholder meeting, the $13.0
million termination fee payable by OTG under specified circumstances, and
the effect that the merger agreement and the existing arrangements with
Legato would have on OTG's ability to pursue or complete an alternative
transaction, and the fact that the merger agreement was the product of
arm's-length negotiations;
. the terms and impact on the proposed merger of the voting agreement and
the fact that the voting agreement would terminate if the merger agreement
is terminated; and
. the likelihood of completing the merger, given the limited conditions and
need for relatively few regulatory approvals or consents to consummate the
merger.
31
The OTG board of directors also identified and considered a number of
uncertainties and risks concerning the merger, including:
. the risk that the per share value of the consideration actually received
by OTG stockholders might be significantly less than the per share price
implied by the exchange ratio prior to the announcement of the merger
because the exchange ratio will not be adjusted for changes in market
price of either Legato common stock or OTG common stock;
. the substantial price volatility that Legato common stock has experienced
in the past year;
. the risk that the benefits sought in the merger and the related
transactions might not be achieved;
. the difficulty of integrating the businesses of OTG and Legato, and the
possible adverse effects that could result from the need for senior
management to focus significant time and effort on completing the merger
and integrating the businesses;
. the risk that OTG might suffer employee attrition or fail to attract key
personnel due to uncertainties associated with the merger, and that
customers may delay purchases of OTG's products until the merger is
completed;
. stockholder class action lawsuits pending against Legato, and the risks
associated with that litigation; and
. the risk that the merger might not be consummated and the other applicable
risks described in this document under "Risk Factors" beginning on page 11.
After considering the risks, the OTG board of directors concluded that the
positive factors outlined above outweighed the negative considerations.
The foregoing discussion of the information and factors considered by the
OTG board of directors is not intended to be exhaustive but is believed to
include the material factors considered by the OTG board of directors in
connection with its review of the proposed merger. In view of the variety of
factors considered, both positive and negative, as well as the complexity of
these matters, the OTG board of directors did not find it practical to, and did
not, quantify or otherwise assign relative weight to the specific factors
considered, and individual members of the OTG board may have given different
weights to different factors. In making its determinations and recommendations,
the OTG board as a whole viewed its determinations and recommendations based on
the totality of the information presented to and considered by it.
Recommendation of OTG's Board Of Directors
After careful consideration, the OTG board of directors, with one director
recused, on February 20, 2002, unanimously determined that the terms of the
merger agreement and the merger are advisable, and in the best interest of, OTG
and its stockholders and approved the merger agreement and the merger. The OTG
board of directors, with one director recused, recommends that the stockholders
of OTG vote "FOR" adoption of the merger agreement.
Opinion of JPMorgan H&Q
Pursuant to an engagement letter dated February 1, 2002, Legato retained
JPMorgan Securities Inc. as its financial advisor in connection with the
proposed transaction and to render an opinion to the Legato board of directors
as to the fairness to Legato of the consideration to be paid in the merger from
a financial point of view. JPMorgan H&Q was selected by Legato's board of
directors based on JPMorgan H&Q's qualifications, experience and reputation, as
well as JPMorgan H&Q's historic investment banking relationship and familiarity
with Legato. JPMorgan H&Q rendered its oral opinion to the Legato board of
directors on February 18, 2002 (as subsequently confirmed in writing on
February 20, 2002) that, as of that date, the consideration to be paid in the
merger was fair, from a financial point of view, to Legato. The amount of the
consideration was determined through negotiations between Legato and OTG and
not as a result of recommendations by JPMorgan H&Q.
32
THE FULL TEXT OF THE OPINION DELIVERED BY JPMORGAN H&Q TO THE LEGATO BOARD
OF DIRECTORS DATED FEBRUARY 20, 2002, WHICH SETS FORTH THE ASSUMPTIONS MADE,
GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF
REVIEW UNDERTAKEN BY JPMORGAN H&Q IN RENDERING ITS OPINION, IS ATTACHED AS
ANNEX B TO THIS DOCUMENT AND IS INCORPORATED HEREIN BY REFERENCE.
JPMORGAN H&Q'S OPINION IS DIRECTED TO THE LEGATO BOARD OF DIRECTORS AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO LEGATO OF THE
CONSIDERATION TO BE PAID IN THE MERGER. JPMORGAN H&Q'S OPINION DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY LEGATO STOCKHOLDER AS TO HOW TO VOTE WITH
RESPECT TO THE PROPOSED TRANSACTION.
IN FURNISHING ITS OPINION, JPMORGAN H&Q DID NOT ADMIT THAT IT IS AN EXPERT
WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, NOR DID
IT ADMIT THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING
OF THE SECURITIES ACT.
The summary of JPMorgan H&Q's opinion set forth below is qualified in its
entirety by reference to the full text of its opinion. Legato stockholders are
urged to read the opinion carefully in its entirety.
In connection with its review of the merger, and in arriving at its opinion,
JPMorgan H&Q, among other things:
. reviewed the merger agreement dated February 20, 2002;
. reviewed publicly available business and financial information concerning
Legato and OTG and the industry in which they operate;
. compared the proposed financial terms of the merger with the publicly
available financial terms of transactions involving companies JPMorgan H&Q
deemed relevant and the consideration received for such companies;
. compared the financial and operating performance of Legato and OTG with
publicly available information concerning other companies JPMorgan H&Q
deemed relevant and reviewed the current and historical market prices of
Legato and OTG common stock and publicly traded securities of the other
companies;
. reviewed external Wall Street research projections, as adjusted by members
of the managements of Legato and OTG, relating to their respective
businesses; and
. performed other financial studies and analyses and considered other
information as JPMorgan H&Q deemed appropriate for the purposes of the
opinion.
In giving its opinion, JPMorgan H&Q assumed and relied upon, without
independent verification, the accuracy and completeness of all information that
was publicly available or was furnished to JPMorgan H&Q by Legato and OTG, or
otherwise reviewed by JPMorgan H&Q, and JPMorgan H&Q did not assume any
responsibility or liability for that information. JPMorgan H&Q did not conduct
any valuation or appraisal of any of the assets or liabilities of Legato or
OTG, nor have any valuations or appraisals been provided to JPMorgan H&Q, nor
did it conduct a physical inspection of the properties and facilities of Legato
or OTG.
In relying on financial analyses and forecasts provided to JPMorgan H&Q,
JPMorgan H&Q assumed that they had been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management of Legato of the expected future results of operations and financial
condition of Legato and OTG to which such analyses or forecasts related.
JPMorgan H&Q also assumed that the merger would qualify as a tax-free
reorganization for United States federal income tax purposes, and that the other
33
transactions contemplated by the merger agreement would be consummated as
described in the merger agreement. JPMorgan H&Q relied as to all legal matters
relevant to rendering its opinion upon the advice of its counsel. JPMorgan H&Q
further assumed that all material governmental, regulatory or other consents
and approvals necessary for the consummation of the merger will be obtained
without any adverse effect on Legato or OTG or on the contemplated benefits of
the merger.
JPMorgan H&Q's opinion was necessarily based upon market, economic and other
conditions as in effect on, and that could be evaluated as of, the date of the
opinion and any subsequent developments in those conditions would require a
reevaluation of such opinion. JPMorgan H&Q does not have any obligation to
update, revise or reaffirm its opinion. JPMorgan H&Q expresses no opinion as to
the price at which Legato common stock may trade at any future time.
The preparation of a fairness opinion is a complex process and involves
various judgments and determinations as to the most appropriate and relevant
assumptions and financial analyses and the application of these methods to the
particular circumstances involved. Fairness opinions are therefore not
necessarily susceptible to partial analysis or summary description.
Accordingly, JPMorgan H&Q believes that its analyses and the summary set forth
below must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the following summary,
without considering all factors and analyses, could create an incomplete view
of the processes underlying the analyses performed by JPMorgan H&Q in
connection with its opinion. In arriving at its opinion, JPMorgan H&Q did not
attribute any particular weight to any analyses or factors considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. JPMorgan H&Q did not form an opinion as to whether
any individual analysis or factor (positive or negative), considered in
isolation, supported or failed to support the JPMorgan H&Q opinion.
In performing its analyses, JPMorgan H&Q made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Legato and OTG. The
analyses performed by JPMorgan H&Q are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by the analyses. The analyses were prepared solely as
part of the JPMorgan H&Q analysis of the fairness to Legato, from a financial
point of view, of the consideration to be used in the merger. Additionally,
analyses relating to the values of businesses do not purport to be appraisals
or to reflect the prices at which businesses actually may be acquired.
The following is a brief summary of the material financial analyses
performed by JPMorgan H&Q in connection with providing its opinion to the
Legato board of directors on February 18, 2002, as subsequently confirmed in
writing on February 20, 2002. Some of the summaries of the financial analyses
include information presented in tabular format. To fully understand the
financial analyses, the tables should be read together with the text of each
summary. Considering the data set forth in the tables without considering the
narrative description of the financial analyses, including the methodologies
and assumptions underlying the analyses, could create a misleading or
incomplete view of the financial analyses.
Pro Forma Merger Analysis. JPMorgan H&Q analyzed the pro forma impact of
the merger on the estimated financial results of Legato, for the fiscal year
ending December 31, 2002. Projections for Legato and OTG were based on
published Wall Street research estimates. OTG's 2002 estimated operating
results were adjusted to conform to Legato's accounting policies. JPMorgan H&Q
observed that, excluding the impact of goodwill impairment and the amortization
of other tangibles and intangibles written-off in the acquisition, the
pro forma accretive or dilutive impact of the merger on Legato's estimated
fiscal 2002 cash earnings per share was accretive, based on an assumed closing
date of May 15, 2002 and excluding any synergies.
34
Contribution Analysis. JPMorgan H&Q derived implied offer prices based on
Legato's and OTG's relative income statement contributions to the combined
entity for calendar years 2001 and 2002. In addition to comparing Wall Street
research estimates, JPMorgan H&Q evaluated the relative contributions using
adjusted OTG financials based on Wall Street research estimates adjusted to
conform to Legato's accounting policies. Implied offer prices were derived by
calculating the implied value per share for OTG by applying the contribution
percentage to the enterprise value of the combined entity, subtracting the net
debt of OTG and dividing by the number of diluted shares outstanding for OTG as
of February 15, 2002, the last trading day prior to the delivery of the oral
opinion on February 18, 2002. JPMorgan H&Q used published Wall Street research
estimates, adjusted by the managements of Legato and OTG, and disregarded any
purchase accounting period adjustments. The results of this analysis are as
follows:
OTG Implied OTG
Metric Contribution Offer Price
------ ------------ -----------
Actual 2001 revenue.............................. 21.1% $10.73
Estimated 2002 revenue........................... 23.4% $11.86
Adjusted 2002 revenue............................ 21.8% $11.07
Actual 2001 gross profit......................... 21.6% $10.96
Estimated 2002 gross profit...................... 23.5% $11.94
Adjusted 2002 gross profit....................... 21.8% $11.07
Analysis of Selected Public Companies. Using published Wall Street research
estimates, JPMorgan H&Q compared, among other things, trading and valuation
statistics for OTG to corresponding measures for nine publicly traded
comparable companies. The companies that JPMorgan H&Q reviewed in connection
with this analysis were:
. BMC Software, Inc. . NetIQ Corporation
. Computer Associates International, Inc. . Precise Software Solutions Ltd.
. Compuware Corporation . Quest Software, Inc.
. Embarcadero Technologies, Inc. . Veritas Software Corporation
. Legato Systems, Inc.
JPMorgan H&Q derived estimated revenue multiples to enterprise value for the
calendar year ending December 31, 2002 revenues of these public companies. The
results of this analysis are as follows:
Metric Median Multiple Mean Multiple
------ --------------- -------------
Enterprise Value 2002 Revenue............... 4.1x 4.7x
JPMorgan H&Q then applied the median and mean of these revenue multiples to
OTG's estimated calendar year 2002 revenues, adjusted to reflect Legato's
revenue recognition policy, to derive an implied equity value for OTG based on
these multiples, and an implied price per share based on the diluted number of
shares of OTG's common stock as of February 15, 2002. This methodology implied
OTG per share prices of $10.80, and $12.10 using 2002 median and mean of
revenue multiples, respectively. JPMorgan H&Q observed that the OTG offer price
per share of $11.75 as of February 18, 2002 based on an exchange ratio of
0.6876 and $2.50 cash consideration was in the estimated range of $10.80-$12.10
per share under this analysis.
JPMorgan H&Q noted that none of the selected companies was identical to OTG
and that any analysis of the selected companies necessarily involved complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that would necessarily affect the relative
trading values.
Analysis of Selected Precedent Transactions. JPMorgan H&Q reviewed the
purchase price paid in selected comparable transactions in the enterprise
software sector which JPMorgan H&Q deemed relevant. JPMorgan H&Q then compared
the aggregate values of these transactions as a multiple of estimated next
twelve month
35
revenues with the corresponding multiples for OTG as implied by the cash
consideration and exchange ratio in the merger. Using the mean and median
calendar year 2002 revenue multiples implied by the selected transactions,
JPMorgan H&Q derived an implied aggregate value for OTG which was then used to
derive an implied per share value range for OTG common stock of $8.80-$13.60
per share. JPMorgan H&Q observed that the OTG offer price per share of $11.75
as of February 18, 2002 based on an exchange ratio of 0.6876 and $2.50 cash
consideration was in the estimated range of $8.80-$13.60 per share under this
analysis.
Enterprise Value / 1-year Forward Revenue Multiple
----------------------------------------- --------
Mean............................................. 5.4x
Median........................................... 3.1x
Discounted Cash Flow Analysis. JPMorgan H&Q performed an analysis of the
implied present value per share of OTG common stock on a stand-alone basis
based on OTG's estimated free cash flows using Wall Street research estimates
that were publicly available as of February 18, 2002 as adjusted by members of
the management of OTG. JPMorgan H&Q observed that the OTG offer price per share
of $11.75 as of February 18, 2002 based on an exchange ratio of 0.6876 and
$2.50 cash consideration was in the estimated range of $11.10-$14.80 per share
under this analysis.
JPMorgan H&Q, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, strategic transactions, corporate restructurings,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
JPMorgan H&Q has acted as a financial advisor to the board of directors of
Legato in connection with the proposed merger, and JPMorgan H&Q will receive a
fee for its services, which include the rendering of its opinion.
In the past, JPMorgan H&Q has provided investment banking and other
financial advisory services to Legato and has received fees for rendering these
services. In the ordinary course of business, JPMorgan H&Q acts as a market
maker and broker in the publicly traded securities of Legato and OTG and
receives customary compensation in connection with those trading activities,
and also provides research coverage for Legato. In the ordinary course of
business, JPMorgan H&Q actively trades in the equity and derivative securities
of Legato and OTG for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities. JPMorgan H&Q may in the future provide investment banking or other
financial advisory services to Legato or OTG.
Pursuant to an engagement letter dated February 1, 2002, Legato has agreed
to pay JPMorgan H&Q a customary fee for its services, a portion of which is
payable in connection with delivery of the fairness opinion, and a portion of
which is payable upon consummation of the merger. Legato has also agreed to
reimburse JPMorgan H&Q for its reasonable out-of-pocket expenses and to
indemnify JPMorgan H&Q against liabilities, including liabilities under the
federal securities laws, relating to or arising out of JPMorgan H&Q's
engagement as financial advisor to the Legato board of directors.
Opinion of Goldman, Sachs & Co.
Goldman Sachs rendered its oral opinion to OTG's board of directors, which
was subsequently confirmed in writing, to the effect that based upon and
subject to the factors and assumptions set forth in the opinion, the
0.6876 shares of Legato common stock and $2.50 in cash consideration to be
received for each share of OTG common stock in the merger was fair from a
financial point of view to the holders of OTG common stock.
The full text of the written opinion of Goldman Sachs, dated February 20,
2002, which sets forth assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached as Annex C to this document. Goldman Sachs provided its
opinion for the information and assistance of OTG's board of directors in
connection with its consideration of the
36
merger. The Goldman Sachs opinion is not a recommendation as to how any holder
of OTG's common stock should vote with respect to the merger. OTG stockholders
are urged to, and should, read such opinion in its entirety.
In connection with rendering the opinion described above and performing its
related financial analyses, Goldman Sachs reviewed, among other things:
. the merger agreement;
. the Registration Statement on Form S-1, including the prospectus contained
therein dated March 10, 2000, of OTG filed in connection with the initial
public offering of the shares of common stock of OTG;
. the Annual Report to Stockholders and Annual Report on Form 10-K of OTG
for the year ended December 31, 2000, a draft, dated January 28, 2002, of
the Annual Report on Form 10-K of OTG for the year ended December 31,
2001, and Annual Reports to Stockholders and Annual Reports on Form 10-K
of Legato for the five years ended December 31, 2000;
. certain interim reports to stockholders and Quarterly Reports on Form 10-Q
of OTG and Legato;
. certain other communications from OTG and Legato to their respective
stockholders; and
. certain internal financial analyses and forecasts for OTG and Legato
prepared by their respective managements, including certain cost savings
and operating synergies projected by the managements of OTG and Legato to
result from the transaction contemplated by the merger agreement.
Goldman Sachs also held discussions with members of the senior managements
of OTG and Legato regarding their assessment of the strategic rationale for,
and the potential benefits of, the transaction contemplated by the merger
agreement and the past and current business operations, financial condition and
future prospects of their respective companies, including discussions with
members of the senior management of OTG regarding their assessment of the risks
and uncertainties of OTG achieving the internal financial forecasts prepared by
the management of OTG and with OTG and its outside counsel regarding the
pending stockholder litigation against Legato, including the possible outcomes
of such litigation.
In addition, Goldman Sachs:
. reviewed the reported price and trading activity for OTG common stock and
Legato common stock;
. compared certain financial and stock market information for OTG and Legato
with similar information for certain other companies the securities of
which are publicly traded; and
. reviewed the financial terms of certain recent business combinations in
the software industry specifically and in other industries generally and
performed such other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial, accounting, tax, legal and other information discussed with or
reviewed by it and assumed such accuracy and completeness for purposes of
rendering its opinion. In addition, Goldman Sachs has not made an independent
evaluation or appraisal of the assets and liabilities of OTG or Legato or any
of their subsidiaries and Goldman Sachs has not been furnished with any
evaluation or appraisal of either company or any of their subsidiaries. Goldman
Sachs assumed that OTG and Legato will obtain all material governmental,
regulatory or other consents, waivers and approvals in connection with the
consummation of the transactions contemplated by the merger agreement which, if
not obtained, would result in an adverse effect on OTG or Legato or on the
expected benefits of the transaction contemplated by the merger agreement.
Goldman Sachs noted that provisions of the merger agreement have the effect
that the OTG common stock owned by Mr. Kay and entities affiliated with him in
the aggregate will be converted into 0.6876 shares of
37
common stock of Legato and $2.50 in cash multiplied by the number of such
shares of common stock of OTG, but that the allocation of such aggregate
consideration among Mr. Kay and those entities may result in a different
consideration allocation than 0.6876 shares of common stock of Legato and $2.50
in cash per share of common stock of OTG among such holders; Goldman Sachs
expressed no view regarding those provisions of the merger agreement.
The following summarizes the material financial analyses used by Goldman
Sachs in connection with providing its opinion to the board of directors of
OTG. The summary does not purport to be a complete description of the analyses
performed or factors considered by Goldman Sachs. The order of the analyses
described does not represent relative importance or weight given to those
analyses by Goldman Sachs.
The following summaries of financial analyses include information presented
in tabular format. You should read these tables together with the text of each
summary.
Historical Stock Trading Analysis. Goldman Sachs reviewed the historical
trading prices for OTG common stock and Legato common stock for the period from
the initial public offerings of the common stock of OTG and Legato,
respectively, to February 15, 2002. Goldman Sachs observed that the high, low
and average closing prices of shares of OTG common stock from the initial
public offering of the common stock of OTG to February 15, 2002 were $56.19,
$4.50 and $16.89, respectively. Goldman Sachs observed that the high, low and
average closing prices of shares of OTG common stock for the six-month period
ended February 15, 2002 were $12.47, $4.50 and $7.88, respectively. OTG common
stock closed at $10.03 per share on February 15, 2002. Goldman Sachs observed
that the high, low and average closing prices of shares of Legato common stock
from the initial public offering of the common stock of Legato to February 15,
2002 were $79.25, $2.94 and $15.99, respectively. Goldman Sachs observed that
the high, low and average closing prices of shares of Legato common stock for
the six-month period ended February 15, 2002 were $17.43, $4.76 and $10.80,
respectively. Legato common stock closed at $13.45 per share on February 15,
2002.
Goldman Sachs also described, for the six-month period ended February 15,
2002, the comparative stock performance of the common stock of (a) OTG; (b)
Legato; (c) a composite of storage and systems management software companies
consisting of the following companies: BMC Software, Inc., Computer Associates
International, Inc., StorageNetworks, Inc. and Veritas Software Corporation;
(d) a composite of storage hardware companies consisting of the following
companies: Advanced Digital Information Corporation, Compaq Computer
Corporation, Quantum Corporation, EMC Corporation, Hewlett-Packard Company,
Maxtor Corporation, Network Appliance, Inc. and Storage Technology Corporation;
and (e) the Nasdaq Composite Index. Goldman Sachs observed that over the
six-month period ended February 15, 2002, the closing market prices for each
specified company or group appreciated or depreciated as set forth below:
Comparative Stock Performance
Six Months
Total
Appreciation
------------
OTG........................................................ 59%
Legato..................................................... 41%
Storage and Systems Management Software.................... -14%
Storage Hardware........................................... 9%
Nasdaq Composite Index..................................... -6%
Goldman Sachs also reviewed historical ratios for the exchange of OTG common
stock into Legato common stock, for selected periods ended February 15, 2002.
These ratios were based on the daily closing prices, obtained from FactSet
Research Systems Inc., a supplier of online integrated financial and economic
information, of the
38
OTG common stock and the Legato common stock during the period, as adjusted to
reflect the proportion of the total consideration to be paid in Legato common
stock. This analysis indicated the following historical exchange ratios,
adjusted for the $2.50 per share cash consideration, and implied premiums
relative to the exchange ratio of 0.6876 of a share of Legato common stock for
each share of OTG common stock as provided in the merger agreement:
Historical Adjusted Exchange Ratio Analysis
Historical
Adjusted
Exchange
Ratios Premium
---------- -------
30-day average................................... 0.5801 18.5%
60-day average................................... 0.5780 19.0%
90-day average................................... 0.5621 22.3%
Goldman Sachs also reviewed the historical closing price for OTG common
stock on February 15, 2002 and the average closing price of OTG common stock
for certain periods ended on February 15, 2002, and compared the closing prices
to the $11.75 implied per share value of the consideration to be received by
the holders of OTG common stock in the merger based on the closing price of
Legato common stock on February 15, 2002. The following table presents the
premium of such implied per share value to the closing prices of OTG common
stock for the periods presented:
OTG Premium Analysis
Premium
-------
February 15, 2002.......................................... 17.1%
10-day average............................................. 13.8%
30-day average............................................. 5.9%
60-day average............................................. 17.0%
90-day average............................................. 33.8%
180-day average............................................ 58.2%
One-year average........................................... 60.4%
Six-month high............................................. -5.8%
Six-month low.............................................. 161.1%
Goldman Sachs also reviewed the closing prices of OTG shares and Legato
shares as of February 19, 2002, the implied value per OTG share of the
consideration to be received by the holders of OTG shares in the merger based
on the closing price of Legato shares as of February 19, 2002 and the premium
of such implied value per OTG share to the closing price of OTG shares on
February 19, 2002.
Selected Companies Analysis. Goldman Sachs reviewed and compared selected
financial multiples for OTG and Legato with corresponding financial multiples
for the following companies in the storage and systems management software and
storage hardware industries: (a) Advanced Digital Information Corporation; (b)
BMC Software, Inc.; (c) Computer Associates International, Inc.; (d) Maxtor
Corporation; (e) Network Appliance, Inc.; (f) Quantum Corporation; (g)
StorageNetworks, Inc.; (h) Storage Technology Corporation; and (i) Veritas
Software Corporation.
Goldman Sachs selected the aforementioned companies for comparison because
they are publicly traded companies in the storage and systems management
software and storage hardware industries with operations that for purposes of
analysis may be considered similar, in varying degrees, to the operations of
OTG and Legato. The
39
multiples were calculated using the closing price per share for OTG and Legato
and each of the selected companies on February 15, 2002, Wall Street research
revenue estimates and Institutional Brokers Estimate System, or IBES, earnings
estimates.
The following table lists the enterprise value-to-revenue multiples for OTG,
Legato and the comparison companies based on 2002 revenue estimates.
Enterprise Value-to-Revenue Multiples
2002E
-----
Veritas Software Corporation....................................... 8.4x
Network Appliance, Inc............................................. 7.2x
Legato............................................................. 4.1x
OTG................................................................ 3.4x
Computer Associates International, Inc............................. 3.2x
BMC Software, Inc.................................................. 2.5x
Advanced Digital Information Corporation........................... 1.6x
Quantum Corporation................................................ 1.3x
StorageNetworks, Inc............................................... 1.2x
Storage Technology Corporation..................................... 1.0x
Maxtor Corporation................................................. 0.3x
The following table lists the price-to-earnings per share multiples for OTG,
Legato and the comparison companies based on 2003 earnings estimates.
Price-to-Earnings Per Share Multiples
2003E
--------------
Legato..................................................... 70.8x
Network Appliance, Inc..................................... 67.3x
Veritas Software Corporation............................... 40.7x
OTG........................................................ 35.8x
Quantum Corporation........................................ 35.1x
BMC Software, Inc.......................................... 31.8x
Advanced Digital Information Corporation................... 25.7x
Maxtor Corporation......................................... 25.1x
Storage Technology Corporation............................. 21.4x
Computer Associates International, Inc..................... 9.1x
StorageNetworks, Inc....................................... Not Meaningful
Pro Forma Merger Analysis. Goldman Sachs performed pro forma analyses of
the financial impact of the transaction contemplated by the merger agreement on
Legato based on estimates for OTG prepared by the management of OTG, estimates
for Legato prepared by the management of Legato, estimates for OTG and Legato
provided by IBES, synergies resulting from the transaction contemplated by the
merger agreement estimated by the managements of OTG and Legato, and publicly
available information. Goldman Sachs compared the estimated 2002 earnings per
share of Legato on a stand-alone basis to the estimated 2002 earnings per share
of the combined company based on the consideration to be paid in the merger and
assuming, in the alternative, no synergies are achieved and that the synergies
estimated by the managements of OTG and Legato are achieved. These analyses
indicated that the transaction contemplated by the merger agreement would be
accretive to the estimated 2002 earnings per share of Legato.
40
Contribution Analysis. Goldman Sachs reviewed certain historical and
estimated future operating and financial information for OTG and Legato based
on estimates for OTG prepared by the management of OTG, estimates for Legato
prepared by the management of Legato, Wall Street research analyst estimates
dated January 30, 2002 for OTG, median Wall Street research estimates for
Legato and publicly available information. In addition, this analysis was based
on an implied ownership by the OTG stockholders of 21% of the equity of the
combined company, or the equivalent of 24.7% when adjusted for the $2.50 per
share cash consideration. The information that Goldman Sachs reviewed included
estimated sales, gross profit and net income for 2002 and 2003. Goldman Sachs
analyzed the relative contributions of each of OTG and Legato for each of the
aforementioned metrics to the combined company on a pro forma basis before
taking into account any of the expected synergies estimated by the managements
of OTG and Legato to be achievable following the consummation of the merger.
The following table presents the results of this analysis:
Contribution of OTG to the Combined Company
Equity Market Value.................................................. 22.0%
Sales Gross Profit Net Income
--------------------- --------------------- ---------------------
Based on Based on Based on
Wall Wall Wall
Based on Street Based on Street Based on Street
Managements' Research Managements' Research Managements' Research
Year Estimates Estimates Estimates Estimates Estimates Estimates
---- ------------ --------- ------------ --------- ------------ ---------
2002E................... 24.9% 24.8% 25.4% 25.0% 54.2% 84.1%
2003E................... 27.7% 25.3% 28.1% 25.8% 39.6% 35.7%
Pending Legato Litigation. Goldman Sachs calculated ranges of hypothetical
impacts on the premium to be realized by OTG's stockholders in the transaction
and on Legato's estimated 2002 earnings per share, in each case resulting from
a hypothetical settlement of the pending stockholder litigation against Legato.
These calculations were based on (a) Legato management's 2002 earnings per
share estimate for Legato, (b) a range of hypothetical settlement amounts for
the litigation which OTG management told Goldman Sachs to use, (c) a
hypothetical settlement funded by a combination of cash and shares of Legato
common stock and (d) a portion of the settlement amount being satisfied by
available coverage under Legato's existing insurance policies.
For purposes of the premium analysis, Goldman Sachs calculated a range of
hypothetical reductions, resulting from the range of hypothetical litigation
settlement amounts, in the implied value per share of OTG common stock of the
merger consideration (using the February 15, 2002 closing price of shares of
Legato common stock) by dividing the hypothetical range of litigation
settlement amounts, as adjusted for the satisfaction of a portion of the
settlement by available coverage under Legato's existing insurance policies,
and as adjusted for the fraction of the combined company to be owned by OTG's
stockholders, by the fully diluted number of shares of OTG common stock as of
February 15, 2002. All cases considered in this analysis indicated that the
implied value per share of OTG common stock of the merger consideration, after
giving effect to reductions resulting from the range of hypothetical litigation
settlement amounts, represented a premium to the closing price of shares of OTG
common stock on February 15, 2002. This analysis does not necessarily reflect
the actual effect that a settlement of the stockholder litigation might have on
the market price of shares of Legato common stock. For purposes of the earnings
analysis, Goldman Sachs calculated a range of hypothetical reductions,
resulting from the range of hypothetical litigation settlement amounts, in
Legato's estimated 2002 earnings per share.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses and did not attribute
any particular weight to any factor or analysis considered by it. Rather,
Goldman
41
Sachs made its determination as to fairness on the basis of its experience and
professional judgment after considering the results of all of its analyses. No
company or transaction used in the above analyses as a comparison is directly
comparable to OTG or Legato or the contemplated transaction. The analyses were
prepared solely for purposes of providing an opinion to the OTG board of
directors as to the fairness from a financial point of view to the holders of
OTG stock of the 0.6876 shares of common stock of Legato and $2.50 in cash
consideration to be received for each share of OTG common stock by the holders
pursuant to the merger agreement. The analyses do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually
may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by the analyses. Because the analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors, none of OTG,
Legato, Goldman Sachs or any other person assumes responsibility if future
results are materially different from those forecast.
As described above, Goldman Sachs' opinion to the board of directors of OTG
was one of many factors taken into consideration by the board of directors of
OTG in making its determination to approve the transaction contemplated by the
merger agreement. The foregoing summary does not purport to be a complete
description of the analyses performed by Goldman Sachs in connection with the
fairness opinion and is qualified in its entirety by reference to the written
opinion of Goldman Sachs attached as Annex C to this document.
Goldman Sachs, as part of its investment banking business, is continually
engaged in performing financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for estate, corporate and
other purposes. Goldman Sachs is familiar with OTG having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the merger agreement. Goldman Sachs also has provided
certain investment banking services to Legato from time to time, including
having acted as Legato's financial advisor in connection with its acquisition
of Intelliguard Software, Inc. in April 1999. In addition, Goldman Sachs may
provide investment banking services to Legato in the future. The board of
directors of OTG selected Goldman Sachs as its financial advisor because it is
an internationally recognized investment banking firm that has substantial
experience in transactions similar to the merger. Goldman Sachs provides a full
range of financial advisory and securities services and, in the course of its
normal trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of OTG or Legato for its own
account and for the accounts of customers.
Pursuant to the terms of its engagement letter with Goldman Sachs, OTG has
agreed to pay customary fees payable upon consummation of the transaction
contemplated by the merger agreement. OTG also has agreed to reimburse Goldman
Sachs for its reasonable out-of-pocket expenses, including attorneys' fees and
disbursements, and to indemnify Goldman Sachs and related persons against
various liabilities in connection with its engagement, including certain
liabilities under the federal securities laws.
Interests of OTG Directors and Officers in the Merger
In considering the recommendation of the OTG board of directors to vote for
the proposal to adopt the merger agreement, stockholders of OTG should be aware
that members of OTG's management team have agreements or arrangements that
provide them with benefits if the merger is completed which results in those
persons having interests in the merger that differ from those of other OTG
stockholders. The OTG board of directors was aware of these agreements in
determining to recommend to the OTG stockholders that they vote for the
proposal to adopt the merger agreement.
Appointment of Richard A. Kay to Legato Board of Directors, Stock Options
and Employment Arrangements. Upon the completion of the merger, Legato has
agreed to appoint Mr. Richard A. Kay, OTG's chairman, chief executive officer
and president, as a director of Legato. Mr. Kay is expected to become the chief
executive officer of the OTG business group of Legato, reporting to Mr. Wright.
42
Pursuant to Mr. Kay's existing employment agreement with OTG, in the event
that OTG terminates him without cause (as defined in the Agreement) or he
terminates his employment with cause, following a merger of OTG, he is entitled
to severance benefits, including an amount equal to the greater of the
compensation remaining to be paid to him through December 31, 2003, or 12
months salary and annual bonus. Under this agreement, Mr. Kay is also entitled
to a gross-up payment to be made by OTG in the amount of any excise taxes
imposed on the executive in the event of a change of control of OTG.
Upon completion of the merger, stock options granted to Mr. Kay in May 2001
to purchase 250,000 shares of OTG common stock, with an exercise price equal to
the then current market price of $6.25 per share, will become fully vested.
Allocation of Merger Consideration and Voting Agreement. The merger
agreement allocates the consideration to be received by Mr. Kay and some of the
family trust entities for which he is entitled to act in a manner that is
different than other OTG stockholders. This allocation does not increase the
total merger consideration paid by Legato in connection with the merger or paid
to Mr. Kay and the family trust entities. The total merger consideration, stock
and cash, that would otherwise have been issuable to Mr. Kay and those entities
will be allocated to provide Mr. Kay with an additional amount in cash equal to
the amount those entities would have otherwise received, and the other entities
with the number of shares of Legato common stock Mr. Kay would have otherwise
received, having a value, as of February 20, 2002, equal to the additional cash
Mr. Kay received.
In connection with entering into the merger agreement, Legato required Mr.
Kay and entities for which he is entitled to act to execute a voting agreement
and proxy which among other things, restricts the transfer of those shares. See
"--Voting Agreement and Proxy" on page 59.
OTG Officers' Employment and Arrangements with Legato. In connection with
the merger agreement, Legato required that the following individuals enter into
new employment arrangements with Legato:
Expected position in the
Name Title with OTG OTG business group of Legato
---- -------------- ----------------------------
Ms. Amena Ali senior vice president, marketing senior vice president, marketing
and strategy and strategy
Mr. F. William Caple executive vice president, executive vice president
director and secretary
Mr. Michael J. Del Rosso chief technology officer chief technology officer
Mr. Grant Wagner senior vice president of sales senior vice president of
worldwide sales
The agreements take effect upon the consummation of the merger and would
replace the current OTG arrangements with those individuals. Among other
things, each of these agreements provides for the payment of salaries and
bonuses. Pursuant to the new agreements, upon completion of the merger, in
exchange for waivers of existing rights to benefits and accelerated vesting
with respect to outstanding OTG options, each of Ms. Ali and Messrs. Caple, Del
Rosso and Wagner, would receive:
. severance payments in an amount equal to twelve months of his or her base
salary, and a pro rata share of his or her annual bonus, as well as the
provision of fringe benefits for twelve months after the date of
termination;
. a retention bonus in the amount of $100,000, to be paid in two equal
installments on July 1, 2003 and December 31, 2003 if employee completes
continuous employment with Legato from the closing of the
43
merger through December 31, 2003 or if he or she is terminated prior to
such time other than for cause or if he or she terminates for good reason
(as defined in the agreements); and
. options to purchase 75,000 shares of Legato common stock with an exercise
price equal to the closing price of Legato common stock on the date of the
closing of the merger.
Mr. Ronald W. Kaiser, chief financial officer and treasurer of OTG, entered
into an amendment to his existing employment agreement with OTG, which would
take effect upon the consummation of the merger. Pursuant to the amendment to
Mr. Kaiser's employment agreement with OTG, Mr. Kaiser agreed to waive his
right to accelerated vesting of his stock options upon the completion of the
merger until the earliest of December 31, 2002, or at such earlier time as may
be mutually agreed to or upon his termination without cause by Legato, in
exchange for the right to receive a cash payment of $60,000 upon the completion
of his continuous service from the closing of the merger through December 31,
2002, or upon his earlier termination without cause by Legato. Under the
amendment, Mr. Kaiser is only entitled to accelerated vesting of his stock
options if he completes continuous service through December 31, 2002 or is
earlier terminated as described in the prior sentence.
Existing Employment and Severance Arrangements with OTG Officers. Each of
OTG's executive officers, Messrs. Kay, Caple and Kaiser, are parties to
agreements with OTG. Mr. Kay's employment agreement is described above. Under
their respective agreements, Mr. Caple and Mr. Kaiser are entitled to severance
payments including 12 months salary in the event that either of them are
terminated by OTG without cause or if they terminate their employment for good
reason. Furthermore, each of Mr. Caple and Mr. Kaiser are entitled to
accelerated vesting with respect to 50% of the outstanding options held by them
upon a change of control of OTG. If Mr. Caple or Mr. Kaiser is terminated
within 12 months of the change of control, other than for cause, then all
outstanding options held by the terminated individual will become vested
immediately. Finally, each is also entitled to a gross-up payment to be made by
OTG in the amount of any excise taxes imposed on them in the event of a change
of control of OTG. Upon completion of the merger, Mr. Caple's agreement would
be replaced and Mr. Kaiser's agreement would be amended as described above.
In addition, other OTG officers who are not executive officers are parties
to employment or severance agreements with OTG and will have options which by
their terms will accelerate upon completion of a change of control of OTG, such
as the merger. In the case of Ms. Ali and Messrs. Del Rosso and Wagner, upon
completion of the merger, these agreements would be replaced by the agreements
described above.
Consulting and Investment Banking Arrangements. Mr. John Burton, a member
of the OTG board of directors, is the managing director of Updata Capital, Inc.
Updata provides consulting services for Legato. Upon completion of the merger,
Updata will receive a fee of $500,000 from OTG in connection with services
rendered to OTG relating to the merger. Mr. Burton recused himself from the OTG
board deliberations concerning the transaction.
Indemnification and Insurance. The merger agreement provides that, upon
completion of the merger, Legato will indemnify and hold harmless, and pay all
applicable expenses to, all past and present directors and officers of OTG and
its subsidiaries in all of their capacities, for acts or omissions occurring at
or prior to the completion of the merger:
. to the same extent they were indemnified pursuant to OTG's certificate of
incorporation, bylaws and indemnification agreements with any directors
and officers of OTG and its subsidiaries; and
. to the fullest extent permitted by law, in each case for acts or omissions.
The merger agreement also provides that OTG will purchase a run-off
insurance policy covering claims made in the six years after the completion of
the merger for a premium of up to $3.0 million, or substitute for the current
policy a policy or policies with comparable coverage. If coverage should lapse,
Legato is required to provide insurance, but Legato will not be required to pay
aggregate premiums for insurance in excess of 150% of
44
the aggregate premiums paid by OTG for coverage of its directors and officers
in the twelve-month period prior to the completion of the merger.
Appraisal Rights
Under Delaware law, OTG stockholders are entitled to dissenters' appraisal
rights in connection with the merger. Section 262 of the Delaware General
Corporation Law will govern the exercise of those appraisal rights. The full
text of Section 262 is attached as Annex D to this document for your review.
The following summary of the provisions of Section 262 is not intended to be
a complete statement of its provisions and is qualified in its entirety by
reference to the full text of Annex D. If a holder of OTG common stock:
. files written notice with OTG of an intention to exercise rights to
appraisal of shares prior to the special meeting;
. does not vote in favor of the merger; and
. follows the procedures set forth in Section 262,
the holder will be entitled to be paid the fair value of the shares of OTG
common stock as to which appraisal rights have been perfected. The fair value
of shares of OTG common stock will be determined by the Delaware Court of
Chancery, exclusive of any element of value arising from the merger. A vote
against the merger will not, by itself, constitute appropriate demand for
appraisal rights under Section 262.
The shares of OTG common stock with respect to which holders have perfected
their appraisal rights in accordance with Section 262 and have not effectively
withdrawn or lost their appraisal rights are referred to as "dissenting shares."
Appraisal rights are available only to the record holder of shares. If you
wish to exercise appraisal rights but have a beneficial interest in shares
which are held of record by or in the name of another person, like a broker or
nominee, you should act promptly to cause the record holder to follow the
procedures set forth in Section 262 to perfect your appraisal rights. A demand
for appraisal should be signed by or on behalf of the stockholder exactly as
the stockholder's name appears on the stockholder's stock certificates.
. If the shares are owned of record in a fiduciary capacity such as by a
trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person,
as in a joint tenancy or tenancy in common, the demand should be executed
by or on behalf of all joint owners. An authorized agent, including one or
more joint owners, may execute a demand for appraisal on behalf of a
record holder; however, in the demand the agent must identify the record
owner or owners and expressly disclose that the agent is executing the
demand as an agent or the record owner or owners.
. A record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares
held for one or more beneficial owners and not exercise rights with
respect to the shares held for other beneficial owners. In that case, the
written demand should state the number of shares for which appraisal
rights are being demanded.
When no number of shares is stated, the demand will be presumed to cover all
shares held of record by the holder. If you demand appraisal of your shares
under Section 262 and you fail to perfect, or effectively withdraw or lose,
your right to appraisal, your shares will be converted into a right to receive
the merger consideration in accordance with the terms of the merger agreement.
Dissenting shares lose their status as dissenting shares if:
. the merger is abandoned;
. the dissenting stockholder fails to make a timely written demand for
appraisal;
45
. the dissenting shares are voted in favor of adoption of the merger
agreement;
. neither OTG nor the dissenting stockholder files a complaint or intervenes
in a pending action within 120 days after the effective date of the
merger; or
. the dissenting stockholder delivers to OTG within 60 days of the effective
date of the merger, or thereafter with OTG's approval, a written
withdrawal of the stockholder's demand for appraisal of the dissenting
shares, although no appraisal proceeding in the Delaware Court of Chancery
may be dismissed as to any stockholder without the approval of the court.
Within ten days after the effective date of the merger for cash
consideration, OTG must mail a notice to all stockholders who have complied
with the procedures described above, notifying stockholders of the effective
date of the merger. Within 120 days after the effective date, holders of OTG
common stock may file a petition in the Delaware Court of Chancery for the
appraisal of their shares, although they may, within 60 days of the effective
date, withdraw their demand for appraisal. Within 120 days of the effective
date, the holders of dissenting shares may also, upon written request, receive
from OTG a statement setting forth the aggregate number of shares with respect
to which demands for appraisals have been received.
Failure to follow the steps required by Section 262 for perfecting appraisal
rights may result in the loss of your appraisal rights, in which event you will
be entitled to receive the merger consideration with respect to the dissenting
shares in accordance with the merger agreement. In view of the complexity of
the provisions of Section 262, if you are considering objecting to the merger,
you should consult your own legal advisor.
Material United States Federal Income Tax Consequences of the Merger
The following discussion describes the material federal income tax
consequences of the merger generally applicable to the OTG stockholders upon
the exchange of their OTG common stock for Legato common stock and cash in the
merger. This discussion addresses only those stockholders who hold OTG common
stock as a capital asset and will hold Legato common stock received in the
merger as a capital asset.
This discussion does not address all federal income tax considerations that
may be relevant to particular stockholders in light of their individual
circumstances (including, in particular, the tax consequences of the merger to
Mr. Kay and the entities for which he serves as trustee), to stockholders that
are subject to special rules, like financial institutions, tax-exempt
organizations, insurance companies, dealers in securities and foreign
stockholders, to stockholders who hold OTG common stock as part of a straddle,
hedge or conversion transaction, to stockholders who acquired OTG common stock
pursuant to the exercise of employee stock options or otherwise as
compensation, to stockholders who are deemed to receive Legato common stock or
cash in the merger in exchange for services or property, other than solely OTG
common stock, or to stockholders whose shares are qualified small business
stock for purposes of Section 1202 of the Internal Revenue Code of 1986, as
amended (the "Code").
The following discussion is based upon and subject to the current provisions
of the Code, applicable Treasury Regulations, judicial decisions and current
administrative rulings, all of which are subject to change, possibly on a
retroactive basis. Tax consequences under state, local, foreign and other laws
are not addressed in this discussion. You are advised to consult your tax
advisor as to the particular facts and circumstances which may be unique to you
and also as to any estate, gift, state, local or foreign tax considerations
arising out of the merger.
Based upon the assumptions and representations referred to in this
discussion, Brobeck, Phleger & Harrison LLP, counsel to Legato, has rendered an
opinion to Legato and Hale and Dorr LLP, counsel to OTG, has rendered an
opinion to OTG, that the merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Code and that this discussion correctly
describes certain material federal income tax consequences generally applicable
to the OTG stockholders upon the exchange of their shares of OTG common stock
for shares of Legato common stock and cash in the merger.
46
In addition, it is a condition to the completion of the merger that Legato
and OTG each receive an opinion from their respective counsel confirming their
opinions that the merger will constitute a reorganization. If either Legato or
OTG waives this condition to the merger or there is a material change in the
anticipated tax consequences of the merger prior to the closing, the parties
will recirculate this document and resolicit the vote of the OTG stockholders.
The tax opinions of Legato's and OTG's counsel are conditioned upon the
following:
. the truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement and in certificates received
from Legato and OTG examined and relied upon by Brobeck, Phleger &
Harrison LLP and Hale and Dorr LLP in connection with the merger;
. that all covenants contained in the merger agreement will be performed
without waiver or breach of any material provision;
. that the merger will be duly effected under applicable state law; and
. the assumptions specified in the opinions.
Qualification of the merger as a "reorganization" will result in the
following federal income tax consequences to the OTG stockholders:
Exchange of OTG Common Stock for Legato Common Stock and Cash. An OTG
stockholder will recognize gain (but not loss) limited to the lesser of (a) the
amount of cash received and (b) the amount by which the fair market value of
the Legato common stock and the cash received in the merger exceeds the
stockholder's adjusted tax basis in the OTG shares surrendered. For this
purpose, an OTG stockholder must calculate gain or loss separately for each
share of OTG common stock surrendered in the merger and may not offset a loss
recognized on one share against gain recognized on another share.
An OTG stockholder will be required to treat any gain recognized upon the
merger as capital gain or dividend income based on the rules prescribed under
Sections 356 and 302 of the Code. Under these rules, each OTG stockholder will
be treated for federal income tax purposes as if such stockholder had received
only Legato common stock in the merger and immediately thereafter Legato had
redeemed part of such stock in exchange for the cash actually distributed to
the stockholder in the merger. The gain recognized by an OTG stockholder on the
exchange will be taxed as capital gain if the deemed redemption from the
stockholder (a) is a "substantially disproportionate redemption" of stock with
respect to the stockholder, or (b) is "not essentially equivalent to a
dividend" with respect to the stockholder. For purposes of testing the deemed
redemption under these rules, an OTG stockholder will be considered to own,
after the merger, Legato common stock owned, and in some cases constructively
owned, by some individuals and entities related to the stockholder, as well as
any Legato common stock that such stockholder, or related individuals or
entities, has the right to acquire upon the exercise or conversion of options.
The deemed redemption of an OTG stockholder's Legato common stock will be a
"substantially disproportionate redemption" if, as a result of the deemed
redemption, the ratio determined by dividing the number of shares of Legato
common stock owned by the stockholder immediately after the merger by the total
number of outstanding shares of Legato common stock is less than 80% of the
same ratio calculated as if only Legato common stock, including the number of
shares of Legato common stock with a value, determined at the effective time of
the merger, equal to the cash portion of the merger consideration, were issued
to the OTG stockholder in the merger.
The deemed redemption of an OTG stockholder's Legato common stock will be
"not essentially equivalent to a dividend" if the stockholder experiences a
"meaningful reduction" in the stockholder's proportionate equity interest in
Legato by reason of the deemed redemption. Although there are no definitive
rules for determining when a meaningful reduction has occurred, the Internal
Revenue Service has indicated in published rulings that a
47
payment in redemption of stock will not be characterized as a dividend if the
stockholder's percentage ownership interest in the subject corporation prior to
the redemption is minimal, the stockholder exercises no control over the
affairs of the corporation, and the stockholder's percentage ownership interest
in the corporation is reduced in the deemed redemption.
If neither of the redemption tests set forth above is satisfied, an OTG
stockholder will be treated as having received a dividend equal to the amount
of the stockholder's recognized gain, assuming that the stockholder's ratable
share of the accumulated earnings and profits of OTG, and possibly of Legato,
equals or exceeds that recognized gain.
An OTG stockholder's basis in the Legato shares received will equal the
stockholder's adjusted basis the stockholder's OTG shares increased by any
taxable gain recognized as a result of the merger and reduced by the amount of
cash received in the merger. An OTG stockholder's holding period of the Legato
shares received will include the holding period of the OTG shares surrendered.
Cash For Fractional Shares. An OTG stockholder who receives cash in lieu
of a fractional share of Legato common stock will be treated as having received
the fractional share pursuant to the merger and then as having exchanged the
fractional share for cash in a redemption by Legato. The amount of any gain or
loss upon this deemed redemption will be equal to the difference between the
ratable portion of the tax basis of OTG common stock exchanged in the merger
that is allocated to the fractional share and the cash received for the
fractional share. Any gain or loss will constitute long-term capital gain or
loss if OTG common stock has been held by the holder for more than one year at
the time of the consummation of the merger.
Reporting Requirements. Each holder of OTG common stock that receives
Legato common stock in the merger will be required to retain records and file
with the stockholder's federal income tax return a statement setting forth
facts relating to the merger. Additionally, unless an OTG stockholder provides
a Form W-9 statement of its federal identification number or otherwise provides
evidence of an exemption from withholding taxes, the cash payment received by
that stockholder in connection with the merger will be subject to backup
withholding tax. Amounts withheld may be refunded upon filing an appropriate
tax return with the Internal Revenue Service.
No rulings have been or will be requested from the Internal Revenue Service
with respect to any of the matters addressed in this discussion. The tax
opinions of counsel referred to herein will not bind the Internal Revenue
Service, and the Internal Revenue Service may sustain a position contrary to
the tax opinions. A successful Internal Revenue Service challenge to the
"reorganization" status of the merger would result in an OTG stockholder
recognizing taxable gain or loss with respect to each share of OTG common stock
surrendered equal to the difference between the stockholder's basis in the OTG
share and the fair market value, as of the effective time of the merger, of the
Legato common stock and cash received in exchange therefor. In that case, an
OTG stockholder's aggregate basis in the Legato common stock so received would
be equal to the fair market value of the stock, and the stockholder's holding
period for such stock would begin the day after the merger. In addition, a
successful Internal Revenue Service challenge to the reorganization status of
the merger would result in OTG recognizing taxable gain in an amount equal to
the excess of the fair market value of its assets as of the effective time of
the merger over its tax basis in the assets at such time.
Regulatory Matters
Antitrust Considerations. The merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, which prevents specified
transactions from being completed until required information and materials are
furnished to the Antitrust Division of the Department of Justice and the
Federal Trade Commission and specified waiting periods are terminated or
expire. Early termination of this waiting period was granted on March 22, 2002.
48
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds after expiration of
the waiting period. Accordingly, at any time before or after the completion of
the merger, either the Antitrust Division of the Department of Justice or the
Federal Trade Commission could take action under the antitrust laws as it deems
necessary or desirable in the public interest, or other persons could take
action under the antitrust laws.
Additionally, at any time before or after the completion of the merger, any
state could take action under the antitrust laws as it deems necessary or
desirable in the public interest. There can be no assurance that a challenge to
the merger will not be made or that, if a challenge is made, Legato and OTG
will prevail.
Restrictions on Sales of Shares by Affiliates of OTG
The shares of Legato common stock to be issued in connection with the merger
will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of Legato common stock
issued to any person who is deemed to be an "affiliate" of OTG at the time of
the OTG special meeting. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under the
common control of OTG and may include executive officers, directors and major
stockholders of OTG. Affiliates may not sell their shares of Legato common
stock acquired in connection with the merger except pursuant to:
. an effective registration statement under the Securities Act covering the
resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act; or
. any other applicable exemption under the Securities Act.
Legato's registration statement on Form S-4, of which this document forms a
part, does not cover the resale of shares of Legato common stock to be received
by OTG's affiliates in connection with the merger. However, those shares may be
sold subject to the volume and manner of sale limitations of Rule 145(d).
Delisting and Deregistration of OTG Common Stock after the Merger
If the merger is completed, OTG's common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Securities Exchange
Act of 1934.
49
THE MERGER AGREEMENT
The following summary highlights selected information from the merger
agreement, the complete text of which is attached to this document as Annex
A. This summary may not contain all the information that is important to you.
Legato and OTG urge you to read carefully the merger agreement in its
entirety.
Effective Time
Once all the conditions to the merger contained in the merger agreement have
been satisfied or waived, Legato and OTG will complete the merger. The merger
will become effective when the certificate of merger is filed with the Delaware
Secretary of State.
Conversion and Exchange of OTG Stock
At the effective time, each share of OTG common stock will be converted
automatically into the right to receive 0.6876 of a share of Legato common
stock plus a cash payment of $2.50, without interest, less any withholding
taxes.
As described under "Interests of OTG's Directors and Officers in the
Merger," Mr. Kay and entities for which he is entitled to act will receive a
different allocation of cash and stock than all other OTG stockholders, but
will, as a group, receive the merger consideration equal to the consideration
they would have received without the inter-entity allocation.
No fractional shares of Legato common stock will be issued in the merger.
Instead, fractional shares will be paid in cash, without interest, based on the
closing price for Legato common stock reported by Nasdaq on the day on which
the merger becomes effective.
Exchange of Certificates
Soon after the effective time Computershare, the exchange agent, will mail
to each record holder of OTG common stock a transmittal letter that record
holders will use to exchange OTG common stock certificates for Legato common
stock certificates, cash payment in lieu of for any fractional share of Legato
common stock and the cash payment of $2.50 per share of OTG common stock.
Additionally, after the effective time, holders of OTG common stock
certificates can exchange their stock certificates for certificates evidencing
Legato common stock and the cash payment of $2.50 per share of OTG common stock
at the offices of the exchange agent. Do not attempt to surrender your
certificate before the effective time.
No dividends or other distributions on the Legato common stock that are
declared or made after the merger and have a record date after the merger will
be paid to OTG stockholders until they surrender their certificates.
OTG Stock Options
At the effective time, each outstanding OTG stock option will be assumed by
Legato and become an option to receive upon exercise, (a) $2.50 in cash,
without interest, net of any withholding taxes, per Legato share underlying the
stock option and (b) a number of shares of Legato common stock equal to the
number of shares of OTG common stock underlying the OTG stock option
immediately before the effective time of the merger, multiplied by the 0.6876
exchange ratio, rounded down to the nearest whole share, at an exercise price
per share, rounded up to the nearest whole cent, equal to the exercise price
per share of OTG common stock divided by 0.6876. All other terms and conditions
of the OTG stock options will not change and the OTG stock options will operate
in accordance with their terms, except to the extent senior employees have
waived acceleration of the options in accordance with their terms, as described
in "Interests of OTG's Directors and Officers in the Merger."
50
Representations and Warranties
The merger agreement contains representations and warranties of OTG relating
to, among other things:
. corporate organizational matters; . tax matters;
. subsidiaries and affiliates; . environmental laws;
. capital structure; . intellectual property;
. authorization, validity of . employment matters;
agreement and necessary corporate
actions; . compliance with applicable laws;
. board approval of the merger and . contracts and commitments;
applicable state anti-takeover
laws; . customers;
. the stockholder vote required to . information supplied in
adopt the merger agreement; connection with this document;
. consents and approvals required . opinion of financial advisor;
to adopt the merger agreement;
. absence of certain payments;
. reports and financial statements;
. absence of payments prohibited by
. undisclosed liabilities of OTG; the Foreign Corrupt Practices Act;
. absence of specified changes or . insider interests; and
events;
. brokers and finders.
. litigation;
. employee benefits;
The merger agreement contains representations and warranties of Legato
relating to, among other things:
. corporate organizational matters; . information supplied in
connection with this document;
. capital structure;
. compliance with applicable laws;
. authorization, validity of
agreement, necessary corporate . tax matters;
actions;
. environmental laws;
. OTG stock ownership;
. intellectual property;
. the stockholder vote required to
approve the merger agreement; . absence of certain payments;
. consents and approvals required . absence of payments prohibited by
to approve the merger agreement; the Foreign Corrupt Practices Act;
. reports and financial statements; . opinion of financial advisor; and
. absence of specified changes or . brokers and finders.
events;
. litigation;
Covenants
The covenants in the merger agreement are complicated and not easily
summarized. You are urged to read carefully the provisions of the merger
agreement titled "Covenants."
Interim Conduct of OTG Pending the Merger
OTG agreed that, subject to specified exemptions, during the period before
completion of the merger, except as expressly contemplated or permitted by the
merger agreement, or to the extent that Legato consents in writing,
51
OTG and its subsidiaries will each conduct its respective business in the
ordinary course, consistent with past practice, and will use commercially
reasonable efforts to preserve its business organization and its existing
relationships with licensors, customers, suppliers, distributors, creditors,
business partners and others having business dealings with it. In addition to
these agreements regarding the conduct of business generally, OTG has agreed
that, subject to specified exceptions, neither it nor its subsidiaries will:
. amend its certificate of incorporation or bylaws;
. issue, sell, transfer, pledge, dispose of or encumber any shares of
capital stock, any voting debt or other securities convertible into such
securities, other than the granting of up to 400,000 options to
non-executive officer employees consistent with past practices or the
issuance of OTG stock pursuant to previous agreements upon the exercise of
existing options and purchase rights;
. declare, set aside or pay dividends;
. split, combine or reclassify any shares of its capital stock or redeem,
purchase or otherwise acquire any shares of its capital stock;
. redeem, purchase or otherwise acquire any shares of its capital stock
other than share revesting arrangements entitling OTG to purchase shares
from employees or consultants at the employee's or consultant's cost;
. modify, amend or terminate any of its material contracts or waive, release
or assign any material rights or claims, except in the ordinary course of
business consistent with past practice;
. adopt or implement a stockholder rights plan or poison pill that does not
exempt the transactions described in this document;
. incur, modify or assume any long-term indebtedness, or except in the
ordinary course of business consistent with past practice, incur or assume
any short-term indebtedness in amounts not consistent with past practice;
modify the terms of any indebtedness, other than modifications of short
term debt in the ordinary course of business consistent with past practice;
. assume, guarantee, endorse or otherwise become liable or responsible,
whether directly, contingently or otherwise, for the obligations of any
other person except in the ordinary course of business consistent with
past practice;
. make any loans, advances or capital contributions to, or investments in,
any other person, other than to or in wholly owned OTG subsidiaries or to
employees as expense advances in the ordinary course of business
consistent with past practice;
. transfer, lease, license, sell, mortgage, pledge, dispose of, or encumber
any material assets other than in the ordinary course of business
consistent with past practice;
. make or offer to make any change in the compensation payable or to become
payable to any of its officers, directors, employees, agents or
consultants or enter into or amend any employment, severance, consulting,
termination or other agreement or employee benefit plan, other than to
employees or consultants who are not officers or directors or affiliates
of OTG in the ordinary course of business consistent with past practice;
. make any loans to any of its officers, directors or employees, in excess
of $200,000 in the aggregate, or make any change in its existing borrowing
or lending arrangements for or on behalf of any of those persons pursuant
to a company benefit plan or otherwise;
. pay or make any accrual or arrangement for payment of any pension,
retirement allowance or other employee benefit pursuant to any existing
plan, agreement or arrangement to any officer, director, employee or
affiliate, except payments or accruals made in the ordinary course of
business consistent with past practice;
52
. pay, offer to pay or agree to pay or make any accrual or arrangement for
payment to any officers, directors, employees or affiliates of OTG or any
OTG subsidiary of any amount relating to unused vacation days, except
payments and accruals made in the ordinary course of business consistent
with past practice;
. adopt or pay, grant, issue, accelerate or accrue salary or other payments
or benefits pursuant to any pension, profit-sharing, bonus, extra
compensation, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay,
retirement or other employee benefit plan, agreement or arrangement, or
any employment or consulting agreement with or for the benefit of any
director, officer, employee, agent or consultant, except payments or
accruals made in the ordinary course of business consistent with past
practice, or amend in any material respect any such existing plan,
agreement or arrangement in a manner inconsistent with the foregoing;
. enter into any contract or transaction involving total consideration in
excess of $400,000 other than in the ordinary course of business
consistent with past practice;
. revalue in any material respect any of its assets, including writing down
the value of inventory or writing-off notes or accounts receivable, other
than in the ordinary course of business consistent with past practice or
as required by a change in GAAP occurring after the date of the merger
agreement;
. settle or compromise any pending or threatened suit, action or claim that
relates to the merger or the settlement or compromise of which would
involve more than $300,000 and does not obligate OTG to take or refrain
from taking any action other than the payment of that amount, that would
otherwise be material to OTG and OTG subsidiaries as a whole, or that
relates to matters concerning OTG's or any subsidiary's intellectual
property;
. adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
OTG or any OTG subsidiary, other than the merger;
. change any of the accounting methods used by it unless required by a
change in GAAP occurring after the date of the merger agreement;
. make any material election relating to taxes, change any material election
relating to taxes already made, adopt any material accounting method
relating to taxes, change any material accounting method relating to taxes
unless required by a change in GAAP or change in the Internal Revenue Code
or the regulations under the Internal Revenue Code occurring after the
date of the merger agreement, enter into any closing agreement relating to
material taxes, settle any claim or assessment relating to material taxes
or consent to material taxes or any waiver of the statute of limitations
for any such claim or assessment;
. take, or agree to commit to take, any action that would reasonably be
expected to result in any of the conditions of the merger not being
satisfied, or materially impair the ability of OTG or Legato to
consummate, or materially delay consummation of, the merger; or
. enter into any agreement, contract, commitment, understanding or
arrangement to do any of the foregoing, or to authorize, recommend,
propose or announce an intention to do any of the foregoing.
Interim Conduct of Legato Pending the Merger
Legato agreed that during the period before completion of the merger, except
to the extent OTG consents in writing, neither it nor its subsidiaries will:
. adopt a plan of complete or partial liquidation, dissolution, merger or
consolidation where Legato would become a subsidiary of a person;
. enter into any transaction that would be reasonably likely to materially
delay the consummation of the merger;
53
. amend its certificate of incorporation or bylaws in a manner that would
adversely affect Legato's common stock or amend, modify or waive any
provisions of Legato's stockholders' rights plan or in a manner that would
redeem the rights under the stockholders' rights plan or make those rights
applicable to the merger, or in a manner that would adversely affect OTG's
stockholders;
. declare or pay any dividends;
. split, combine or reclassify any shares of its stock or redeem, purchase
or otherwise acquire any shares of its stock;
. take, or agree to take, any action that would reasonably be expected to
result in any of the conditions of the merger not being satisfied, or that
would materially impair the ability of Legato or Legato's merger
subsidiary to consummate, or materially delay consummation of, the merger;
or
. take, or agree to take any of the foregoing actions.
No Solicitation of Competing Transactions
The merger agreement contains detailed provisions prohibiting OTG from
seeking a competing transaction. Under these "no solicitation" provisions, OTG
has agreed that it, its affiliates and its subsidiaries will not, and OTG and
its subsidiaries will cause each of their respective representatives, to not
directly or indirectly:
. encourage, solicit, participate in or initiate or resume discussions,
inquiries, negotiations or other actions concerning a competing
transaction including by furnishing or disclosing non-public information
about OTG, or take any action designed to facilitate any discussions,
inquiries, negotiations or any other action that could be expected to lead
to the making of any proposals with respect to or concerning a competing
transaction;
. withdraw or modify or propose to withdraw or modify its position with
respect to the merger agreement or the merger; or
. approve or recommend or propose to approve or recommend or enter into any
agreement with respect to any competing transaction.
OTG's board of directors is not prohibited, however, from making disclosure
to OTG's stockholders, as in the board's good faith determination, after
consultation with outside counsel, is required under applicable law, or taking
and disclosing to OTG's stockholders a position with respect to a tender or
exchange offer pursuant to Rule 14d-9 or Rule 14e-2 under the Exchange Act. In
addition, these restrictions will not prohibit OTG from furnishing information
concerning OTG's business, properties or assets to, or entering into a
confidentiality agreement that is no more permissive than OTG's confidentiality
agreement with Legato with, or negotiating and participating in discussions and
negotiations with, a third party in response to a competing transaction if:
. neither OTG nor any of OTG's representatives have violated any of the "no
solicitation" restrictions referred to above;
. the third party has, on an unsolicited basis, submitted a bona fide
written proposal to OTG's board of directors; and
. OTG's board of directors determines in good faith, after consultation with
its outside legal and financial advisors that such proposal is or may
reasonably be expected to lead to a superior proposal.
Under the "no solicitation" restrictions of the merger agreement, OTG has
also agreed to immediately cease any activities, discussions or negotiations
existing as of February 20, 2002, with respect to a competing transaction. OTG
has in addition agreed that:
. it will promptly notify Legato of the existence of any proposal,
discussion, negotiation or inquiry of the type referred to in the "no
solicitation" provisions of the merger agreement received by OTG, any OTG
54
subsidiary or any of their respective advisors, and promptly communicate
to Legato the material terms of, and the identity of the parties making,
any proposals or inquiries, or engaging in discussions;
. it will promptly provide to Legato any non-public information concerning
OTG provided to any other party and not previously provided to Legato; and
. it will not enter into any agreement or understanding with a third party
providing for the payment of fees and reimbursement of expenses of a third
party if Legato makes a proposal in response to a superior proposal unless
OTG terminates the merger agreement at the time it enters into that
agreement with the third party.
OTG's board of directors is not prohibited from withdrawing or modifying its
approval of the merger agreement or its recommendation that OTG's stockholders
vote in favor of adoption of the merger agreement, and may approve or recommend
a superior proposal or terminate the merger agreement to enter into another
agreement if first OTG provides Legato with at least 48 hours prior written
notice that the OTG board of directors has received a superior proposal which
it intends to accept, specifying the material terms and conditions of such
proposal and identifying the person making the superior proposal.
A "competing transaction" is any offer or proposal, other than by Legato,
which contemplates any of the following:
. any merger, consolidation, share exchange, reorganization, liquidation,
dissolution, business combination or other similar transaction involving
OTG pursuant to which the stockholders of OTG immediately preceding such
transaction hold less than 50% of the aggregate equity interests in the
surviving or resulting entity of such transaction;
. any sale, lease, exchange, license, transfer or other disposition of
fifteen percent or more of the consolidated assets, other than sales of
inventory and non-exclusive licenses to customers in the ordinary course
of business consistent with past practices, of OTG and its subsidiaries,
in a single transaction or a series of transactions;
. any tender offer or exchange offer for 15% or more of the outstanding
voting securities of OTG or the filing of a registration statement under
the Securities Act or a pre-commencement communication under the Exchange
Act in connection with offers of those types; or
. any public announcement of a proposal, plan or intention to do any of the
foregoing, or any agreement to engage in any of the foregoing.
"Superior proposal" means an unsolicited bona fide written offer to
consummate a competing transaction, but changing the 15% amounts in the
definition of competing transaction to 50%, not resulting from, arising out of
or otherwise by virtue of any breach of the merger agreement, and with respect
to which the board of directors of OTG determines in good faith:
. has a reasonable likelihood of closing on terms which the board of
directors of OTG determines in good faith, after consultation with a
financial advisor of nationally recognized reputation regarding the
consideration to be received by the OTG stockholders in the competing
transaction from a financial point of view, would, if consummated, result
in a transaction more favorable to OTG's stockholders than the merger, and
. is capable of being, and likely to be, funded on the proposed terms,
including committed financing, to the extent required.
55
Conditions to the Merger
Mutual Obligations. Legato's and OTG's obligations to complete the merger
depend on the satisfaction or waiver by both companies of each of the following
conditions:
. the OTG stockholders will have adopted and the Legato stockholders will
have approved the merger agreement;
. no statute, rule or regulation shall have been enacted or promulgated by
any governmental entity which prohibits the consummation of the merger and
no injunction or order preventing the merger will have been issued by any
court in effect precluding the merger and remain in effect, and the
parties shall have used commercially reasonable efforts to prevent the
entry of such restraints and to appeal as promptly as possible any such
restraints that may be entered;
. the waiting period requirement of the U.S. antitrust laws will have
expired;
. the registration statement of which this document is a part shall have
become effective in accordance with the provisions of the U.S. securities
laws and the registration statement and this document will not be subject
to any stop order or any pending or threatened stop order proceedings; and
. all consents of any governmental entity or third party, the failure of
which to obtain would reasonably be expected to have a material adverse
effect with respect to the corporation surviving the merger, shall have
been obtained.
"Material adverse effect" means a material adverse effect on or change with
respect to:
. the business, financial condition, assets, operations or results of
operations of a party and its subsidiaries, taken as a whole, or
. the ability of such party to timely consummate any of the transactions
contemplated by the merger agreement.
A material adverse effect will not result from, among other things:
. general economic, financial, regulatory or political conditions in the
United States or elsewhere,
. conditions affecting the computer software industry generally,
. the execution and announcement of the merger agreement, the performance of
a party's obligations thereunder, or the consummation of the transactions
contemplated by the merger agreement; or
. a decline in the market price of a party's securities in the capital
markets.
Legato's Obligations. Legato's obligation to complete the merger is
subject to the satisfaction or waiver of the following conditions:
. OTG's representations and warranties contained in the merger agreement
will be true and correct in all respects as of February 20, 2002 and as of
the closing date, as if made on the closing date, other than
representations and warranties that speak only as of a specified date,
except that any inaccuracies in OTG's representations and warranties will
be disregarded if the inaccuracies would not have, and are not reasonably
expected to have, individually or in the aggregate, a material adverse
effect on OTG and OTG's subsidiaries;
. OTG must have complied, in all material respects, with its obligations
contained in the merger agreement;
. Legato will have received:
. a tax opinion that the merger will constitute a reorganization for
federal income tax purposes; and
. a certificate executed by the chief financial officer and chief
executive officer of OTG confirming that closing conditions have been
satisfied; and
56
. the holders of less than five percent of OTG's outstanding capital stock
shall have delivered to OTG a demand for appraisal rights, and shall not
have voted in favor of the merger or otherwise failed to perfect their
appraisal rights.
OTG's Obligations. OTG's obligation to complete the merger are subject to
the satisfaction of the following conditions:
. the representations and warranties made by Legato in the merger agreement
will be true and correct in all respects as of February 20, 2002 and as of
the closing date as if made on the closing date, other than
representations and warranties that speak only as of a specified date,
except that any inaccuracies in Legato's representations and warranties
will be disregarded if the inaccuracies would not have, and are not
reasonably likely to have, individually or in the aggregate, a material
adverse effect on Legato and Legato's subsidiaries;
. Legato will have performed, in all material respects, all of its
obligations contained in the merger agreement;
. OTG will have received:
. a tax opinion that the merger will constitute a reorganization for
federal income tax purposes; and
. a certificate executed by the chief financial officer of Legato
confirming that closing conditions have been satisfied;
. the shares of Legato common stock to be issued in the merger shall have
been approved for listing on the Nasdaq National Market, subject to notice
of issuance.
Each of the conditions to Legato's and OTG's obligation to complete the
merger and other transactions contemplated by the merger agreement may be
waived, in whole or in part, to the extent permitted by applicable law, by
agreement of by the applicable party.
Termination
The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after the stockholder approvals have been
obtained:
. by mutual written consent of Legato and OTG;
. by either Legato or OTG if:
. the merger is not completed on or before July 15, 2002 (or September
16, 2002 if the only remaining condition is the expiration of the
waiting period under U.S. antitrust law), except that this right to
terminate the merger agreement will not be available to any party
whose failure to fulfill any obligation under the merger agreement has
been the cause of, or has resulted in, the failure of the merger to be
completed on the applicable date;
. any governmental entity issues an order, decree or ruling, or takes
any other action, which Legato and OTG have used their commercially
reasonable efforts to lift, permanently restraining, enjoining or
otherwise prohibiting the merger, and the order, decree, ruling or
other action becomes final and nonappealable; or
. the approval of either party's stockholders to adopt the merger
agreement is not obtained at a duly convened meeting of that party's
stockholders.
. by Legato if:
. OTG's board of directors fails to recommend that OTG's stockholders
vote in favor of the adoption of the merger agreement or withdraws or
modifies or proposes to withdraw or modify its recommendation of
adoption of the merger agreement;
57
. OTG's board of directors approves or recommends or enters into an
agreement with respect to a competing transaction, whether or not
permitted by the terms of the merger agreement; or
. OTG breaches in a material respect any of its representations,
warranties, covenants or other agreements contained in the merger
agreement which breach cannot be or has not been cured within thirty
days after Legato has given OTG written notice of such breach, such
that OTG's representations, warranties, covenants or other material
obligations under the merger agreement would not be satisfied as of
the time of such termination.
. by OTG if:
. OTG gives Legato 48 hours notice that it intends to accept a superior
proposal, complies with the requirements of the "no solicitation"
provisions of the merger agreement, and pays Legato a termination fee;
or
. Legato breaches in a material respect any of its representations,
warranties, covenants or other agreements contained in the merger
agreement which breach cannot be or has not been cured within thirty
days after OTG has given Legato written notice of such breach, such
that Legato's representations, warranties, covenants, or other
material obligations under the merger agreement would not be satisfied
as of the time of termination.
Effect of Termination. If the merger agreement is terminated by either
party, the merger agreement will become void and Legato and OTG will have no
liability under the merger agreement, assuming no fraud or willful material
breach of the merger agreement has occurred. Provisions for no publicity,
termination, termination fees and expenses and the general contract provisions
will survive termination of the merger agreement.
Termination Fee and/or Payment of Expenses Upon Termination. The merger
agreement requires OTG to make a payment to Legato depending on the
circumstances surrounding the termination. Specifically, if the agreement is
terminated because:
. OTG terminates the merger agreement 48 hours after OTG gives Legato notice
it intends to accept a superior proposal and concurrently with or promptly
following the termination enters into an agreement for, authorizes or
consummates a superior proposal, where the failure to take the termination
action, in the good faith judgment of OTG's board of directors after
consultation with its independent legal counsel, would create a reasonable
probability of a breach of the OTG board of directors' fiduciary duties to
OTG and its stockholders under applicable law then OTG must pay to Legato
the termination fee of $13.0 million;
. Legato terminates the merger agreement after OTG's board of directors
withdraws or modifies its approval of the merger agreement or its
recommendation that OTG's stockholders vote in favor of the adoption of
the merger agreement, or if OTG approves, recommends or accepts a
competing transaction, then OTG must pay to Legato a termination fee of
$13.0 million;
. OTG failed to obtain the required vote at a stockholders meeting to
approve the merger, then within five business days of receipt of an
invoice, OTG will pay to Legato expenses incurred in connection with the
merger agreement by Legato up to $2.6 million; however, if prior to the
termination there was publicly announced a proposal for a competing
transaction that was not withdrawn and within twelve months of the
termination OTG accepted a competing transaction, then OTG will also pay
Legato the termination fee of $13.0 million, less any previously
reimbursed expenses; or
. OTG terminates the merger agreement subsequent to July 15, 2002, the OTG
stockholder meeting was not convened, prior to the termination there was
publicly announced a proposal for a competing transaction that was not
withdrawn, and within twelve months of the termination OTG accepts a
competing transaction, then OTG will pay to Legato the termination fee of
$13.0 million.
58
The merger agreement requires Legato to pay OTG its expenses incurred in
connection with the merger agreement up to $2.6 million if Legato fails to
obtain the required vote at its stockholders meeting to approve the merger.
Expenses
Legato and OTG will each pay 50% of the filing fees in connection with the
merger under U.S. antitrust laws and costs of printing and mailing this
document and of printing the registration statement. With the exception of the
provisions above regarding termination fees and expenses, whether or not the
merger is completed, all other expenses and fees incurred in connection with
the merger agreement and the merger will be paid by the party incurring the
expenses or fees.
Amendment, Extension and Waiver
The merger agreement may be amended, modified and supplemented by written
agreement of the parties, by action taken by their respective boards of
directors, at any time before or after the approval of the merger by the
stockholders of Legato and OTG has been obtained. After the agreement has been
approved by the stockholders of the respective companies, no amendment which
under applicable law requires further approval of the stockholders may be made
without such further approval. The parties may by written agreement:
. extend the time for performance under the merger agreement;
. waive any inaccuracy in the representations and warranties of the other
parties; or
. waive compliance by the other parties with certain provisions of the
merger agreement.
Voting Agreement and Proxy
Legato entered into a voting agreement with Richard A. Kay and trusts and
other entities for which he is entitled to act, pursuant to which Mr. Kay and
those entities each granted an irrevocable proxy appointing Legato as his or
its lawful attorney and proxy. The proxies give Legato the limited right to
vote each of the 10,603,688 shares of the OTG common stock in the matters
described below, subject to the voting agreement. As of the record date, these
shares represented approximately 32% of the shares of OTG common stock
outstanding. Legato is entitled to vote the shares subject to the voting
agreement and proxy:
. in favor of approval and adoption of the merger and the merger agreement
and the transactions contemplated thereby and by the voting agreement;
. in favor of any matter that could be reasonably expected to facilitate the
merger; and
. against any matter that could reasonably be expected to hinder, impede or
delay the merger or materially adversely affect the merger and the
transactions contemplated thereby and by the merger agreement and the
voting agreement.
The owners of the OTG common stock subject to the voting agreement may vote
their shares on all other matters. The voting agreement terminates upon the
earlier to occur of the date and time on which the merger becomes effective in
accordance with the terms and provisions of the merger agreement and the date
of termination of the merger agreement. The owners of the OTG common stock
subject to the voting agreement have also agreed not to dispose of beneficial
ownership of any of their shares during the term of the voting agreement.
59
COMPARISON OF RIGHTS OF LEGATO STOCKHOLDERS AND OTG STOCKHOLDERS
Legato and OTG are both organized under the laws of the State of Delaware.
Any differences in the rights of holders of Legato capital stock and OTG
capital stock arise primarily from differences among the companies'
certificates of incorporation and bylaws. Upon completion of the merger,
holders of OTG common stock will become holders of Legato common stock and
their rights will be governed by Delaware law, the Legato amended and restated
certificate of incorporation and the Legato bylaws.
You are urged to read carefully the relevant provisions of Delaware law, as
well as the certificates of incorporation and bylaws of Legato and OTG. Copies
of the certificate of incorporation and bylaws of Legato are exhibits to the
registration statement that Legato filed with the SEC with respect to the offer
and sale of shares of Legato common stock of which this document forms a part.
See "Where You Can Find More Information."
The following table summarizes the differences among the companies'
organizational documents.
Rights Legato OTG
------------------------- -------------------------- --------------------------
Capitalization 200,000,000 authorized 65,000,000 authorized
shares of common stock. shares of common stock.
5,000,000 authorized 5,000,000 authorized
shares of preferred stock. shares of preferred stock.
No preferred stock No preferred stock
currently outstanding. currently outstanding.
Voting rights One vote per common One vote per common
share. No cumulative share. No cumulative
voting. voting.
Preferred stock voting Preferred stock voting
rights to be determined rights to be determined
by the board. by the board.
Number and election of The bylaws provide that The certificate of
directors the number of directors incorporation and bylaws,
shall be determined by as amended, provide for
resolution of the board. not less than six nor
At present there are more than thirteen
seven directors, each directorships. Directors
elected annually. are divided into three
classes for purposes of
election, with one class
standing for election
annually. At present,
there are seven directors.
Majority stockholder vote A resolution of the board
required to change the is required to change the
size of the board. size of the board.
Vacancies on the board of Vacancies filled by a Vacancies filled by a
directors majority of remaining majority of remaining
directors. directors.
Power to call special Power to call special Power to call special
meetings meetings denied to meetings denied to
stockholders stockholders
Action by written consent Stockholders may not act Stockholders may not act
of stockholders by written consent. by written consent.
60
Rights Legato OTG
-------------------------- ------------------------- -------------------------
Amendment of The organizational Two-thirds of the
organizational documents documents may be amended, outstanding shares
altered or repealed by a entitled to vote are
majority of the required to change
outstanding shares provisions relating to:
entitled to vote.
. the board of
directors, including
the number of members
and vacancies;
. the prohibition
against stockholders
taking action by
written consent;
. the prohibition
against the ability of
stockholders to call a
special meeting; and
. the requirement that a
two-thirds stockholder
vote is required for
stockholder to amend
the bylaws.
State anti-takeover Governed by Section 203 Governed by Section 203
statute of Delaware law. of Delaware law.
Limitation on director Director liability Director liability
liability limited to the fullest limited to the fullest
extent permitted by law. extent permitted by law.
Indemnification of Indemnification provided Indemnification provided
directors and officers to fullest extent of to fullest extent of
Delaware law. Delaware law.
Stockholders Rights Plan Allows stockholders to None.
dilute the economic and
voting power of an
acquiring person, unless
the rights are amended or
redeemed by Legato's
board of directors.
61
LEGAL MATTERS
The validity of the shares of Legato's common stock offered by this document
will be passed upon for Legato by Brobeck, Phleger & Harrison LLP, San
Francisco, California.
Brobeck, Phleger & Harrison LLP, counsel for Legato, and Hale and Dorr LLP,
counsel for OTG, will pass upon federal income tax consequences of the merger
for Legato and OTG, respectively.
EXPERTS
The consolidated financial statements as of December 31, 2001 and 2000, and
for each of the three years in the period ended December 31, 2001, incorporated
in this document by reference to the Annual Report on Form 10-K of Legato for
the year ended December 31, 2001, have been so incorporated in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of OTG and subsidiaries as of December
31, 2001 and 2000 and for each of the years in the three year period ended
December 31, 2001, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present
proper proposals for inclusion in a company's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
their proposals to the company in a timely manner.
Legato. The deadline for submitting stockholder proposals for inclusion in
Legato's proxy statement and form of proxy for its annual meeting was December
13, 2001. March 15, 2002 was the last date on which notice of a stockholder
proposal for that annual meeting would have been considered timely under
Legato's bylaws.
OTG. If the proposed merger is completed, OTG does not anticipate holding
its 2002 annual meeting of stockholders. If the 2002 annual meeting of
stockholders is held, and is held on a date which is less than 20 days prior to
or less than 60 days after May 31, 2002, OTG must have received proposals of
stockholders intended to be presented at the meeting at its principal office in
Rockville, Maryland no later than January 3, 2002 for inclusion in the proxy
statement for that meeting. In addition, OTG's by-laws require that it receive
advance notice of stockholder nominations for election to its board of
directors and of other matters that stockholders may wish to present at the
2002 annual meeting. OTG must receive this advance notice not less than 60 nor
more than 90 days prior to the first anniversary of OTG's 2001 annual meeting,
which was held on May 31, 2001. If the date of the 2002 annual meeting of
stockholders is advanced by more than 20 days or delayed by more than 60 days
from the anniversary date, a stockholder's notice must be received not earlier
than the 90th day prior to the annual meeting and not later than the later of
(a) the 60th day prior to the annual meeting and (b) the 10th day following the
day notice of the date was mailed or public disclosure was made, whichever
first occurs. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that the business or nomination was not
properly brought before the meeting and shall be disregarded.
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WHERE YOU CAN FIND MORE INFORMATION
Legato has filed with the SEC a registration statement on Form S-4 to
register the shares of Legato's common stock to be offered and sold in
connection with the merger. This document is a part of that registration
statement. As permitted by the SEC, this document does not contain all of the
information that is included in the registration statement or its exhibits.
Legato and OTG both file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company, including
Legato's registration statement related to the shares of common stock to be
issued in connection with the merger, at the SEC's public reference room at 450
Fifth Street N.W., Washington, D.C. 20549. You can obtain information about the
SEC public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the SEC at www.sec.gov. You can obtain more information about Legato and
the shares of common stock to be issued in the merger by reviewing the
registration statement, along with its exhibits.
Statements in this document regarding the contents of any contract or other
document are not necessarily complete and you should refer to the copies of
those contracts or documents filed as exhibits to the registration statement.
All statements in this document are qualified in all respects by reference to
the complete text of those contracts and documents.
All information concerning Legato contained or incorporated by reference in
this document has been furnished by Legato and all information concerning OTG
contained or incorporated by reference in this document has been furnished by
OTG.
The SEC allows both Legato and OTG to "incorporate by reference" information
into this document. This means that both Legato and OTG may disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be part of
this document, except for any information modified or superseded by information
in or incorporated by reference in this document. This document incorporates by
reference the documents listed below that Legato and OTG have previously filed
with the SEC. The documents contain important information about both Legato and
OTG and their respective financial affairs.
Legato's Filings with the SEC (File No. 000-26130):
Annual Report on Form 10-K for the fiscal year ended December 31, 2001;
Current Report on Form 8-K filed on February 21, 2002;
Description of common stock contained in the Registration Statement on Form
8-A; and
Description of preferred stock purchase rights contained in the Registration
Statement on Form 8-A.
OTG's Filings with the SEC (File No. 000-29809):
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as
amended on April 11, 2002; and
Current Report on Form 8-K filed on February 22, 2002.
Legato and OTG each incorporate by reference into this document additional
documents that either of them may file with the SEC between the date of this
document and the date of the special meetings. These documents are periodic
reports, like Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, as well as proxy and information statements. You
can obtain copies of the documents incorporated by reference from Legato or OTG
as applicable, or from the SEC or its web site as described above. Documents
63
incorporated by reference are available from Legato and OTG without charge,
excluding all exhibits unless an exhibit has been specifically incorporated by
reference into this document. You may obtain documents incorporated by
reference in this document by requesting them in writing or by telephone from
the appropriate company at the following addresses:
For Legato Documents: For OTG Documents:
Legato Systems, Inc. OTG Software, Inc.
2350 West El Camino Real 2600 Tower Oaks Boulevard
Mountain View, California 94040 Rockville, Maryland 20852
Attention: Investor Relations Attention: Investor Relations
(650) 210-7000 (800) 324-4223
If you would like to request documents from either company, please do so by
May 7, 2002 to receive them before the stockholders' meetings.
This document does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered by this document, or the solicitation
of a proxy, in any jurisdiction to or from any person to whom or from whom it
is unlawful to make such offer, solicitation of an offer or proxy solicitation
in the applicable jurisdiction.
Neither the delivery of this document nor any distribution of securities
registered pursuant to this document shall, under any circumstances, create any
implication that there has been no change in the information set forth in this
document since the date of this document. The information contained in this
document with respect to Legato was provided by Legato and the information
contained in this document with respect to OTG was provided by OTG.
64
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document contains
and incorporates by reference "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements may
include statements regarding the period following completion of the merger.
This document contains and incorporates by reference forward-looking
statements based on current projections about operations, industry, financial
condition and liquidity. Words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" and words and terms of similar substance
used in connection with any discussion of future operating or financial
performance, the merger or the combined company's business, identify
forward-looking statements. You should note that the discussion of Legato's and
OTG's board of directors' reasons for the merger and the description of their
respective financial advisors opinions contains many forward looking statements
that describe beliefs, assumptions and estimates as of the indicated dates and
those forward looking expectations may have changed as of the date of this
document. In addition, any statements that refer to expectations, projections
or other characterizations or future events or circumstances, including any
underlying assumptions, are forward-looking statements. Those statements are
not guarantees and are subject to risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results could differ materially and
adversely from these forward-looking statements.
All forward-looking statements reflect management's expectations of future
events as of the date of those statements and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. In addition to the
risks related to the businesses of Legato and OTG, the uncertainty concerning
the completion of the merger and the matters discussed under "Risk Factors,"
among others, could cause actual results to be materially adverse from those
described in the forward-looking statements. These factors include: relative
value of Legato's and OTG's common stocks, the market's difficulty in valuing
Legato's and OTG's business, the failure to realize the anticipated benefits of
the merger and conflicts of interest of directors recommending the merger. You
are cautioned not to place undue reliance on the forward-looking statements,
which speak only of the date of this document or the date indicated in this
document.
All subsequent forward-looking statements attributable to Legato or OTG or
any person acting on their behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section.
65
LEGATO SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
As of February 20, 2002, Legato entered into the merger agreement with OTG.
OTG provides data management and collaboration solutions that virtualize
storage for any type of data, including files, messages and databases, while
providing easy and transparent access. Under the terms of the merger agreement,
each issued and outstanding share of OTG common stock will be exchanged for
$2.50 per share of cash and 0.6876 of a share of Legato common stock. All
outstanding options to purchase OTG common stock will be assumed, whereby, upon
exercise, each option will be exchanged for $2.50 per share of cash and 0.6876
of a share of Legato common stock. Legato expects to issue approximately 23.1
million shares of Legato common stock and reserve approximately 3.9 million
shares of Legato common stock for issuance upon exercise of OTG's outstanding
options. The actual number of shares of Legato common stock issued will be
determined on the effective date of the merger, based on the actual number of
shares of OTG common stock outstanding on that date.
The unaudited pro forma combined financial statements reflect an estimated
purchase price of $372.8 million, which consists of the following:
. Legato common stock of $250.8 million, measured using the average fair
market value of Legato's common stock from February 19, 2002 to February
25, 2002, five trading days surrounding the date that the merger agreement
was announced.
. Cash paid to OTG stockholders of $83.4 million.
. Assumption of OTG options of $33.8 million of which $15.0 million relates
to the right to receive cash and $18.8 million relates to the fair value
of the converted options. The Black-Scholes option pricing model was used
to determine fair value.
. Legato's acquisition related expenses of $4.8 million, which consist
primarily of financial advisory, accounting, legal and printing fees.
The final purchase price is dependent on the actual number of shares of
common stock exchanged, the actual number of options assumed and the actual
acquisition related costs and will be determined upon completion of the merger.
The preliminary purchase price allocation is as follows (in thousands):
Tangible assets acquired............... $132,578
Acquired in-process research and
development.......................... 46,000
Developed technology................... 33,800
Distribution channel................... 12,500
Contracts.............................. 1,500
Goodwill............................... 188,736
Deferred stock-based compensation...... 4,488
Liabilities assumed.................... (27,719)
Deferred tax liability................. (19,120)
--------
$372,763
========
The preliminary purchase price allocation was based on Legato's estimates of
fair value and a preliminary independent appraisal of intangible assets with
the excess cost over the net assets acquired allocated to goodwill. This
allocation is subject to change pending a final analysis of the total purchase
price and fair value of the assets acquired and liabilities assumed. Except for
deferred revenue, OTG's tangible assets acquired and liabilities assumed as of
December 31, 2001 were used for purposes of calculating the pro forma
adjustments as they approximate fair value at such date. The deferred revenue
has been adjusted to the estimated fair value.
F-1
LEGATO SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 2001
(in thousands)
Pro Forma
--------------------------
Legato OTG Adjustments Combined
-------- -------- ----------- ---------
ASSETS
Current Assets:
Cash, cash equivalents and investments.... $145,695 $ 89,294 $(83,360)(A) $ 151,629
Accounts receivable, net.................. 39,581 25,120 (9,293)(E) 55,408
Other current assets...................... 12,373 2,966 -- 15,339
Deferred tax assets....................... 61,136 2,997 (4,304)(J) 59,829
-------- -------- -------- ---------
Total current assets.................. 258,785 120,377 (96,957) 282,205
Property and equipment, net.................. 42,884 10,146 -- 53,030
Other assets................................. 2,196 467 -- 2,663
Long-term deferred tax assets................ 19,754 1,588 (14,816)(J) 6,526
Intangible assets, net....................... 31,642 17,982 218,554 (B) 268,178
-------- -------- -------- ---------
$355,261 $150,560 $106,781 $ 612,602
======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................... $ 8,316 $ 2,625 $ -- $ 10,941
Accrued liabilities....................... 41,440 12,783 19,772 (A)(C) 73,995
Deferred revenue.......................... 41,748 8,908 (890)(D) 49,766
-------- -------- -------- ---------
Total current liabilities............. 91,504 24,316 18,882 134,702
Deferred revenue, net of current portion..... 3,798 719 (72)(D) 4,445
Long-term liabilities........................ -- 3,646 -- 3,646
-------- -------- -------- ---------
Total liabilities..................... 95,302 28,681 18,810 142,793
-------- -------- -------- ---------
Stockholders' Equity:
Common stock and capital in excess of par. 329,951 150,908 118,723 (A) 599,582
Deferred compensation..................... -- (845) (3,643)(F) (4,488)
Accumulated other comprehensive income.... 684 27 (27)(A) 684
Accumulated deficit....................... (70,676) (28,211) (27,082)(A)(E) (125,969)
-------- -------- -------- ---------
Total shareholders' equity............ 259,959 121,879 87,971 469,809
-------- -------- -------- ---------
$355,261 $150,560 $106,781 $ 612,602
======== ======== ======== =========
See accompanying notes to unaudited pro forma combined financial information.
F-2
LEGATO SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2001
(in thousands, except per share data)
Pro Forma
--------------------------
Legato OTG Adjustments Combined
--------- -------- ----------- ---------
Revenues:
License....................................... $ 147,528 $ 45,177 $ (1,100)(E) $ 191,605
Service and support........................... 95,073 19,747 -- 114,820
--------- -------- -------- ---------
Total revenue............................. 242,601 64,924 (1,100) 306,425
--------- -------- -------- ---------
Cost of revenues:
License....................................... 5,517 6,045 (205)(E) 11,357
Service and support........................... 48,916 7,121 57 (F) 56,094
--------- -------- -------- ---------
Total cost of revenue..................... 54,433 13,166 (148) 67,451
--------- -------- -------- ---------
Gross profit.............................. 188,168 51,758 (952) 238,974
--------- -------- -------- ---------
Operating expenses:
Sales and marketing........................... 125,824 29,834 418 (F)(E) 156,076
Research and development...................... 64,292 18,007 640 (F) 82,939
General and administration.................... 30,768 10,378 284 (F) 41,430
Amortization of intangibles................... 33,755 834 9,926 (G) 44,515
Impairment of intangibles..................... 48,869 -- -- 48,869
Acquisition-related costs..................... -- 1,585 -- 1,585
In-process research and development........... -- 3,700 -- 3,700
Restructuring charge.......................... 9,373 -- -- 9,373
--------- -------- -------- ---------
Total operating expenses.................. 312,881 64,338 11,268 388,487
--------- -------- -------- ---------
Loss from operations............................. (124,713) (12,580) (12,220) (149,513)
Other income (expense), net...................... 7,675 3,476 (3,168)(H) 7,983
--------- -------- -------- ---------
Loss before taxes................................ (117,038) (9,104) (15,388) (141,530)
Taxes............................................ (35,543) (1,554) (2,185)(J) (39,282)
--------- -------- -------- ---------
Net loss......................................... $ (81,495) $ (7,550) $(13,203) $(102,248)
========= ======== ======== =========
Basic and diluted net loss per share(I).......... $ (0.92) $ (0.91)
========= =========
Weighted average common shares outstanding....... 88,842 111,915
========= =========
See accompanying notes to unaudited pro forma combined financial information.
F-3
LEGATO SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
1. Basis of presentation
The unaudited pro forma combined balance sheet gives effect to the merger as
if it occurred on December 31, 2001 and combines the consolidated balance
sheets of Legato and OTG as of December 31, 2001. The unaudited pro forma
combined statement of operations gives effect to the merger as if it had
occurred on January 1, 2001 and presents the results of operations of Legato
and OTG for the year ended December 31, 2001. Since the unaudited pro forma
combined information is based upon the respective historical consolidated
financial statements of Legato and OTG, it should be read in conjunction with
the historical consolidated financial statements of Legato and OTG and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the reports that Legato and OTG have on
file with the Securities and Exchange Commission.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the merger had been consummated
at the dates indicated, nor is it necessarily indicative of the future
operating results or the financial position of the combined companies.
2. Pro forma adjustments
The following adjustments were applied to Legato's historical financial
statements and those of OTG to arrive at the pro forma combined financial
information:
A To record the cash and stock consideration, the liability to OTG option
holders of $2.50 per share in cash upon exercise and the value of the
converted options and to eliminate the historical stockholders' equity
of OTG.
B To eliminate OTG historical goodwill and intangibles, the fair value of
which will be included in the Legato/OTG purchase price allocation, and
to record the goodwill and intangible assets resulting from the
acquisition.
C To record estimated direct merger costs of approximately $4.8 million to
be incurred by Legato. The $9.3 million of estimated merger costs to be
incurred by OTG will be expensed.
D To reduce the deferred revenue of OTG to its estimated fair market value.
E To record the elimination of inter-company revenue and to record a
conforming adjustment in conjunction with adoption of Legato's revenue
recognition policies for OTG's contractual arrangements with extended
payment terms. The adjustment defers the recognition of revenue and the
corresponding amounts of accounts receivable, royalties and commissions
until the quarter in which the payment is due.
F To record the amortization of the deferred stock-based compensation
resulting from the merger. The deferred stock-based compensation will be
amortized over the vesting period of the options assumed, which is
generally four years.
G To record the amortization of purchased intangibles over one to five
years. The write-off of estimated in-process research and development is
always excluded from the pro forma presentation of the statement of
operations. The unaudited pro forma combined financial information has
assumed the adoption of SFAS 142 for this transaction. Accordingly, the
goodwill has not been amortized within the unaudited pro forma combined
statement of operations.
H To reduce interest income as a result of the cash payment utilizing an
estimated interest rate of approximately 4%.
F-4
LEGATO SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
I Pro forma basic net loss per share is computed using the weighted
average number of common shares outstanding, including the pro forma
effect of issuing approximately 23.1 million shares of Legato common
stock in connection with this transaction.
J To record the deferred tax liability and income tax expense adjustment
resulting from the pro forma adjustments primarily relating to the
amortization of intangible assets.
F-5
Annex A
================================================================================
AGREEMENT AND PLAN OF MERGER
by and among
LEGATO SYSTEMS, INC.,
ORION ACQUISITION SUB CORP.
and
OTG SOFTWARE, INC.
Dated as of
February 20, 2002
================================================================================
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS AND INTERPRETATION.......................................................... A-1
Section 1.1 Definitions.................................................................... A-1
Section 1.2 Interpretation................................................................. A-8
ARTICLE 2 THE MERGER.............................................................................. A-9
Section 2.1 The Merger..................................................................... A-9
Section 2.2 Effective Time................................................................. A-9
Section 2.3 Effects of the Merger.......................................................... A-9
Section 2.4 Certificate of Incorporation and Bylaws of the Surviving Corporation........... A-9
Section 2.5 Directors and Officers of the Surviving Corporation............................ A-9
Section 2.6 Closing........................................................................ A-9
ARTICLE 3 EFFECTS OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES........................ A-10
Section 3.1 Effect on Company Capital Stock................................................ A-10
Section 3.2 Cancellation of Treasury Stock and Parent-Owned Stock.......................... A-10
Section 3.3 Exchange of Company Certificates............................................... A-10
Section 3.4 No Fractional Shares........................................................... A-11
Section 3.5 Investment of Exchange Fund.................................................... A-12
Section 3.6 Termination of Exchange Fund................................................... A-12
Section 3.7 Certain Adjustments............................................................ A-12
Section 3.8 Company Options................................................................ A-12
Section 3.9 Appraisal Rights............................................................... A-13
Section 3.10 Lost, Stolen or Destroyed Company Certificates................................. A-13
Section 3.11 Withholding Rights............................................................. A-13
Section 3.12 Conversion of Merger Sub Capital Stock......................................... A-14
Section 3.13 Taking of Necessary Action; Further Action..................................... A-14
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................... A-14
Section 4.1 Organization; Qualification.................................................... A-14
Section 4.2 Subsidiaries and Affiliates.................................................... A-14
Section 4.3 Capitalization................................................................. A-15
Section 4.4 Authorization, Validity of Agreement, Company Action........................... A-15
Section 4.5 Board Approvals Regarding Transactions......................................... A-16
Section 4.6 Vote Required.................................................................. A-16
Section 4.7 Consents and Approvals, No Violations.......................................... A-16
Section 4.8 Reports and Financial Statements............................................... A-16
Section 4.9 No Undisclosed Liabilities..................................................... A-17
Section 4.10 Absence of Certain Changes..................................................... A-17
Section 4.11 Litigation..................................................................... A-17
Section 4.12 Employee Benefit Plans......................................................... A-17
Section 4.13 Tax Matters.................................................................... A-19
Section 4.14 Environmental Laws............................................................. A-20
Section 4.15 Intellectual Property.......................................................... A-20
Section 4.16 Employment Matters............................................................. A-21
Section 4.17 Compliance with Laws........................................................... A-22
Section 4.18 Contracts and Commitments...................................................... A-22
Section 4.19 Customers...................................................................... A-23
Section 4.20 Information Supplied........................................................... A-23
Section 4.21 Opinion of Financial Advisor................................................... A-24
A-i
Page
----
Section 4.22 Absence of Certain Payments.................................................... A-24
Section 4.23 Insider Interests.............................................................. A-24
Section 4.24 Brokers or Finders............................................................. A-24
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB............................. A-24
Section 5.1 Organization; Qualification.................................................... A-24
Section 5.2 Capitalization................................................................. A-25
Section 5.3 Authorization, Validity of Agreement, Parent Action............................ A-25
Section 5.4 Share Ownership................................................................ A-25
Section 5.5 Vote Required.................................................................. A-26
Section 5.6 Consents and Approvals, No Violations.......................................... A-26
Section 5.7 Reports and Financial Statements............................................... A-26
Section 5.8 Absence of Certain Changes..................................................... A-27
Section 5.9 Litigation..................................................................... A-27
Section 5.10 Information Supplied........................................................... A-27
Section 5.11 Compliance with Laws........................................................... A-27
Section 5.12 Tax Matters.................................................................... A-27
Section 5.13 Environmental Laws............................................................. A-28
Section 5.14 Intellectual Property.......................................................... A-29
Section 5.15 Absence of Certain Payments.................................................... A-30
Section 5.16 Opinion of Financial Advisor................................................... A-30
Section 5.17 Brokers or Finders............................................................. A-30
ARTICLE 6 COVENANTS............................................................................... A-30
Section 6.1 Interim Operations of the Company.............................................. A-30
Section 6.2 Interim Operations of the Parent............................................... A-32
Section 6.3 Access; Confidentiality........................................................ A-33
Section 6.4 Reasonable Efforts............................................................. A-33
Section 6.5 No Solicitation of Competing Transaction....................................... A-34
Section 6.6 Publicity...................................................................... A-35
Section 6.7 Notification of Certain Matters................................................ A-35
Section 6.8 Directors' and Officers' Insurance and Indemnification......................... A-35
Section 6.9 State Takeover Laws............................................................ A-36
Section 6.10 Preparation of the Registration Statement and the Proxy Statement/Prospectus;
Stockholders' Meeting........................................................ A-36
Section 6.11 Tax Treatment.................................................................. A-37
Section 6.12 Conveyance Taxes............................................................... A-37
Section 6.13 Exemption from Liability Under Section 16(b)................................... A-37
Section 6.14 Affiliate Legends.............................................................. A-38
Section 6.15 Service Credit................................................................. A-38
Section 6.16 Acquisitions of Company Stock.................................................. A-38
Section 6.17 Parent Board of Directors...................................................... A-38
ARTICLE 7 CONDITIONS.............................................................................. A-38
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger..................... A-38
Section 7.2 Conditions to the Parent's and Merger Sub's Obligations to Effect the Merger... A-39
Section 7.3 Conditions to the Company's Obligations to Effect the Merger................... A-39
ARTICLE 8 TERMINATION............................................................................. A-40
Section 8.1 Termination.................................................................... A-40
Section 8.2 Effect of Termination.......................................................... A-41
Section 8.3 Method of Termination.......................................................... A-41
A-ii
Page
----
ARTICLE 9 MISCELLANEOUS........................................................................... A-42
Section 9.1 Fees and Expenses.............................................................. A-42
Section 9.2 Amendment and Modification..................................................... A-42
Section 9.3 Non-survival of Representations and Warranties................................. A-43
Section 9.4 Notices........................................................................ A-43
Section 9.5 Counterparts................................................................... A-43
Section 9.6 Entire Agreement; No Third Party Beneficiaries................................. A-43
Section 9.7 Severability................................................................... A-44
Section 9.8 Governing Law.................................................................. A-44
Section 9.9 Enforcement.................................................................... A-44
Section 9.10 Extension, Waiver.............................................................. A-44
Section 9.11 Assignment..................................................................... A-44
A-iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 20, 2002 (this
"Agreement"), by and among Legato Systems, Inc., a Delaware corporation (the
"Parent"), Orion Acquisition Sub Corp., a Delaware corporation and a direct
wholly-owned subsidiary of the Parent ("Merger Sub"), and OTG Software, Inc., a
Delaware corporation (the "Company"). Capitalized terms used and not otherwise
defined herein have the meanings set forth in Article 1.
WHEREAS, the boards of directors of each of the Parent, Merger Sub and the
Company have determined that it is advisable and in the best interests of their
respective corporations and stockholders to enter into a business combination
by means of the merger of the Company with and into Merger Sub and have
approved and adopted the Merger, this Agreement and the transactions
contemplated hereby;
WHEREAS, as a condition and inducement to each party's entering into this
Agreement, the Company Major Stockholders, concurrently with the execution and
delivery of this Agreement, is entering into a Voting Agreement; and
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger shall qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Code and that this Agreement shall be, and hereby is,
adopted as a plan of reorganization within the meaning of Section 368(a) of the
Code.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants in this Agreement, the parties
hereto, intending to be legally bound, agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
Section 1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context clearly requires otherwise:
"Additional Cash" means the aggregate amount of cash equal to the product of
the Major Affiliate Number and $2.50.
"Additional Shares" means the number of shares of Parent Common Stock equal
to the Additional Cash divided by $12.55, the last sale price of the Parent
Common Stock on the date hereof.
"Affiliate" has the meaning set forth in Rule l2b-2 of the Exchange Act.
"Affiliate Share Fraction" means the Additional Shares divided by the Major
Affiliate Number.
"Balance Sheet Date" means December 31, 2001.
"Benefit Plan" means any material employee benefit fund, plan, program,
arrangement or contract (including any "pension" plan, fund or program, as
defined in Section 3(2) of ERISA, and any "employee benefit plan," as defined
in Section 3(3) of ERISA and any plan, program, arrangement or contract
providing for severance; medical, dental or vision benefits; life insurance or
death benefits; disability benefits, sick pay or other wage replacement;
vacation, holiday or sabbatical; pension or profit-sharing benefits; stock
options or other equity compensation; bonus or incentive pay or other material
fringe benefits), whether written or not but does not include any contract,
agreement or other arrangement relating to only one employee.
A-1
"Business Day" means any day other than a Saturday, a Sunday or a day on
which commercial banks in The City of New York are authorized or obligated by
law, rule or regulation to be closed.
"Certificate of Merger" means a certificate of merger to be reasonably
agreed upon by the Parent, Merger Sub, and the Company and filed with the
Secretary of State of the State of Delaware as provided in the DGCL, pursuant
to Section 2.2.
"Change in Company Recommendation" means any action by the Company's board
of directors, or any committee thereof, with respect to the (i) withdrawal or
modification or any proposal to withdraw or modify, or the taking of any action
in furtherance of the withdrawal or modification, in a manner adverse to the
Parent or Merger Sub, of the approval or recommendation by such board of
directors or any such committee of this Agreement or the Merger, (ii) approval
or recommendation or a proposal to approve or recommend or take any action in
furtherance of approval or recommendation of, any Competing Transaction or
(iii) entering into any agreement with respect to any Competing Transaction.
"Closing" means the closing referred to in Section 2.6.
"Closing Date" means the date and time at which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
"Company Agreement" means any contract of the Company or any Company
Subsidiary listed on Schedule 4.18.
"Company Audited Financial Statements" means each of the audited
consolidated financial statements of the Company (including any related notes
and schedules) included (or incorporated by reference) in the Company SEC
Documents.
"Company Balance Sheet" means the most recent consolidated balance sheet
dated December 31, 2001 of the Company and its Subsidiaries included in the
Company Unaudited Annual Financial Statements.
"Company Benefit Plan" means any Benefit Plan maintained sponsored or
contributed to or required to be contributed to by the Company or any Company
ERISA Affiliate.
"Company Certificate" means a certificate representing, immediately prior to
the Effective Time, one or more shares of Company Common Stock, but not
certificates representing Dissenting Shares.
"Company Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Company Disclosure Letter" means the disclosure letter, dated as of the
date of this Agreement, delivered by the Company to the Parent concurrently
with the execution of this Agreement and forming a part hereof.
"Company ERISA Affiliate" means the Company, any Company Subsidiary and any
other trade or business (whether or not incorporated) that is or was under
"common control" with the Company or any Company Subsidiary (within the meaning
of ERISA Section 4001) or with respect to which the Company or any Company
Subsidiary could otherwise incur liability under Title IV of ERISA.
"Company ESPP" means the Company's amended and restated 2000 Employee Stock
Purchase Plan.
"Company Financial Advisor" means Goldman, Sachs & Co.
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"Company Financial Statements" means each of (i) the Company Audited
Financial Statements, (ii) the Company Unaudited Interim Financial Statements
and (iii) the Company Unaudited Annual Financial Statements.
"Company Insiders" means those officers and directors of the Company who are
subject to short-swing profits liability provisions of Section 16(a) of the
Exchange Act.
"Company Intellectual Property" means all Intellectual Property that (a) is
owned by the Company or any Company Subsidiary, (b) is licensed to the Company
or any Company Subsidiary, (c) was developed or created by or for the Company
or any Company Subsidiary or (d) is currently used in the Company's business or
the business of any Company Subsidiary.
"Company Major Stockholders" means the Major Stockholder and the Major
Stockholder Affiliates.
"Company Material Adverse Effect" means a Material Adverse Effect with
respect to the Company.
"Company Option" means an option or warrant to purchase Shares (other than
pursuant to the Company ESPP) which has been granted by the Company and which
is outstanding at the Effective Time.
"Company Preferred Stock" means the preferred stock, par value $0.01, of the
Company.
"Company SEC Documents" means each form, report, schedule, statement and
other document required to be filed by the Company since March 9, 2000 through
the Closing Date under the Exchange Act or the Securities Act or by the rules
and regulations of the NNM, and any amendment to such document filed through
the date of this Agreement, whether or not such amendment is required to be so
filed.
"Company Stock Plans" means the Company's 1998 Stock Incentive Plan, 2000
Stock Incentive Plan and the 1994 Stock Plan of Smart Storage, Inc., as amended.
"Company Subsidiary" means each Person that is a Subsidiary of the Company.
"Company Unaudited Annual Financial Statements" means the unaudited
consolidated financial statements of the Company as of and through the period
ended December 31, 2001, which have been made available to the Parent.
"Company Unaudited Interim Financial Statements" means the unaudited
condensed consolidated interim financial statements of the Company (including
any related notes and schedules) included (or incorporated by reference) in the
Company SEC Documents.
"Company's knowledge" means the actual knowledge of the directors or
officers of the Company.
"Competing Transaction" means any of the following (other than the Merger
and the other Transactions): (i) any merger, consolidation, share exchange,
reorganization, liquidation, dissolution, business combination or other similar
transaction involving the Company pursuant to which the stockholders of the
Company immediately preceding such transaction hold less than 50% of the
aggregate equity interests in the surviving or resulting entity of such
transaction; (ii) any sale, lease, exchange, license, transfer or other
disposition of fifteen percent or more of the consolidated assets (other than
sales of inventory and non-exclusive licenses to customers in the ordinary
course of business consistent with past practices) of the Company and the
Company Subsidiaries, in a single transaction or a series of transactions;
(iii) any tender offer or exchange offer for fifteen percent or more of the
outstanding voting securities of the Company or the filing of (x) a
registration statement under the Securities Act or (y) a pre-commencement
communication under the Exchange Act in connection therewith; or (iv) any
public announcement of a proposal, plan or intention to do any of the
foregoing, or any agreement to engage in any of the foregoing.
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"Confidentiality Agreement" means the confidentiality agreement, dated
January 10, 2002, between the Company and the Parent and the confidentiality
agreement, dated January 24, 2002 between the Company and the Parent.
"DGCL" means the General Corporation Law of the State of Delaware.
"Dissenting Shares" means shares of Company Common Stock, if any, held by
Persons who have not voted such shares for adoption of this Agreement and with
respect to which such Persons shall have perfected (and not lost or
surrendered) appraisal rights in accordance with the DGCL.
"Effective Time" means the date and time at which the Certificate of Merger
is duly filed with the Secretary of State of the State of Delaware or such
other date and time as is agreed upon by the parties and specified in the
Certificate of Merger.
"Employment Agreements" means employment and severance agreements and
arrangements, as amended through the date of this Agreement, with respect to
employees and former employees of the Company or any Company Subsidiary.
"Environmental Claim" means any claim, action, investigation or notice by
any Person or entity alleging potential liability for investigatory, cleanup or
governmental response costs, or natural resources or property damages, or
personal injuries, attorney's fees or penalties relating to (i) the presence,
or release into the environment, of any Hazardous Materials at any location
owned or operated by the Company or any Subsidiary of the Company, now or in
the past, or (ii) any violation, or alleged violation, of any Environmental Law.
"Environmental Law" means each Law relating to pollution, protection or
preservation of human health or the environment including ambient air, surface
water, ground water, land surface or subsurface strata, and natural resources,
and including each Law relating to emissions, discharges, releases or
threatened releases of Hazardous Materials, or otherwise relating to the
generation, storage, containment (whether above ground or underground),
disposal, transport or handling of Hazardous Materials, or the preservation of
the environment or mitigation of adverse effects thereon and each Law with
regard to record keeping, notification, disclosure and reporting requirements
respecting Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"Exchange Act" means the Securities Exchange Act of 1934.
"Exchange Agent" means the bank or trust company designated by the Parent,
subject to the Company's reasonable approval, to act as exchange agent and
paying agent for the holders of the Shares pursuant to Section 3.3(a).
"Exchange Ratio" has the meaning ascribed to it in Section 3.1.
"GAAP" means generally accepted accounting principles in the United States
as in effect from time to time.
"Governmental Entity" means a court, arbitral tribunal, administrative
agency or commission or other governmental or regulatory authority or agency.
"Hazardous Materials" means pollutants, contaminants, toxic or hazardous
substances, materials and wastes, petroleum and petroleum products, asbestos
and asbestos-containing materials, polychlorinated biphenyls, radon and lead or
lead-based paints and materials.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
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"Indemnified Party" means each present and former officer and director of
the Company or any Company Subsidiary, and each Person who becomes any of the
foregoing prior to the Effective Time.
"Intellectual Property" means all trademarks and trademark rights, trade
names and trade name rights, service marks and service mark rights, service
names and service name rights, patents and patent rights, utility models and
utility model rights, copyrights, mask work rights, brand names, trade dress,
product designs, product packaging, business and product names, logos, slogans,
rights of publicity, trade secrets, inventions (whether patentable or not),
invention disclosures, improvements, processes, formulae, industrial models,
processes, designs, specifications, technology, methodologies, computer
software (including all source code and object code), firmware, development
tools, flow charts, annotations, all Web addresses, sites and domain names, all
data bases and data collections and all rights therein, any other confidential
and proprietary right or information, whether or not subject to statutory
registration, and all related technical information, manufacturing, engineering
and technical drawings, know-how and all pending applications for and
registrations of patents, utility models, trademarks, service marks and
copyrights, and the right to sue for patent infringement, if any, in connection
with any of the foregoing, and all documents, disks, records, files and other
media on which any of the foregoing is stored.
"IRS" means the United States Internal Revenue Service or any successor
agency performing similar functions under the Code.
"Law" means any law, statute, order, decree, consent decree, judgement,
rule, regulation, ordinance or other pronouncement having the effect of law
whether in the United States, any foreign country, or any domestic or foreign
state, county, city or other political subdivision or of any Governmental
Entity applicable to the parties hereto, this Agreement or the transactions
contemplated hereby.
"Licenses" means all licenses and agreements pursuant to which a Person or
any Subsidiary of that Person has acquired rights in or to any Intellectual
Property, or licenses and agreements pursuant to which a Person or any
Subsidiary of that Person has licensed or transferred the right to use any of
the foregoing (including, any covenants not to sue with respect to any
Intellectual Property).
"Lien" means any mortgage, pledge, assessment, security interest, lease,
lien, easement, license, covenant, condition, restriction, adverse claim, levy,
charge, option, equity, adverse claim or restriction or other encumbrance of
any kind, or any conditional sale contract, title retention contract or other
contract to give any of the foregoing, except for any restrictions on transfer
generally arising under any applicable federal or state securities Law.
"Major Affiliate Number" means the number of Shares held by the Major
Stockholder Affiliates as of the Effective Time.
"Major Cash Fraction" means an amount expressed in dollars equal to the
Additional Cash divided by the Major Stockholder Number.
"Major Share Fraction" means the Additional Shares divided by the Major
Stockholder Number.
"Major Stockholder" means Richard A. Kay.
"Major Stockholder Affiliates" means the entities which are parties to the
Voting Agreement.
"Major Stockholder Number" means the number of Shares held by the Major
Stockholder as of the Effective Time.
"Material Adverse Effect" means a material adverse effect on or change with
respect to (i) the business, financial condition, assets, operations or results
of operations of a Person and its Subsidiaries, taken as a whole,
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or (ii) the ability of such Person to timely consummate any of the
Transactions; provided, however, that in no event shall any change or effect
that arises out of, results from or relates to the following constitute a
Material Adverse Effect: (a) general economic, financial, regulatory or
political conditions in the United States or elsewhere, (b) conditions
affecting the computer software industry generally, (c) the execution and
announcement of this Agreement, the performance of a Person's obligations
hereunder, or the consummation of the Transactions or (d) a decline in the
market price of such Person's securities in the capital markets.
"Merger" means the merger of the Company into Merger Sub referred to in
Section 2.1.
"Merger Sub Common Stock" means common stock, par value $0.0001 per share,
of Merger Sub.
"NNM" means the distinct tier of the Nasdaq Stock Market referred to as the
Nasdaq National Market.
"Parent Balance Sheet" means the most recent consolidated balance sheet
dated December 31, 2001 of the Parent and its Subsidiaries included in the
Parent Unaudited Annual Financial Statements.
"Parent Audited Financial Statements" means the audited consolidated
financial statements of the Parent (including any related notes and schedules)
as of and through the period ended December 31, 2000, included (or incorporated
by reference) in the Parent SEC Documents.
"Parent Common Stock" means shares of common stock, par value $0.0001 per
share, of the Parent, together with an associated Right under the Parent Rights
Plan.
"Parent Financial Statements" means each of (i) the Parent Audited Financial
Statements, (ii) the Parent Unaudited Interim Financial Statements and (iii)
the Parent Unaudited Annual Financial Statements.
"Parent Intellectual Property" means all Intellectual Property that (a) is
owned by the Parent; (b) is licensed to the Parent or (c) was developed or
created by or for the Parent.
"Parent Material Adverse Effect" means a Material Adverse Effect with
respect to the Parent.
"Parent Option" means an option or warrant to purchase shares of Parent
Common Stock.
"Parent Preferred Stock" means the preferred stock, par value $0.0001 per
share, of the Parent.
"Parent Rights Plan" means the Rights Agreement, dated as of May 23, 1997,
by and between Parent and Harris Trust and Savings Bank, as amended from time
to time.
"Parent SEC Documents" means each form, report, schedule, statement and
other document required to be filed by the Parent since December 31, 2000
through the Closing Date under the Exchange Act or the Securities Act or by the
rules and regulations of the NNM, and any amendment to such document filed
through the date of this Agreement, whether or not such amendment was required
to be so filed.
"Parent Stock Price" means the closing price for a share of Parent Common
Stock as quoted on the NNM on the day during which the Effective Time occurs.
"Parent Subsidiary" means each Person that is a Subsidiary of the Parent.
"Parent Unaudited Annual Financial Statements" means the unaudited
consolidated financial statements of the Parent as of and through the period
ended December 31, 2001, which have been made available to the Company.
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"Parent Unaudited Interim Financial Statements" means the unaudited
condensed consolidated interim financial statements of the Parent (including
any related notes and schedules) included (or incorporated by reference) in the
Parent SEC Documents.
"Parent's knowledge" means the actual knowledge of the directors or officers
of the Parent.
"Person" means a natural person, partnership (general or limited),
corporation, limited liability company, business trust, joint stock company,
trust, unincorporated association, joint venture, Governmental Entity or other
entity or organization.
"Product" means any product designed, manufactured, shipped, sold, marketed
and/or distributed by or on behalf of the Company or any Company Subsidiary,
including any product sold in the United States by the Company or any Company
Subsidiary as the distributor, agent, or pursuant to any other contractual
relationship with a non-U.S. manufacturer.
"Proxy Statement/Prospectus" means the joint proxy statement to be filed by
the Company and the Parent with the SEC pursuant to Section 6.9, together with
all amendments and supplements thereto and including the annexes thereto.
"Purchase Rights" means rights to purchase shares of Company Common Stock
under the Company ESPP.
"Registration Statement" means the registration statement on Form S-4 or
other appropriate registration form to be filed with the SEC by the Parent in
connection with the offer and issuance of Parent Common Stock in or as a result
of the Merger.
"Right" means the preferred share purchase right as such term is defined in
the Parent Rights Plan.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933.
"Share" means a share of Company Common Stock.
"Subsidiary" means, with respect to any Person, any corporation or other
organization, whether incorporated or unincorporated, of which (a) at least a
majority of the securities or other interests having by their terms ordinary
voting power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is,
directly or indirectly, owned or controlled by such Person or by any one or
more of its Subsidiaries, or (b) such Person or any other Subsidiary of such
Person is a general partner (excluding any such partnership where such Person
or any Subsidiary of such Person does not have a majority of the voting
interest in such partnership).
"Superior Proposal" means an unsolicited bona fide written offer to
consummate a Competing Transaction (but changing the fifteen percent amount in
clauses (ii) and (iii) of the definition of Competing Transaction to fifty
percent) not resulting from, arising out of or otherwise by virtue of any
breach of Section 6.5(a), and with respect to which the board of directors of
the Company determines in good faith (a) has a reasonable likelihood of closing
on terms which the board of directors of the Company determines in good faith
(after consultation with a financial advisor of nationally recognized
reputation regarding the consideration to be received by the holders of the
Shares in the Competing Transaction from a financial point of view) would, if
consummated, result in a transaction more favorable to the Company's
stockholders than the Merger, and (b) is capable of being, and likely to be,
funded on the proposed terms, including committed financing, to the extent
required.
"Surviving Corporation" has the meaning ascribed to it in Section 2.1.
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"Tax Return" means any return, statement, report or form (including, any
estimated tax report or return, withholding tax report or return and
information report or return) required to be filed with respect to any Taxes.
"Tax" or "Taxes" means (i) any and all taxes, fees, levies, tariffs, and
imposts in the nature of a tax (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed
by any Governmental Entity or taxing authority, including, without limitation,
income, franchise, windfall or other profits, gross receipts, property, sales,
use, capital stock, payroll, employment, social security, workers'
compensation, unemployment compensation or net worth taxes; taxes or other
charges in the nature of excise, withholding, ad valorem, stamp, transfer,
value-added or gains taxes; license, registration and documentation fees; and
customs duties, tariffs and similar charges; (ii) any liability for the payment
of any amounts of the type described in (i) as a result of being a member of an
affiliated, combined, consolidated, unitary or aggregate group for any taxable
period; and (iii) any liability for the payment of amounts of the type
described in (i) or (ii) as a result of being a transferee of, or a successor
in interest to, any Person or as a result of an express or implied obligation
to indemnify any person.
"Termination Fee" means $13 million, less any amounts previously paid
pursuant to Section 9.1(b).
"Transactions" means the transactions provided for or contemplated by this
Agreement and the Voting Agreement, including the Merger.
"Voting Agreement" means the agreement, dated as of the date of this
Agreement, between the Company Major Stockholders and the Parent.
"Voting Debt" means indebtedness having general voting rights and debt
convertible into securities having such rights.
"WARN Act" means of the Worker Adjustment and Retaining Notification Act of
1988, as amended.
Section 1.2 Interpretation.
(a) When a reference is made in this Agreement to a section or article, such
reference shall be to a section or article of this Agreement unless otherwise
clearly indicated to the contrary.
(b) Whenever the words "include," "includes" or "including" are used in this
Agreement they shall be deemed to be followed by the words "without limitation."
(c) The words "hereof," "herein" and "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, paragraph, exhibit and schedule references are to the articles,
sections, paragraphs, exhibits and schedules of this Agreement unless otherwise
specified.
(d) The plural of any defined term shall have a meaning correlative to such
defined term, and words denoting any gender shall include all genders and the
neuter. Where a word or phrase is defined herein, each of its other grammatical
forms shall have a corresponding meaning.
(e) A reference to any party to this Agreement or any other agreement or
document shall include such party's successors and permitted assigns.
(f) A reference to any legislation or to any provision of any legislation
shall include any modification, amendment or re-enactment thereof, any
legislative provision substituted therefore and all rules, regulations and
statutory instruments issued under or pursuant to such legislation.
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(g) The parties have participated jointly in the negotiation and drafting of
this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties, and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
(h) No prior draft of this Agreement shall be used in the interpretation or
construction of this Agreement.
ARTICLE 2
THE MERGER
Section 2.1 The Merger. Subject to the satisfaction or waiver of all of
the conditions set forth in this Agreement and in accordance with the DGCL, at
the Effective Time, the Company shall merge with and into Merger Sub. Following
the Effective Time, the separate corporate existence of the Company shall cease
and Merger Sub shall continue as the surviving corporation (sometimes referred
to as the "Surviving Corporation") in the Merger as a wholly-owned subsidiary
of the Parent.
Section 2.2 Effective Time. Subject to the provisions of this Agreement,
at the Closing, the parties shall cause the Merger to be consummated by filing
with the Secretary of State of the State of Delaware the Certificate of Merger
and shall make all other filings or recordings required under the DGCL. The
Merger shall become effective at the Effective Time.
Section 2.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all of the property,
rights, privileges, powers and franchises of each of the Company and Merger Sub
shall vest in the Surviving Corporation, and all debts, liability and duties of
each of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
Section 2.4 Certificate of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time, the certificate of incorporation of Merger
Sub as in effect immediately prior to the Effective Time shall be the
certificate of incorporation of the Surviving Corporation, except that the name
of the corporation shall be OTG Software, Inc., until thereafter amended in
accordance with applicable law. At the Effective Time, the bylaws of Merger
Sub, as in effect immediately prior to the Effective Time shall be the bylaws
of the Surviving Corporation, except that the name of the corporation shall be
OTG Software, Inc., until thereafter amended in accordance with applicable law.
Section 2.5 Directors and Officers of the Surviving Corporation. At the
Effective Time, the directors of Merger Sub immediately prior to the Effective
Time shall be the directors of the Surviving Corporation until their successors
are elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the certificate of incorporation and
the bylaws of the Surviving Corporation. At the Effective Time, the officers of
Merger Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation until their earlier death, resignation or removal in
accordance with the certificate of incorporation and the bylaws of the
Surviving Corporation.
Section 2.6 Closing. The closing ("Closing") of the Merger shall take
place at 10:00 a.m. (local time) on a date to be agreed upon by the parties,
and if such date is not agreed upon by the parties, the Closing shall occur on
the second Business Day after satisfaction or waiver of all of the conditions
set forth in Article 7, at the offices of Brobeck, Phleger & Harrison, LLP, One
Market, Spear Street Tower, San Francisco, CA 94105, or at such other place as
agreed upon by the parties.
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ARTICLE 3
EFFECTS OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES
Section 3.1 Effect on Company Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders of any
shares of Company Common Stock, each issued and outstanding share of Company
Common Stock (X) (other than any shares of Company Common Stock held by the
Major Stockholder and the Major Stockholder Affiliates, any shares of Company
Common Stock to be cancelled pursuant to Section 3.2 and Dissenting Shares)
shall be converted into the right to receive (a) 0.6876 (the "Exchange Ratio")
of a fully paid and nonassessable share of Parent Common Stock (the "Stock
Merger Consideration") and (b) an amount in cash equal to $2.50 per share
without interest, less any required withholding tax (the "Cash Merger
Consideration"); (Y) held by the Major Stockholder Affiliates shall be
converted into the right to receive (a) the Exchange Ratio fully paid and
nonassessable shares of Parent Common Stock, as Stock Merger Consideration, and
(b) the Affiliate Share Fraction fully paid and nonassessable shares of Parent
Common Stock in lieu of the Cash Merger Consideration; (Z) held by the Major
Stockholder shall be converted into the right to receive (a) the Exchange Ratio
(less the Major Share Fraction) fully paid and nonassessable shares of Parent
Common Stock, (b) the Cash Merger Consideration and (c) the Major Cash
Fraction. As of the Effective Time, all such shares of Company Common Stock
shall no longer be outstanding and shall automatically be cancelled and retired
and shall cease to exist. As of the Effective Time, each Company Certificate,
without any action on the part of the Parent, the Company or the holder of such
share of Company Common Stock, shall be deemed to represent the right to
receive the merger consideration as provided by the second preceding sentence.
Each holder of a Company Certificate shall cease to have any rights with
respect thereto, except the right to receive, upon the surrender of any such
Company Certificates, certificates representing the shares of Parent Common
Stock to be issued or paid in consideration therefor upon surrender of such
Company Certificate in accordance with Section 3.3 and cash in lieu of
fractional interests pursuant to Section 3.4.
Section 3.2 Cancellation of Treasury Stock and Parent-Owned Stock. Each
share of Company Common Stock owned by the Company as treasury stock, any
Company Subsidiary, the Parent, Merger Sub or any other wholly-owned Subsidiary
of Parent (other than shares in trust accounts, managed accounts, custodial
accounts and the like that are beneficially owned by third parties) shall be
cancelled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
Section 3.3 Exchange of Company Certificates.
(a) As soon as practicable, the Parent shall designate the Exchange Agent to
act as agent for the holders of Shares to receive in trust the shares of Parent
Common Stock, funds to be paid for fractional shares and funds to pay the Cash
Merger Consideration, to which holders of the Shares shall become entitled
pursuant to this Article 3. From time to time after the Effective Time, the
Parent shall deposit, or cause to be deposited, with the Exchange Agent for the
benefit of holders of Shares the aggregate consideration to which such holders
shall be entitled at the Effective Time pursuant to Section 3.1.
(b) As soon as reasonably practicable after the Effective Time, the Parent
shall cause the Exchange Agent to mail to each holder of record of one or more
Company Certificates, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Company
Certificates shall pass, only upon receipt of the Company Certificates by the
Exchange Agent and shall be in such form and have such other provisions not
inconsistent with this Agreement as the Parent may reasonably specify) and (ii)
instructions for effecting the surrender of Company Certificates in exchange
for certificates representing shares of Parent Common Stock together with any
dividends and other distributions with respect thereto, any cash in lieu of
fractional shares and the Cash Merger Consideration. Upon surrender of a
Company Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, and such other documents as may be reasonably required by
the Exchange Agent, the holder of such Company Certificate shall be entitled to
receive in exchange therefor (x) a certificate representing
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that number of whole shares of Parent Common Stock (which shall be credited in
street name through Depository Trust Company if delivered in street name unless
a physical certificate is specifically requested or is otherwise required by
applicable Law) and payment of cash in lieu of fractional shares which such
holder has the right to receive pursuant to this Article 3 and (y) cash in an
amount equal to the product of (I) the number of shares of Company Common Stock
formerly represented by such Company Certificate and (II) the Cash Merger
Consideration, and the Company Certificate so surrendered shall be cancelled.
If certificates representing shares of Parent Common Stock are to be registered
in the name of a Person, cash in lieu of fractional shares is to be paid or the
Cash Merger Consideration is to be paid to a Person other than the Person in
whose name the surrendered Company Certificate is registered, it shall be a
condition to the issuance of such certificates representing shares of Parent
Common Stock that the Company Certificate so surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and that the Person
requesting such payment shall have paid any transfer and other Taxes required
by reason of the issuance of certificates representing shares of Parent Common
Stock to a Person other than the registered holder of the Company Certificate
surrendered or shall have established to the satisfaction of the Parent that
such Tax either has been paid or is not applicable. No interest shall be paid
or shall accrue on the cash payable upon the surrender of any Company
Certificate.
(c) At the close of business on the day during which the Effective Time
occurs, the stock transfer books of the Company shall be closed, and thereafter
there shall be no further registration of transfers of shares of Company Common
Stock on the records of the Company.
(d) No dividends or other distributions with respect to the Parent Common
Stock with a record date after the Effective Time shall be paid to the holder
of any unsurrendered Company Certificate with respect to the shares of Parent
Common Stock represented thereby, no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to Section 3.4 and no Cash Merger
Consideration shall be paid to any such holder, until the surrender of such
Company Certificate in accordance with this Article 3. Subject to the effect of
applicable escheat or similar laws, following surrender of any such Company
Certificate, there shall be paid to the holder thereof, without interest, (i)
promptly after the time of such surrender, the amount of any cash payable in
lieu of fractional shares of Parent Common Stock to which such holder is
entitled pursuant to Section 3.4 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such shares of Parent Common Stock, (ii) the Cash Merger
Consideration, and (iii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time
and a payment date subsequent to such surrender payable with respect to such
shares of Parent Common Stock.
(e) All shares of Parent Common Stock issued upon the surrender for exchange
of Company Certificates in accordance with the terms of this Article 3
(including any cash paid pursuant to Section 3.3(d) or 3.4) shall be deemed to
have been issued and paid in full satisfaction of all rights pertaining to the
Shares formerly represented by such Company Certificates, subject, however, to
the obligation of the Surviving Corporation, if any, to pay any dividends or
make any other distributions with a record date prior to the Effective Time
which may have been declared or made by the Company on such shares of Company
Common Stock in accordance with the terms of this Agreement and which remain
unpaid at the Effective Time. If, after the Effective Time, Company
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this
Article 3, except as otherwise provided by Law.
Section 3.4 No Fractional Shares. No certificates representing fractional
shares of Parent Common Stock shall be issued upon the surrender for exchange
of Company Certificates, and such fractional share interests shall not entitle
the owner thereof to vote or to any other rights of a stockholder of the
Parent. Notwithstanding any other provision of this Agreement, each holder of
Shares converted pursuant to Section 3.1 who would otherwise have been entitled
to receive a fraction of a share of Parent Common Stock (after taking into
account all Company Certificates delivered by such holder) shall receive, in
lieu thereof, cash (without interest) in an amount equal to the product of (i)
such fraction multiplied by (ii) the Parent Stock Price.
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Section 3.5 Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund, as directed by the Surviving
Corporation or Parent, on a daily basis. Any interest and other income
resulting from such investments shall be payable to the Surviving Corporation
or Parent on demand.
Section 3.6 Termination of Exchange Fund. At any time following twelve
months after the Effective Time, the Parent shall be entitled to require the
Exchange Agent to deliver to it any portion of the Exchange Fund which had been
made available to the Exchange Agent and which has not been disbursed to
holders of Company Certificates, and thereafter such holders shall be entitled
to look only to the Parent (subject to abandoned property, escheat or other
similar laws) with respect to the shares of Parent Common Stock, cash in lieu
of fractional interests in a share of Parent Common Stock or any dividends or
distributions with respect to shares of Parent Common Stock and the Cash Merger
Consideration payable upon due surrender of their Company Certificates, without
any interest thereon. Notwithstanding the foregoing, none of the Parent, Merger
Sub, the Surviving Corporation nor the Exchange Agent shall be liable to any
holder of a Company Certificate for shares of Parent Common Stock, cash in lieu
of fractional interests in a share of Parent Common Stock or any dividends or
distributions with respect to shares of Parent Common Stock delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Any such shares, cash, dividends or distributions in respect of
such Company Certificate shall, to the extent permitted by applicable law,
become the property of the Parent, free and clear of all claims or interest of
any Person previously entitled thereto.
Section 3.7 Certain Adjustments. If between the date hereof and the
Effective Time, the outstanding shares of Company Common Stock or Parent Common
Stock shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of
shares, or any dividend payable in stock or other securities shall be declared
thereon with a record date within such period, or if the Rights become
exercisable, the Exchange Ratio, Affiliate Share Fraction and Major Share
Fraction shall be adjusted accordingly to provide to the holders of shares of
Company Common Stock the same economic effect as contemplated by this Agreement
prior to such reclassification, recapitalization, split-up, combination,
exchange or dividend or issuance of Rights.
Section 3.8 Company Options.
(a) As of the Effective Time, each outstanding Company Option shall
thereafter entitle the holder thereof to receive, upon the exercise thereof,
(i) that number of shares of Parent Common Stock (rounded down to the nearest
whole share) equal to the product of (A) the number of shares of Company Common
Stock subject to such Company Option immediately prior to the Effective Time
and (B) the Exchange Ratio, and (ii) a cash payment in an amount equal to the
product of (A) the number of shares of Company Common Stock subject to such
Company Option immediately prior to the Effective Time and (B) the Cash Merger
Consideration (unreduced by any withholding Taxes), at an exercise price per
share (rounded up to the nearest whole cent) equal to (y) the exercise price
per share of Company Common Stock subject to such Company Option divided by (z)
the Exchange Ratio.
(b) As of the Effective Time, the Parent shall assume in full each Company
Option, whether vested or unvested, together with all Company Stock Plans. The
assumption of a Company Option by the Parent shall not terminate or modify
(except as required hereunder or as provided by the existing terms of the
Company Option, Company Stock Plans or any Employment Agreement) any right of
first refusal, right of repurchase, vesting schedule or other restriction on
transferability relating to a Company Option or the stock issuable upon the
exercise thereof. Continuous employment with the Company shall be credited to
an optionee for purposes of determining the number of shares subject to
exercise, vesting or repurchase after the Effective Time, and the provisions in
the applicable Company Stock Plans and stock option agreement evidencing the
terms and conditions of any Company Option relating to the exercisability of
any Company Option upon termination of an optionee's employment or service as a
director shall not be deemed triggered until such time as such optionee shall
be neither an employee or officer nor serving as a director of the Parent or
any Subsidiary of the Parent except as or as provided by the existing terms of
the Company Option, Company Stock Plans or any Employment
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Agreement. After such assumption, the Parent shall issue, upon any partial or
total exercise of any Company Option, in lieu of shares of Company Common
Stock, the number of shares of Parent Common Stock as described in Section
3.8(a) together with the Cash Merger Consideration. The Parent shall file with
the SEC, as soon as reasonably practicable following the Effective Time, a
registration statement on Form S-8 under the Securities Act, covering, to the
extent permissible, the shares of Parent Common Stock to be issued upon the
exercise of Company Options assumed pursuant to this Section 3.8(b). Prior to
the Effective Time, the Company shall make such amendments, if any, to the
Company Stock Plans as shall be necessary to permit the assumption contemplated
by this Section 3.8(b).
(c) Except provided by Section 3.8(a) or as may be otherwise agreed to by
the Parent and the Company, all stock option plans established by the Company
or any Company Subsidiary shall terminate as of the Effective Time and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in respect of the capital stock of the Company
or any Company Subsidiary shall be deleted, terminated and of no further force
or effect as of the Effective Time.
(d) If and to the extent necessary or required by the terms of the plans
governing Company Options or pursuant to the terms of any Company Option
granted thereunder, each of the Parent and the Company shall use commercially
reasonable efforts to obtain the consent of each holder of outstanding Company
Options to the foregoing treatment of such Company Options.
(e) The Company shall terminate the Company ESPP in accordance with its
terms immediately prior to the Effective Time. Participants in the Company ESPP
shall be notified of the cancellation of the Company ESPP and shall have the
opportunity to purchase shares of Company Common Stock through the Company ESPP
in accordance therewith prior to the Closing.
Section 3.9 Appraisal Rights. Any Dissenting Shares shall not be converted
into, or be exchangeable for, the right to receive Parent Common Stock and Cash
Merger Consideration but shall instead be converted into the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the DGCL unless and until such Dissenting Shares
shall cease to be Dissenting Shares under the DGCL. The Company shall give the
Parent prompt notice of any demand for appraisal of Shares or the existence of
any Dissenting Shares (and shall also give the Parent prompt notice of any
withdrawals of such demands for appraisal rights). The Company shall not,
except with the prior written consent of the Parent, enter into negotiations or
proceedings or voluntarily make any payments with respect to, or settle or
offer to settle, any such demand for appraisal rights. If, after the Effective
Time, any Dissenting Shares shall lose their status as Dissenting Shares, the
Parent shall issue and deliver, upon surrender by such stockholder of a Company
Certificate, the number of shares of Parent Common Stock and Cash Merger
Consideration to which such stockholder would otherwise be entitled pursuant to
this Article 3 (and cash in lieu of fractional shares pursuant to Section 3.4).
Section 3.10 Lost, Stolen or Destroyed Company Certificates. If any
Company Certificates are lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Company Certificates, upon
the making of an affidavit of that fact by the holder thereof, such shares of
Parent Common Stock (and cash for the Cash Merger Consideration and in lieu of
fractional shares) as may be required pursuant to Section 3.1, provided,
however, that the Parent may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
Company Certificates to indemnify the Parent against any claim that may be made
against the Parent, the Surviving Corporation or the Exchange Agent with
respect to the Company Certificates alleged to have been lost, stolen or
destroyed.
Section 3.11 Withholding Rights. The Parent or the Surviving Corporation
shall be entitled to deduct and withhold, or cause the Exchange Agent to deduct
or withhold, from the shares of Parent Common Stock and Cash Merger
Consideration otherwise payable pursuant to this Agreement to any former holder
of shares of Company Common Stock such amounts as it reasonably determines it
was required to deduct and withhold with
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respect to the making of such payment under the Code or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by the
Parent or the Surviving Corporation, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the former holder of such
shares of Company Common Stock in respect of which such deduction and
withholding was made by the Parent or the Surviving Corporation.
Section 3.12 Conversion of Merger Sub Capital Stock. As of the Effective
Time, by virtue of the Merger and without any further action on the part of the
holder of shares of Merger Sub Common Stock, each issued and outstanding share
of Merger Sub Common Stock shall be converted into and become one fully paid
and nonassessable share of Common Stock, par value $0.0001 per share, of the
Surviving Corporation.
Section 3.13 Taking of Necessary Action; Further Action. If, at any time
after the Effective Time, any further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company, the officers and directors of the
Surviving Corporation are fully authorized in the name of their corporation or
otherwise to take, and will use good faith efforts to take, all such lawful and
necessary action, so long as such action is not inconsistent with this
Agreement.
ARTICLE 4
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Letter, the Company represents
and warrants to the Parent and Merger Sub that all of the statements contained
in this Article 4 are true and correct. The Company Disclosure Letter shall be
arranged in paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article 4 and the disclosure in any paragraph shall qualify
(a) the corresponding paragraph in this Article 4 and (b) the other paragraphs
in this Article 4 only to the extent that it is clear from a reading of such
disclosure that it also qualifies or applies to such other paragraphs.
Section 4.1 Organization; Qualification. The Company (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware; (b) has all requisite corporate power and authority to carry
on its business as it is now being conducted and to own, lease and operate its
properties and assets; and (c) is duly qualified or licensed to do business as
a foreign corporation in good standing in every jurisdiction in which such
qualification is required, except for such failures to be so qualified or
licensed and in good standing as have not had and would not, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse
Effect. The Company has made available to the Parent complete and correct
copies of its certificate of incorporation and the bylaws, each as presently in
effect.
Section 4.2 Subsidiaries and Affiliates. Section 4.2 of the Company
Disclosure Letter sets forth the name, jurisdiction of incorporation and
authorized and outstanding capital of each material Company Subsidiary and the
jurisdictions in which such Company Subsidiary is qualified to do business, as
well as a list of other Company Subsidiaries. Other than the Company
Subsidiaries, and except as set forth in Section 4.2 of the Company Disclosure
Letter, the Company does not own, directly or indirectly, any capital stock or
other equity securities of any corporation or have any direct or indirect
equity or ownership interest in any business or other Person, which equity or
ownership interests and investments in the aggregate exceed $1,000,000. Except
for director qualifying shares and except as would not have a Company Material
Adverse Effect, all the outstanding capital stock of each Company Subsidiary
is, directly or indirectly, owned (of record and beneficially) by the Company
free and clear of any liens, options or encumbrances of any kind, restrictions
on transfers (other than restrictions on transfer arising under applicable
securities laws), claims or charges of any kind, and is validly issued, fully
paid and nonassessable, and there are no outstanding options, rights or
agreements of any kind
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relating to the issuance, sale or transfer of any capital stock or other equity
securities of any Company Subsidiary to any Person except to the Company. Each
Company Subsidiary (a) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation; (b) has full
corporate power and authority to carry on its business as it is now being
conducted and to own, lease and operate its properties and assets; and (c) is
duly qualified or licensed to do business as a foreign corporation in good
standing in every jurisdiction in which such qualification is required, except
for such failures to be so qualified or licensed and in good standing as would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. The Company has made available to the Parent complete
and correct copies of the certificate of incorporation, bylaws or similar
organizational documents of each material Company Subsidiary, as presently in
effect.
Section 4.3 Capitalization.
(a) The authorized capital stock of the Company consists of 65,000,000
shares of Company Common Stock and 5,000,000 shares of Company Preferred Stock.
As of February 15, 2002, (i) 33,691,381 shares of Company Common Stock are
issued and outstanding and 93,200 shares of Company Common Stock are issued and
held in the treasury of the Company; (ii) no shares of Company Preferred Stock
are issued and outstanding and no shares of Company Preferred Stock are issued
and held in the treasury of the Company, (iii) 6,723,301 shares of Company
Common Stock are reserved for issuance upon exercise of Company Options issued
or issuable under the Company Stock Plans and (iv) 505,413 shares of Company
Common Stock are reserved for issuance pursuant to the Company ESPP. Section
4.3(a) of the Company Disclosure Letter lists the holder of each outstanding
Company Option, the number of Shares for which such Company Option is
exercisable, the exercise price of such Company Option, the extent to which
such Company Option will vest upon consummation of any of the Transactions and
the vesting schedule of such Company Option. All the outstanding shares of the
Company's capital stock are, and all shares of Company Common Stock which may
be issued pursuant to the exercise of outstanding Company Options will be, when
issued in accordance with the respective terms of such Company Option, duly
authorized, validly issued, fully paid and nonassessable and not issued in
violation of any preemptive rights. Neither the Company nor any Company
Subsidiary has any outstanding Voting Debt. Except as set forth above and
except for the Transactions, as of the date hereof, (x) there are no shares of
capital stock of the Company authorized, issued or outstanding; (y) there are
no existing options, warrants, calls, pre-emptive rights, subscriptions or
other rights, agreements, arrangements, understandings or commitments of any
character, relating to the issued or unissued capital stock of the Company or
any Company Subsidiary, obligating the Company or any Company Subsidiary to
issue, transfer or sell or cause to be issued, transferred or sold any shares
of capital stock or Voting Debt of, or other equity interest in, the Company or
any Company Subsidiary or securities convertible into or exchangeable for such
shares, equity interests or Voting Debt, or obligating the Company or any
Company Subsidiary to grant, extend or enter into any such option, warrant,
call, subscription or other right, agreement, arrangement or commitment; and
(z) there are no outstanding contractual obligations of the Company or any
Company Subsidiary to repurchase, redeem or otherwise acquire any shares of
Company Common Stock, or the capital stock of the Company, or any Company
Subsidiary or Affiliate of the Company or to provide funds to make any
investment (in the form of a loan, capital contribution or otherwise) in any
Company Subsidiary or any other entity or Person. Except as set forth on
Schedule 4.3, there are no registration rights, and there is no rights
agreement, "poison pill" anti-takeover plan or other agreement or understanding
to which the Company or any Company Subsidiary is a party or by which it or
they are bound with respect to any class of any equity security of the Company
or any the Company Subsidiary.
(b) There are no voting trusts or other agreements or understandings to
which the Company or any Company Subsidiary is a party with respect to the
voting of the capital stock of the Company or any Company Subsidiary.
Section 4.4 Authorization, Validity of Agreement, Company Action. The
Company has full corporate power and authority to execute and deliver this
Agreement, to perform its obligations under this Agreement and to consummate
the Transactions. The execution and delivery of, and the performance by the
Company of its
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obligations under, this Agreement and the consummation by it of the
Transactions, have been duly authorized by the Company's board of directors
and, except for obtaining the approval of its stockholders as contemplated by
Section 4.6, no other corporate action on the part of the Company or its
stockholders is necessary to authorize the execution and delivery by the
Company of this Agreement or the consummation by it of the Transactions. This
Agreement has been duly executed and delivered by the Company and, assuming due
and valid authorization, execution and delivery thereof by each of the Parent
and Merger Sub, this Agreement is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject
to applicable laws of bankruptcy, insolvency or similar laws relating to
creditors' rights generally and to general principles of equity (whether
applied in a proceeding in law or equity).
Section 4.5 Board Approvals Regarding Transactions. The Company's board of
directors, at a meeting duly called and held, has (a) determined that each of
this Agreement and the Merger are fair to, advisable and in the best interests
of the Company and the stockholders of the Company, (b) approved the
Transactions, including approval of the Company Major Stockholders and the
Parent executing and delivering, and performing their obligations under, the
Voting Agreement, and (c) recommended that the stockholders of the Company
adopt this Agreement, and none of the aforesaid actions by the Company's board
of directors has been amended, rescinded or modified. Assuming the accuracy of
the representations and warranties of the Parent and Merger Sub in Section 5.4,
the action taken by the Company's board of directors constitutes approval of
the Merger and the other Transactions by the Company's board of directors under
the provisions of Section 203 of the DGCL such that Section 203 of the DGCL
does not apply to this Agreement or the other Transactions. No other state
takeover, anti-takeover, moratorium, fair price, interested stockholder,
business combination or similar statute or rule is applicable to the Merger or
the other Transactions.
Section 4.6 Vote Required. The affirmative vote of the holders of greater
than fifty percent of the outstanding shares of the Company Common Stock is the
only vote of the holders of any class or series of the Company's capital stock
necessary to approve the Merger or adopt this Agreement and no other vote of
any holders of shares of the Company's capital stock is necessary to approve
any of the Transactions.
Section 4.7 Consents and Approvals, No Violations. Except for the filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of the Exchange Act, the HSR Act (and similar
laws of foreign countries), state securities or blue sky laws, the NNM and the
filing of the Certificate of Merger, none of the execution or delivery by the
Company of, or performance by the Company of its obligations under, this
Agreement, the consummation by the Company of the Transactions or compliance by
the Company with any of the provisions of this Agreement will (a) conflict with
or result in any breach of any provision of the certificate of incorporation,
the bylaws or similar organizational documents of the Company or any Company
Subsidiary, (b) require any filing with, or permit, authorization, consent or
approval of, any Governmental Entity, (c) result in a violation or breach of,
or constitute (with or without due notice or the passage of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration or loss of any rights) under, any of the terms, conditions or
provisions of any Company Agreement or (d) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company, any Company
Subsidiary or any of their properties or assets, excluding from the foregoing
clauses (b) and (c) such filings, permits, authorizations, consents, approvals,
violations, breaches or defaults which would not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
Section 4.7 of the Company Disclosure Letter sets forth all consents, waivers
and approvals under any of the Company's or any Company Subsidiary's
agreements, licenses or leases required to be obtained in connection with the
consummation of the transactions contemplated by this Agreement, which, if
individually or in the aggregate were not obtained, would result in a material
loss of benefits to the Company, the Parent or the Surviving Corporation as a
result of the Merger.
Section 4.8 Reports and Financial Statements.
(a) The Company has timely filed the Company SEC Documents with the SEC. As
of their respective dates or, if amended, as of the date of the last such
amendment filed prior to the date of this Agreement, the Company
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SEC Documents, including any financial statements or schedules included therein
(i) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading and (ii) complied in all material respects with the
applicable requirements of the Exchange Act, the Securities Act, the rules and
regulations of the SEC applicable to such Company SEC Documents. No Company
Subsidiary is required to file any forms, reports or other documents with the
SEC, the NNM, any other stock exchange or any other comparable Governmental
Entity.
(b) The Company Audited Financial Statements and the Company Unaudited
Interim Financial Statements complied, as of their respective dates, with
applicable accounting requirements and rules and regulations of the SEC. The
Company Financial Statements have been prepared in accordance with GAAP applied
on a consistent basis (except as may be indicated in the notes thereto and
subject, in the case of the Company Unaudited Interim Financial Statements and
the Company Unaudited Annual Financial Statements, to normal year-end
adjustments and, with respect to the Company Unaudited Interim Financial
Statements, the absence of certain notes) and fairly present in all material
respects (i) the consolidated financial position of the Company and the Company
Subsidiaries as of the dates thereof and (ii) the consolidated results of
operations, changes in stockholders' equity and cash flows of the Company and
the Company Subsidiaries for the periods presented therein.
Section 4.9 No Undisclosed Liabilities. Except (a) as disclosed in the
Company Financial Statements and (b) for liabilities and obligations incurred
in the ordinary course of business and consistent with past practice since the
Balance Sheet Date, neither the Company nor any Company Subsidiary has any
liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise, that, (i) would be required to be reflected in the Company's
financial statements, and (ii) individually or in the aggregate, have had, or
would reasonably be expected to have, a Company Material Adverse Effect.
Section 4.10 Absence of Certain Changes. Since the Balance Sheet Date,
except as disclosed in the Company SEC Documents, (a) the Company and each
Company Subsidiary has conducted its respective business only in the ordinary
course consistent with past practice, (b) there have not occurred any events or
changes in or developments having, or which would reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect and
(c) the Company has not taken, resolved to take or committed to take any action
which would have been prohibited under Section 6.1 if such section applied to
the period between the Balance Sheet Date and the date of this Agreement.
Section 4.11 Litigation. There is no action, suit, inquiry, arbitration,
proceeding or investigation of any nature pending or, to the knowledge of the
Company, threatened against the Company, any Company Subsidiary, their
respective properties or assets or, to the knowledge of the Company, any of
their respective officers or directors, in their respective capacities as such
which would reasonably be expected to have a Company Material Adverse Effect.
There is no action, suit, inquiry, arbitration proceeding or investigation by
or before any Governmental Entity pending or, to the knowledge of the Company,
threatened, against or involving the Company or any Company Subsidiary or any
of their respective properties (a) that questions or challenges the validity of
this Agreement or any action taken or to be taken by the Company or any Company
Subsidiary pursuant to this Agreement or in connection with the Transactions,
or (b) that, individually or in the aggregate, would reasonably be expected to
have a Company Material Adverse Effect. Neither the Company nor any Company
Subsidiary is subject to any judgment, order or decree specifically naming the
Company or any Company Subsidiary which is reasonably likely to have an adverse
effect on its or the Surviving Corporation's business or on its or the
Surviving Corporation's properties or assets in any material respect.
Section 4.12 Employee Benefit Plans.
(a) Section 4.12(a) of the Company Disclosure Letter lists each Company
Benefit Plan.
(b) With respect to each Company Benefit Plan, the Company has made
available to the Parent a complete and correct copy of (i) such Company Benefit
Plan (or, if not written, a written summary of its material terms)
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and the most recent summary plan description and all summaries of material
modifications issued since the date of the most recent summary plan
description, if any, related to such Company Benefit Plan, (ii) each trust
agreement or other funding arrangement, (iii) the most recent annual report
((Form 5500) filed with the IRS) (and, if the most recent annual report is a
Form 5500R, the most recent Form 5500C filed with respect to such Company
Benefit Plan), (iv) the most recent actuarial report or financial statement,
(v) the most recent determination letter, if any, issued by the IRS and any
pending request for a determination letter and (vi) each registration statement
and prospectus. Neither the Company nor any Company ERISA Affiliate nor, to the
knowledge of the Company or any Company ERISA Affiliate, any other Person or
entity, has any express or implied commitment, whether legally enforceable or
not, to continue (for any period), modify, change or terminate any Company
Benefit Plan, other than with respect to a modification, change or termination
required by applicable Law.
(c) Except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, each Company Benefit Plan
has been administered in accordance with its terms and all applicable laws,
including ERISA and the Code (including the prohibited transaction rules
thereunder). All contributions required to be made under the terms of any of
the Company Benefit Plans have, as of the date of this Agreement, been or will
be timely made. No suit, administrative proceeding, action or other adverse
proceeding or claim has been brought or threatened against or with respect to
any such Company Benefit Plan (other than routine benefits claims or relating
to qualified domestic relations orders (as that term is defined in Section
414(p) of the Code)) and there is no pending audit or inquiry by the IRS or
United States Department of Labor with respect to any Company Benefit Plan. No
event has occurred and, to the knowledge of the Company or any Company ERISA
Affiliate, there exists no condition or set of circumstances that could subject
the Company or any Company ERISA Affiliate to any material liability (other
than for routine benefit liabilities) relating in any way to any Company
Benefit Plan which would reasonably be expected to have a Company Material
Adverse Effect.
(d) Each Company Benefit Plan can be amended, discontinued or terminated at
any time (including after the Effective Time) in accordance with its terms,
without liability (other than (i) liability for benefits accrued prior to the
Effective Time, (ii) liability for ordinary administrative expenses typically
incurred in a termination event or (iii) liabilities for which sufficient
assets are set aside in a trust or insurance contract to satisfy such
liabilities or which are reflected on the most recent Balance Sheet included in
the Company Financial Statements).
(e) Each Company Benefit Plan and its related trust that is intended to
qualify under Section 401(a) and Section 501(a), respectively, of the Code has
received a favorable determination letter from the IRS as to such qualified
status or an application for such a determination letter is pending or has been
established under a standardized prototype plan for which an IRS opinion letter
has been obtained by the plan sponsor and is valid as to the adopting employer
and, in either case, nothing has occurred that could adversely affect such
qualified status.
(f) No Company Benefit Plan is a multi-employer pension plan (as defined in
Section 3(37) of ERISA) and no Company ERISA Affiliate has sponsored or
contributed to or been required to contribute to any such pension plan.
(g) With respect to each Company Benefit Plan that is subject to Title IV of
ERISA or the minimum funding rules of ERISA or Section 302 or 412 of the Code,
(i) no reportable event (within the meaning of Section 4043 of ERISA, other
than an event that is not required to be reported before or within thirty days
of such event) has occurred or is expected to occur, (ii) there was not an
accumulated funding deficiency (within the meaning of Section 302 of ERISA or
Section 412 of the Code), whether or not waived, as of the most recently ended
plan year of such Company Benefit Plan; and (iii) there is no "unfunded benefit
liability" (within the meaning of Section 4001(a)(18) of ERISA). No material
liability under Title IV of ERISA has been incurred by the Company or any
Company ERISA Affiliate that has not been satisfied in full, and no condition
exists that
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presents a material risk to the Company or any Company ERISA Affiliate of
incurring or being subject (whether primarily, jointly or secondarily) to a
material liability thereunder. None of the assets of the Company or any Company
ERISA Affiliate is, or may reasonably be expected to become, the subject of any
lien arising under ERISA or Section 412(n) of the Code.
(h) Except as required by Law, no Company Benefit Plan provides any of the
following retiree or post-employment benefits to any person: medical,
disability or life insurance benefits. To the Company's knowledge, the Company
and each Company ERISA Affiliate is in material compliance with (i) the
requirements of the applicable health care continuation and notice provisions
of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and
(ii) the applicable requirements of the Health Insurance Portability and
Accountability Act of 1996, as amended.
(i) The Company has made available to the Parent complete and correct copies
of all plans, agreements, programs and policies of the Company or any Company
Subsidiary with or relating to (i) severance for their respective employees or
directors, and (ii) their respective employees or directors which contain
"change of control" or similar provisions. Except as set forth on Section
4.12(i) of the Company Disclosure Letter, the consummation of the Transactions
will not, alone or in conjunction with any other possible event (including
termination of employment), (x) entitle any current or former employee or other
service provider of the Company or any Company Subsidiary to severance benefits
or any other payment, compensation or benefit (including forgiveness of
indebtedness), except as expressly provided by this Agreement, or (y)
accelerate the time of payment or vesting, or increase the amount of
compensation or benefit due any such employee or service provider, alone or in
conjunction with any other possible event (including termination of employment).
Section 4.13 Tax Matters.
(a) Except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, the Company and each
Company Subsidiary, and any affiliated, consolidated, combined, unitary or
aggregate group for Tax purposes of which the Company or any Company Subsidiary
is or has been a member, have (i) properly completed and filed all Tax Returns
that were required to be filed by them through the date of this Agreement and
all such Tax Returns are true, correct and complete in all material respects
and (ii) have duly paid or caused to be duly paid in full all Taxes reflected
on such Tax Returns or subsequently assessed by any Governmental Entity
responsible for the imposition of any Tax with respect to such Tax Returns.
Since the Balance Sheet Date, the Company and the Company Subsidiaries have not
incurred any liability for any Taxes other than in the ordinary course of
business. Neither the Company nor any Company Subsidiary has received notice of
any claim made by a Taxing authority in a jurisdiction where the Company or any
Company Subsidiary, as the case may be, does not file Tax Returns, that the
Company or any Company Subsidiary is or may be subject to Taxation by that
jurisdiction.
(b) There is (i) no material lien for Taxes against the property or assets
of the Company or any Company Subsidiary, other than liens for Taxes not yet
due and payable, (ii) no audit, administrative proceeding or court proceeding
with respect to Taxes or Tax Returns of the Company or any Company Subsidiary
that is being conducted or with respect to which the Company or Company
Subsidiary has been notified that such audit or proceeding is pending and no
deficiency or claim for Taxes that is being asserted by any Governmental Entity
responsible for the imposition of any Tax against the Company or any Company
Subsidiary; (iii) no extension of the statute of limitations on the assessment
of any Taxes that has been granted by the Company or any Company Subsidiary and
is currently in effect, and (iv) no agreement, contract or arrangement to which
the Company or any Company Subsidiary is a party, based upon the value of the
Stock Consideration as of the date hereof, may result in the payment of any
amount that would not be deductible by reason of Section 162(m), 280G or 404 of
the Code.
(c) Neither the Company nor any Company Subsidiary has filed a consent
pursuant to Section 341(f) of the Code (or any predecessor provision)
concerning collapsible corporations, or agreed to have Section 341(f)(2) of
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the Code apply to any disposition of a "subsection (f) asset" (as such term is
defined in Section 341(f)(4) of the Code) owned by the Company or any Company
Subsidiary.
(d) Neither the Company nor any Company Subsidiary is a party to any Tax
sharing, Tax indemnity or other agreement or arrangement with any entity not
consolidated in the Financial Statements most recently filed by the Company
with the SEC or has any liability or potential liability to another party under
any such agreement, and neither the Company nor any Company Subsidiary has any
liability or potential liability for Taxes of any Person (other than the
Company or any Company Subsidiary) under Section 1.1502-6 of the Treasury
Regulations (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise.
(e) The Company and each Company Subsidiary have withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party.
(f) Neither the Company nor any Company Subsidiary is or has ever been a
"United States real property holding corporation" within the meaning of Section
897 of the Code during the applicable period specified in Section 897(c)(1)(A)
of the Code.
Section 4.14 Environmental Laws. Except as would not, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse
Effect, the Company and each Company Subsidiary are in compliance with all
Environmental Laws, including, but not limited to, compliance with any permits
or other governmental authorizations or the terms and conditions of such
permits or authorized actions. Neither the Company nor any Company Subsidiary
has received any communication or notice, whether from a Governmental Entity or
otherwise, alleging any violation of or noncompliance with any Environmental
Laws by the Company or any Company Subsidiary, and there is no pending or, to
the Company's knowledge, threatened Environmental Claim, except where such
Environmental Claim would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect. All permits and other
governmental authorizations currently held or required to be held by the
Company and any of Company Subsidiary pursuant to any Environmental Laws are
identified in the Section 4.14 of the Company Disclosure Letter. The Company
has made available to the Parent all assessments, reports, data, results of
investigations or audits, and other information that is in the possession of or
reasonably available to the Company or any Company Subsidiary regarding
environmental matters pertaining to or the environmental condition of the
business of the Company or any of Company Subsidiary, or the compliance (or
noncompliance) by the Company or any Company Subsidiary with any Environmental
Laws. All facilities or properties presently owned, leased, used or operated by
the Company or any Company Subsidiary are identified in Section 4.14 of the
Company Disclosure Letter.
Section 4.15 Intellectual Property
(a) Section 4.15(a) of the Company Disclosure Letter contains a true and
complete list of all of the patent, trademark and copyright applications and
registrations filed and issued pursuant to federal, state, local and foreign
laws by the Company and/or any Company Subsidiary to protect its interests in
Company Intellectual Property, as well as certain other non-registered
intellectual property in which the Company has an interest. To the Company's
knowledge, Section 4.15(a) of the Company Disclosure Letter lists all the
significant Company Intellectual Property presently used by the Company in the
conduct of its business.
(b) Company Intellectual Property consists solely of items and rights which
are: (i) owned by the Company or any Company Subsidiary; (ii) in the public
domain; or (iii) except as set forth in Section 4.15(b) of the Company
Disclosure Letter, rightfully used by the Company or any Company Subsidiary and
their successors pursuant to a valid license. The Company and Company
Subsidiaries have all rights in Company Intellectual Property necessary to
carry out their current and currently contemplated and reasonably foreseeable
activities.
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(c) Except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, the reproduction,
manufacturing, distribution, licensing, sublicensing, sale or any other
exercise of rights in any Company Intellectual Property, Product, work,
technology or process as now used or offered or proposed for use, licensing or
sale by the Company or any Company Subsidiary does not infringe on any
copyright, trade secret, trademark, service mark, trade name, trade dress, firm
name, Internet domain name, logo, trade dress or mask work of any Person or the
patent of any Person. No claims (i) challenging the validity, effectiveness or
ownership by the Company or any Company Subsidiary of any of Company
Intellectual Property, or (ii) to the effect that the use, distribution,
licensing, sublicensing, sale or any other exercise of rights in any Product,
work, technology or process as now used or offered or proposed for use,
licensing, sublicensing or sale by the Company or any Company Subsidiary
infringes or will infringe on any intellectual property or other proprietary
right of any Person have been asserted or, to the knowledge of the Company, are
threatened by any Person, nor are there, to the Company's knowledge, any valid
grounds for any bona fide claim of any such kind. All material registered,
granted or issued trademarks, Internet domain names and copyrights held by the
Company and any Company Subsidiary are enforceable and subsisting and all
material registered, granted or issued patents held by the Company and any
Company Subsidiary are subsisting and, to the Company's knowledge, enforceable.
To the Company's knowledge, there is no unauthorized use, infringement or
misappropriation of any of Company Intellectual Property by any third party,
employee or former employee.
(d) Except as set forth in Section 4.15(d) of the Company Disclosure Letter,
there are no material royalties, fees, honoraria or other payments payable by
the Company or any Company Subsidiary to any Person by reason of the ownership,
development, use, license, sale or disposition of Company Intellectual
Property, other than salaries and sales commissions paid to employees and sales
agents in the ordinary course of business.
(e) Neither the Company nor any Company Subsidiary is in violation of any
license, sublicense, agreement or instrument to which the Company or any
Company Subsidiary is a party or otherwise bound, nor will execution or
delivery of this Agreement, or performance of the Company's obligations
hereunder, cause the diminution, termination or forfeiture of any Company
Intellectual Property except as would not, individually or in the aggregate,
reasonably be expected to result in a Company Material Adverse Effect. Section
4.15(e) of the Company Disclosure Letter sets forth a list of all Licenses by
the Company or any of Company Subsidiaries of Company Intellectual Property.
(f) Except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, the Company and each of
Company Subsidiaries has observed all provisions of, and performed all of their
obligations currently required to be performed under, the license agreements to
which it is a party. Except as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect, neither the
Company nor any Company Subsidiary has taken any action that could cause, or
failed to take any action, the failure of which could cause, (i) any source
code, trade secret or other Company Intellectual Property to be (A) released
from an escrow or otherwise made available to any person or entity other than
those persons described in Section 4.15(f) of the Company Disclosure Letter or
(B) dedicated to the public or otherwise placed in the public domain or (ii)
any other material adverse affect to the protection of Company Intellectual
Property under trade secret, copyright, patent or other intellectual property
laws.
Section 4.16 Employment Matters.
(a) Except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, the Company and each
Company Subsidiary are in compliance in all respects with all currently
applicable Laws respecting employment, discrimination in employment, terms and
conditions of employment, wages, hours and occupational safety and health and
employment practices, and is not engaged in any unfair labor practice. The
Company and each Company Subsidiary have withheld all amounts required by Law
or by agreement to be withheld from the wages, salaries, and other payments to
employees, and neither the Company nor any Company Subsidiary is liable for any
arrears of wages or any Taxes or any penalty for failure to comply with any of
the foregoing. Neither the Company nor any Company Subsidiary is liable for any
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payment to any trust or other fund or to any governmental or administrative
authority, with respect to unemployment compensation benefits, social security
or other benefits or obligations for employees (other than routine payments to
be made in the ordinary course of business and consistent with past practice).
Except as would not, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect, there are no pending claims against
the Company or any Company Subsidiary under any workers compensation plan or
policy or for long-term disability. Neither the Company nor any Company
Subsidiary is a party to any collective bargaining agreement or other labor
union contract, and neither the Company nor any Company Subsidiary knows of any
activities or proceedings of any labor union in connection with an attempt to
organize any such employees. To the Company's or any Company Subsidiary's
knowledge, no employees of the Company or any Company Subsidiary are in
violation of any term of any employment contract, patent disclosure agreement,
non-competition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by the Company or
Company Subsidiary because of the nature of the business conducted or presently
proposed to be conducted by the Company or any Company Subsidiary or to the use
of trade secrets or proprietary information of others. Except as would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect, no employee of the Company or any Company Subsidiary
has given written notice to the Company or any Company Subsidiary of an
intention to terminate his or her employment with the Company or any Company
Subsidiary. Except for the Employee Agreements listed pursuant to Section
4.18(b), neither the Company nor any Company Subsidiary is a party to any
severance agreements with obligations in excess of $100,000, individually.
(b) All officers and employees of the Company and each Company Subsidiary
have signed proprietary rights and confidentiality agreements in substantially
the form listed on Section 4.16(b) of the Company Disclosure Letter. To the
extent reasonably required by the nature of their services to the Company and
each Company Subsidiary, all consultants of the Company and each Company
Subsidiary have signed proprietary rights and confidentiality agreements.
(c) Since the Company's inception, neither the Company nor any Company
Subsidiary has effected (i) a plant closing as defined in the WARN Act
affecting any site of employment or facility or one or more operating units
within any site of employment or facility of the Company or any Company
Subsidiary or (ii) a mass layoff as defined in the WARN Act affecting any site
of employment or facility of the Company or any Company Subsidiary. Neither the
Company nor any Company Subsidiary is currently engaged in any layoffs or
employment terminations sufficient in number to trigger application of any
similar state or local law.
Section 4.17 Compliance with Laws. Except as would not, individually or in
aggregate, reasonably be expected to have a Company Material Adverse Effect,
the Company and each of the Company Subsidiaries are in compliance with, and
have not violated any applicable Law of any United States federal, state,
local, or foreign Governmental Entity which affects the business, properties or
assets of the Company and any Company Subsidiary, and no notice, charge, claim,
action or assertion has been received by the Company or any Company Subsidiary
or has been filed, commenced or, to the knowledge of the Company, threatened
against the Company or any Company Subsidiary alleging any such violation. All
licenses, permits and approvals required under such Laws are in full force and
effect except where the failure to be in full force and effect would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
Section 4.18 Contracts and Commitments. Neither the Company nor any of the
Company Subsidiaries is a party to or is bound by:
(a) any contracts relating to the borrowing of money, the guaranty of
another Person's borrowing of money, or the creation of an encumbrance or
lien on the assets of the Company or any of the Company Subsidiaries with
outstanding obligations in excess of $500,000, individually, or $5 million
in the aggregate;
(b) any employment or consulting agreement, contract or commitment with
any officer or director level employee or member of the Company's board of
directors or any other employee who is one of the ten most highly
compensated employees, including base salary and bonuses, other than those
that are terminable
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by the Company or any of the Company Subsidiaries on no more than thirty
days notice without liability or financial obligation or benefits generally
available to employees of the Company, except to the extent general
principles of wrongful termination law may limit the Company's or any of the
Company Subsidiaries' ability to terminate employees at will;
(c) any agreement of indemnification or guaranty by the Company or any of
the Company Subsidiaries not entered into in the ordinary course of business
other than indemnification agreements between the Company or any of the
Company Subsidiaries and any of its officers or directors in standard forms
as filed by the Company with the SEC;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company or any of the Company Subsidiaries to
engage in any line of business or conduct business in any geographical area,
compete with any person or granting any exclusive distribution rights or
limits the use or exploitation of the Company Intellectual Property;
(e) any agreement that expires or which the Company may not terminate
more than one year after the date of this Agreement or any contract that may
be renewed at the option of any person other than the Company so as to
expire more than two years after the date of this Agreement, other than
distribution and resale agreements entered into in the ordinary course of
business consistent with past practice;
(f) any agreement where performance in accordance with its terms will
result in a loss to the Company or any Company Subsidiary of more than
$300,000 during any 12 month period upon completion or performance thereof,
after allowance for direct distribution expenses;
(g) any contracts for capital expenditures in excess of $300,000,
individually, or such contracts representing $3 million in the aggregate;
(h) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business; or
(i) any agreement, contract or commitment for the purchase of any
ownership interest in any corporation, partnership, joint venture or other
business enterprise for consideration in excess of $300,000, in any case,
which includes all escrow and earn-out agreements with outstanding
obligations.
A true and complete copy (including all material amendments) of each agreement,
contract, obligation, promise or undertaking (whether written or oral and
whether express or implied) required to be listed in Section 4.18(a) through
Section 4.18(i) of the Company Disclosure Letter (a "Company Agreement"), or a
summary of each oral contract, has been made available to the Parent. Each
Company Agreement is in full force and effect. No condition exists or event has
occurred that, (whether with or without notice or lapse of time or both, or the
happening or occurrence of any other event) would constitute a default by the
Company or a Company Subsidiary of the Company or, to the Company's knowledge,
any other party thereto under, or result in a right in termination of, any
Company Agreement, except as would not, individually or in the aggregate, be
reasonably expected to result in a Company Material Adverse Effect. Neither the
Company nor any Company Subsidiary is in violation of, nor to the Company's
knowledge, is there any valid basis for any claim of material default under or
violation of, any Company Agreement or commitment or restriction to which the
Company or any Company Subsidiary is a party or by which any of them or any of
their assets is bound.
Section 4.19 Customers. Since December 31, 2001, there has not been any
material adverse change in the business relationship of the Company or any
Company Subsidiary with any customer or customers who together accounted for
more than seven percent of the Company's sales (on a consolidated basis) for
the year ended December 31, 2001.
Section 4.20 Information Supplied. None of the information supplied or to
be supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Registration Statement will, at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
A-23
misleading or (ii) the Proxy Statement/Prospectus will, at the date it is first
mailed to the Company's stockholders, and to the Parent stockholders, or at the
time of the Company Stockholders' Meeting and Parent's Stockholders' Meeting to
vote on this Agreement, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The Proxy Statement/Prospectus will comply as to form
in all material respects with the requirements of the Exchange Act and the
rules and regulations thereunder, except that no representation or warranty is
made by the Company with respect to statements made or incorporated by
reference therein based on information supplied by the Parent specifically for
inclusion or incorporation by reference in the Proxy Statement/Prospectus and
no representation or warranty is made by the Company with respect to any
forward-looking information, budgets or projections which may have been
supplied by the Company.
Section 4.21 Opinion of Financial Advisor. The Company has received the
opinion of the Company Financial Advisor dated the date of this Agreement, to
the effect that, as of such date, the Exchange Ratio and Cash Merger
Consideration to be received for each share of Company Common Stock pursuant to
this Agreement is fair to the holders of such shares from a financial point of
view.
Section 4.22 Absence of Certain Payments. Neither the Company nor any
Company Subsidiary nor any director, officer, agent, employee or other Person
acting on behalf of the Company or any Company Subsidiary, has used any
corporate or other funds for unlawful contributions, payments, gifts, or
entertainment, or made any unlawful expenditures relating to political activity
to government officials or others or established or maintained any unlawful or
unrecorded funds in violation of Section 30A of the Exchange Act. Neither the
Company nor any Company Subsidiary nor any current director, officer, agent,
employee or other Person acting on behalf of the Company or any Company
Subsidiary, has accepted or received any unlawful contributions, payments,
gifts or expenditures.
Section 4.23 Insider Interests. Except as set forth in the Company SEC
Documents, no officer or director of the Company or any Company Subsidiary has
any material interest in any property, real or personal, tangible or
intangible, including inventions, patents, trademarks or trade names, used in
or pertaining to the business of the Company or any Company Subsidiary.
Section 4.24 Brokers or Finders. Except as set forth in Section 4.24 of
the Company Disclosure Letter, neither the Company nor any Company Subsidiary
or their respective Affiliates has an obligation to pay any agent, broker,
investment banker, financial advisor, attorney or other firm or Person any
brokers', finder's or legal fee or any other commission or similar fee in
connection with any of the Transactions. True and correct copies of all
agreements between the Company and the Company Financial Advisor including any
fee arrangements are included in Section 4.24 of the Company Disclosure Letter.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF THE PARENT AND MERGER SUB
Except as set forth in the Parent Disclosure Letter, the Parent and Merger
Sub represent and warrant to the Company that all of the statements contained
in this Article 5 are true and correct. The Parent Disclosure Letter shall be
arranged in paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article 5 and the disclosure in any paragraph shall qualify
(a) the corresponding paragraph in this Article 5 and (b) the other paragraphs
in this Article 5 only to the extent that it is clear from a reading of such
disclosure that it also qualifies or applies to such other paragraphs.
Section 5.1 Organization; Qualification. Each of the Parent and Merger Sub
(a) is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (b) has all requisite
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corporate power and authority to carry on its business as it is now being
conducted and to own, lease and operate its properties and assets; and (c) is
duly qualified or licensed to do business as a foreign corporation in good
standing in every jurisdiction in which such qualification is required, except
for such failures to be so qualified or licensed and in good standing as have
not had and would not, individually or in the aggregate, reasonably be expected
to have a Parent Material Adverse Effect. The Parent has made available to the
Company complete and correct copies of its certificate of incorporation and
bylaws, each as presently in effect. Merger Sub has conducted no business and
has no operations other than in connection with this Agreement and the
Transactions.
Section 5.2 Capitalization.
(a) The authorized capital stock of the Parent consists of 200,000,000
shares of Parent Common Stock and 5,000,000 shares of Parent Preferred Stock,
30,000 of which have been designated as Series A Junior Participating Preferred
Stock. As of February 19, 2002, (i) 90,442,748 shares of Parent Common Stock
are issued and outstanding and no shares of Parent Common Stock are issued and
held in the treasury of the Parent, (ii) no shares of Parent Preferred Stock
are issued and outstanding and no shares of Parent Preferred Stock are issued
and held in the treasury of the Parent, and (iii) 26,987,319 shares of Parent
Common Stock are issued or reserved for issuance upon exercise of Parent
Options under the Parent's stock option plans. Section 5.2(a) of the Parent
Disclosure Letter lists, as of February 19, 2002, the aggregate number of
outstanding Parent Options and shares of Parent Common Stock subject thereto,
and the exercise price of such Parent Options. No Parent Option will vest upon
consummation of any of the Transactions. Except as set forth above and except
for the Transactions, as of the date hereof, there are no shares of capital
stock of the Company authorized, issued or outstanding. All the outstanding
shares of the Parent's capital stock are, and all shares of Parent Common Stock
which may be issued pursuant to the exercise of outstanding Parent Options will
be, when issued in accordance with the respective terms of such Parent Option,
duly authorized, validly issued, fully paid and nonassessable and not issued in
violation of any preemptive rights. All the outstanding shares of the Parent's
capital stock are, and all shares of Parent Common Stock which may be issued
pursuant to the exercise of outstanding Parent Options will be, when issued in
accordance with the respective terms of such Parent Option or Article 3, as
applicable, duly authorized, validly issued, fully paid and nonassessable and
not issued in violation of any preemptive rights. Neither the Parent or any of
its Subsidiaries has any outstanding Voting Debt.
(b) Except as set forth in Section 5.2(b) of the Parent Disclosure Letter,
there are no voting trusts or other agreements or understandings to which the
Parent or any of its Subsidiaries is a party with respect to the voting of the
capital stock of the Parent or any of its Subsidiaries.
Section 5.3 Authorization, Validity of Agreement, Parent Action. Each of
the Parent and Merger Sub has full corporate power and authority to execute and
deliver this Agreement, to perform its obligations under this Agreement and to
consummate the Transactions. The execution and delivery of, and the performance
by the Parent and Merger Sub of their respective obligations under, this
Agreement and the consummation by each of the Parent and Merger Sub of the
Transactions, have been duly authorized by each of the Parent's and Merger
Sub's boards of directors and, except for obtaining the approval of the
Parent's stockholders as contemplated by Section 5.5, no other corporate action
on the part of the Parent or Merger Sub or their respective stockholders is
necessary to authorize the execution and delivery by the Parent and Merger Sub
of this Agreement or the consummation by them of the Transactions. This
Agreement has been duly executed and delivered by the Parent and Merger Sub,
and, assuming due and valid authorization, execution and delivery by the
Company, this Agreement is a valid and binding obligation of each of the Parent
and Merger Sub, enforceable against each of them in accordance with its terms,
subject to applicable laws of bankruptcy, insolvency or similar laws relating
to creditors' rights generally and to general principles of equity (whether
applied in a proceeding in law or equity).
Section 5.4 Share Ownership. Neither the Parent nor Merger Sub
beneficially owns any Shares. Neither Parent nor any Parent Subsidiary
(including Merger Sub) is, nor at any time during the last three years has any
of them been, an "interested stockholder" of the Company within the meaning of
Section 203(c)(5) of the DGCL. Neither Parent nor any Parent Subsidiary
(including Merger Sub) owns (directly or indirectly, beneficially or of
A-25
record) and is not a party to any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of, in each case, any
shares of the capital stock of the Company (other than as contemplated by this
Agreement).
Section 5.5 Vote Required. The affirmative vote of the holders of greater
than fifty percent of the shares of the Parent Common Stock voting on the
proposal to approve this Agreement at a meeting of the Parent's stockholders,
is the only vote of the holders of any class or series of the Parent's capital
stock necessary to approve the Merger or adopt this Agreement and no other vote
of any holders of shares of the Parent's capital stock is necessary to approve
any of the Transactions.
Section 5.6 Consents and Approvals, No Violations. Except for the filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, the HSR
Act (and similar laws of foreign countries), state securities or blue sky laws,
the NNM and the filing of the Certificate of Merger, none of the execution or
delivery by the Parent or Merger Sub of, or performance by the Parent or Merger
Sub of its obligations under, this Agreement, the consummation by the Parent or
Merger Sub of the Transactions or compliance by the Parent or Merger Sub with
any of the provisions of this Agreement will (a) conflict with or result in any
breach of any provision of the respective certificate of incorporation or
bylaws of the Parent or Merger Sub; (b) require any filing with, or permit,
authorization, consent or approval of, any Governmental Entity; (c) result in a
violation or breach of, or constitute (with or without due notice or the
passage of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration or loss of any rights) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Parent or any of its Subsidiaries is a party or by which any of them or any
of their respective properties or assets may be bound; or (d) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Parent, any of its Subsidiaries or any of their properties or assets, excluding
from the foregoing clauses (b), (c) and (d) such violations, breaches or
defaults which would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect. No action is required under
the Parent Rights Plan so as to provide that (i) no Person will become an
"Acquiring Person" and (ii) no "Shares Acquisition Date" or "Distribution Date"
(as such terms are defined in the Parent Rights Plan) will occur in each case,
as a result of the approval, execution and delivery of this Agreement and the
Voting Agreement and the consummation of the transactions contemplated by this
Agreement.
Section 5.7 Reports and Financial Statements.
(a) The Parent has timely filed the Parent SEC Documents with the SEC. As of
their respective dates or, if amended, as of the date of the last such
amendment filed prior to the date of this Agreement, the Parent SEC Documents,
including any financial statements or schedules included therein (i) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading and (ii) complied in all material respects with the applicable
requirements of the Exchange Act, the Securities Act, the rules and regulations
of the SEC applicable to such Parent SEC Documents. No Parent Subsidiary is
required to file any forms, reports or other documents with the SEC, the NNM,
any other stock exchange or any other comparable Governmental Entity.
(b) The Parent Audited Financial Statements and the Parent Unaudited Interim
Financial Statements complied, as of their respective dates, with applicable
accounting requirements and rules and regulations of the SEC. The Parent
Financial Statements have been prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto and subject,
in the case of the Parent Unaudited Interim Financial Statements and the Parent
Unaudited Annual Financial Statements, to normal year-end adjustments and, with
respect to the Parent Unaudited Interim Financial Statements, the absence of
certain notes) and fairly present (i) the consolidated financial position of
the Parent and the Parent Subsidiaries as of the dates thereof and (ii) the
consolidated results of operations, changes in stockholders' equity and cash
flows of the Parent and the Parent Subsidiaries for the periods presented
therein.
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(c) Except (x) as disclosed in the Parent Financial Statements and (y) for
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice since the Balance Sheet Date, neither the Parent
nor any Parent Subsidiary has any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, that, (i) would be required to
be reflected in the Parent's financial statements, and (ii) individually or in
the aggregate, have had, or would reasonably be expected to have, a Parent
Material Adverse Effect.
Section 5.8 Absence of Certain Changes. Since the Balance Sheet Date,
except as disclosed in the Parent SEC Documents, (a) the Parent has conducted
its business only in the ordinary course and consistent with past practice and
(b) there have not occurred any events or changes in or developments having, or
which would reasonably be expected to have, individually or in the aggregate, a
Parent Material Adverse Effect.
Section 5.9 Litigation. There is no material action, suit or proceeding of
any nature pending or to the knowledge of the Parent threatened against the
Parent, Merger Sub, or any Parent Subsidiary, their respective properties or
any of their respective officers or directors, in their respective capacities
as such which would reasonably be expected to have a Parent Material Adverse
Effect. There is no material investigation pending or to the knowledge of the
Parent threatened against the Parent, Merger Sub, or any Parent Subsidiary, any
of their respective properties or any of their respective officers or directors
by or before any Governmental Entity which would reasonably be expected to have
a Parent Material Adverse Effect.
Section 5.10 Information Supplied. None of the information supplied or to
be supplied by the Parent specifically for inclusion or incorporation by
reference in (i) the Registration Statement will, at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) the Proxy Statement/Prospectus will, at the date it is first mailed to the
Company's stockholders, and to the Parent stockholders to the extent necessary,
or at the time of the Company Stockholders' Meeting and Parent Stockholders'
Meeting to the extent necessary, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus and the Registration Statement will comply as to form in
all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations thereunder, except that no
representation or warranty is made by the Parent with respect to statements
made or incorporated by reference therein based on information supplied by the
Company specifically for inclusion or incorporation by reference in the Proxy
Statement/Prospectus and no representation or warranty is made by the Parent
with respect to any forward-looking information, budgets or projections which
may have been supplied by Parent.
Section 5.11 Compliance with Laws. Except as would not, individually or in
the aggregate, reasonably be expected to have a Parent Material Adverse Effect,
the Parent and each of the Parent Subsidiaries are in compliance with, and have
not violated any applicable Law of any United States federal, state, local, or
foreign Governmental Entity which affects the business, properties or assets of
the Parent and any Parent Subsidiary, and no notice, charge, claim, action or
assertion has been received by the Parent or any Parent Subsidiary or has been
filed, commenced or, to the knowledge of the Parent, threatened against the
Parent or any Parent Subsidiary alleging any such violation. All licenses,
permits and approvals required under such Laws are in full force and effect
except where the failure to be in full force and effect would not, individually
or in the aggregate, reasonably be expected to have a Parent Material Adverse
Effect.
Section 5.12 Tax Matters.
(a) Except as would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect, the Parent and each Parent
Subsidiary, and any affiliated, consolidated, combined, unitary or aggregate
group for Tax purposes of which the Parent or any Parent Subsidiary is or has
been a member, have (i) properly completed and filed all Tax Returns that were
required to be filed by them through the date of this
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Agreement and all such Tax Returns are true, correct and complete in all
material respects and (ii) have duly paid or caused to be duly paid in full all
Taxes reflected on such Tax Returns or subsequently assessed by any
Governmental Entity responsible for the imposition of any Tax with respect to
such Tax Returns. Since the Balance Sheet Date, the Parent and the Parent
Subsidiaries have not incurred any liability for any Taxes other than in the
ordinary course of business. Neither the Parent nor any Parent Subsidiary has
received notice of any claim made by a Taxing authority in a jurisdiction where
the Parent or any Parent Subsidiary, as the case may be, does not file Tax
Returns, that the Parent or any Parent Subsidiary is or may be subject to
Taxation by that jurisdiction.
(b) There is (i) no material lien for Taxes against the property or assets
of the Parent or any Parent Subsidiary, other than liens for Taxes not yet due
and payable, (ii) no audit, administrative proceeding or court proceeding with
respect to Taxes or Tax Returns of the Parent or any Parent Subsidiary that is
being conducted or with respect to which the Parent or Parent Subsidiary has
been notified in writing that such audit or proceeding is pending and no
deficiency or claim for Taxes that is being asserted by any Governmental Entity
responsible for the imposition of any Tax against the Parent or any Parent
Subsidiary; (iii) no extension of the statute of limitations on the assessment
of any Taxes that has been granted by the Parent or any Parent Subsidiary and
is currently in effect, and (iv) no agreement, contract or arrangement to which
the Parent or any Parent Subsidiary is a party that may result in the payment
of any amount that would not be deductible by reason of Section 162(m), 280G or
404 of the Code.
(c) Neither the Parent nor any Parent Subsidiary has filed a consent
pursuant to Section 341(f) of the Code (or any predecessor provision)
concerning collapsible corporations, or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a "subsection (f) asset" (as such term is
defined in Section 341(f)(4) of the Code) owned by the Parent or any Parent
Subsidiary.
(d) Neither the Parent nor any Parent Subsidiary is a party to any Tax
sharing, Tax indemnity or other agreement or arrangement with any entity not
consolidated in the Financial Statements most recently filed by the Parent with
the SEC or has any liability or potential liability to another party under any
such agreement, and neither the Parent nor any Parent Subsidiary has any
liability or potential liability for Taxes of any Person (other than the Parent
or any Parent Subsidiary) under Section 1.1502-6 of the Treasury Regulations
(or any similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise.
(e) The Parent and each Parent Subsidiary have withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party.
(f) Neither the Parent nor any Parent Subsidiary is or has ever been a
"United States real property holding corporation" within the meaning of Section
897 of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
Section 5.13 Environmental Laws. Except as would not, individually or in
the aggregate, reasonably be expected to have a Parent Material Adverse Effect,
the Parent and each Parent Subsidiary are in compliance with all Environmental
Laws, including, but not limited to, compliance with any permits or other
governmental authorizations or the terms and conditions of such permits or
authorized actions. Neither the Parent nor any Parent Subsidiary has received
any communication or notice, whether from a Governmental Entity or otherwise,
alleging any violation of or noncompliance with any Environmental Laws by the
Parent or any Parent Subsidiary, and there is no pending or, to the Parent's
knowledge, threatened Environmental Claim, except where such Environmental
Claim would not, individually or in the aggregate, reasonably be expected to
have a Parent Material Adverse Effect. All permits and other governmental
authorizations currently held or required to be held by the Parent and any of
Parent Subsidiary pursuant to any Environmental Laws are identified in the
Section 5.13 of the Parent Disclosure Letter. The Parent has made available to
the Company all assessments, reports, data, results of investigations or
audits, and other information that is in the possession of or reasonably
available to the
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Parent or any Parent Subsidiary regarding environmental matters pertaining to
or the environmental condition of the business of the Parent or any of Parent
Subsidiary, or the compliance (or noncompliance) by the Parent or any Parent
Subsidiary with any Environmental Laws. All facilities or properties presently
owned by the Parent or any Parent Subsidiary and all facilities or properties
leased, used or operated by the Parent or any Parent Subsidiary which require
aggregate payments of over $100,000 on an annual basis are identified in
Section 5.13 of the Parent Disclosure Letter.
Section 5.14 Intellectual Property.
(a) Parent Intellectual Property consists solely of items and rights which
are: (i) owned by the Parent or any Parent Subsidiary, (ii) in the public
domain; or (iii) except as set forth in Section 5.14(a) of the Parent
Disclosure Letter, rightfully used by the Parent or any Parent Subsidiary and
their successors pursuant to a valid license. The Parent and Parent
Subsidiaries have all rights in Parent Intellectual Property necessary to carry
out their current and currently contemplated and reasonably foreseeable
activities.
(b) Except as would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect, the reproduction,
manufacturing, distribution, licensing, sublicensing, sale or any other
exercise of rights in any Parent Intellectual Property, Product, work,
technology or process as now used or offered or proposed for use, licensing or
sale by the Parent or any Parent Subsidiary does not infringe on any copyright,
trade secret, trademark, service mark, trade name, trade dress, firm name,
Internet domain name, logo, trade dress or mask work of any Person or the
patent of any Person. No claims (i) challenging the validity, effectiveness or
ownership by the Parent or any Parent Subsidiary of any of Parent Intellectual
Property, or (ii) to the effect that the use, distribution, licensing,
sublicensing, sale or any other exercise of rights in any Product, work,
technology or process as now used or offered or proposed for use, licensing,
sublicensing or sale by the Parent or any Parent Subsidiary infringes or will
infringe on any intellectual property or other proprietary right of any Person
have been asserted or, to the Parent's knowledge, are threatened by any Person,
nor are there, to the Parent's knowledge, any valid grounds for any bona fide
claim of any such kind. All material registered, granted or issued trademarks,
Internet domain names and copyrights held by the Parent and any Parent
Subsidiary are enforceable and subsisting and, to the Parent's knowledge, all
material registered, granted or issued patents held by the Parent and any
Parent Subsidiary are enforceable and subsisting. To the Parent's knowledge,
there is no unauthorized use, infringement or misappropriation of any of Parent
Intellectual Property by any third party, employee or former employee.
(c) Except as set forth in Section 5.14(c) of the Parent Disclosure Letter,
there are no material royalties, fees, honoraria or other payments payable by
the Parent or any Parent Subsidiary to any Person by reason of the ownership,
development, use, license, sale or disposition of Parent Intellectual Property,
other than salaries and sales commissions paid to employees and sales agents in
the ordinary course of business.
(d) Neither the Parent nor any Parent Subsidiary is in violation of any
license, sublicense, agreement or instrument to which the Parent or any Parent
Subsidiary is a party or otherwise bound, nor will execution or delivery of
this Agreement, or performance of the Parent's obligations hereunder, cause the
diminution, termination or forfeiture of any Parent Intellectual Property
except as would not, individually or in the aggregate, reasonably be expected
to result in a Parent Material Adverse Effect.
(e) Except as would not, individually or in the aggregate, reasonably be
expected to ave a Parent Material Adverse Effect, the Parent and each of Parent
Subsidiaries has observed all provisions of, and performed all of their
obligations currently required to be performed under, the license agreements to
which it is a party. Except as would not, individually or in the aggregate,
reasonably be expected to have a Parent Material Adverse Effect, neither the
Parent nor any Parent Subsidiary has taken any action that could cause, or
failed to take any action, the failure of which could cause, (i) any source
code, trade secret or other Parent Intellectual Property to be (A) released
from an escrow or otherwise made available to any person or entity other than
those persons described in Section 5.14(e) of the Parent Disclosure Letter or
(B) dedicated to the public or otherwise placed in
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the public domain or (ii) any other material adverse affect to the protection
of Parent Intellectual Property under trade secret, copyright, patent or other
intellectual property laws.
Section 5.15 Absence of Certain Payments. Neither the Parent nor any
Parent Subsidiary nor any director, officer, agent, employee or other Person
acting on behalf of the Parent or any Parent Subsidiary, has used any corporate
or other funds for unlawful contributions, payments, gifts, or entertainment,
or made any unlawful expenditures relating to political activity to government
officials or others or established or maintained any unlawful or unrecorded
funds in violation of Section 30A of the Exchange Act. Neither the Parent nor
any Parent Subsidiary nor any current director, officer, agent, employee or
other Person acting on behalf of the Parent or any Parent Subsidiary, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
Section 5.16 Opinion of Financial Advisor. The Parent has received the
opinion of JPMorgan Securities Inc. dated as of February 18, 2002, to the
effect that, as of such date, the consideration to be paid in the Merger is
fair, from a financial point of view to the Parent.
Section 5.17 Brokers or Finders. Except as set forth in Section 5.17 of
the Parent Disclosure Letter neither the Parent nor any Parent Subsidiary or
their respective Affiliates has an obligation to pay any agent, broker,
investment banker, financial advisor or other firm or Person to any brokers' or
finders' fee any other commission or similar fee in connection with any of the
Transactions.
ARTICLE 6
COVENANTS
Section 6.1 Interim Operations of the Company. The Company covenants and
agrees that prior to the Effective Time, except (i) as expressly contemplated
by this Agreement, (ii) as set forth in Section 6.1 of the Company Disclosure
Letter or (iii) as agreed in writing by the Parent (which agreement shall not
be unreasonably withheld), after the date hereof:
(a) the business of the Company and of each Company Subsidiary shall be
conducted only in the ordinary course and consistent with past practice, and
the Company and each Company Subsidiary shall use commercially reasonable
efforts to preserve its business organization intact, keep available the
services of its current officers and employees and maintain its existing
relations with licensors, customers, suppliers, distributors, creditors,
business partners and others having business dealings with it, to the end
that their respective goodwill and ongoing business shall be unimpaired at
the Effective Time;
(b) neither the Company nor any Company Subsidiary shall: (i) amend its
certificate of incorporation or bylaws or similar organizational documents,
(ii) issue, sell, transfer, pledge, dispose of or encumber any shares of any
class or series of its capital stock or Voting Debt, or securities
convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of any class or
series of its capital stock or any Voting Debt, other than (x) the issuance
of shares of Company Common Stock reserved for issuance on the date of this
Agreement pursuant to the exercise of Company Options and Purchase Rights
under the Company ESPP outstanding on the date of this Agreement or (y) the
issuance of up to 400,000 company options to non-executive officer employees
consistent with past practices in the ordinary course of business (provided
that consummation of the Merger in accordance with the terms hereof shall
not result in accelerated vesting of such options), (iii) declare, set aside
or pay any dividend or other distribution payable in cash, stock or property
with respect to any shares of any class or series of its capital stock, (iv)
split, combine or reclassify any shares of any class or series of its
capital stock, (v) redeem, purchase or otherwise acquire directly or
indirectly any shares of any class or series of its capital stock, or enter
into any instrument or security which consists of or includes a right to
acquire such shares, other than share revesting arrangements entitling the
Company to purchase shares from employees or consultants at their cost or
(vi) adopt or implement any stockholder rights plan that does not exempt
from its provisions the Transactions;
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(c) neither the Company nor any Company Subsidiary shall modify, amend or
terminate any of its material contracts or waive, release or assign any
material rights or claims, except in the ordinary course of business
consistent with past practice;
(d) neither the Company nor any Company Subsidiary shall (i) incur,
modify or assume any long-term indebtedness for borrowed money, or except in
the ordinary course of business consistent with past practice, incur or
assume any short-term indebtedness for borrowed money; (ii) modify the terms
of any indebtedness, other than modifications of short term debt in the
ordinary course of business consistent with past practice; (iii) assume,
guarantee, endorse or otherwise intentionally become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other Person, except in the ordinary course of business consistent with past
practice; or (iv) make any loans, advances or capital contributions to, or
investments in, any other Person (other than to or in wholly owned Company
Subsidiaries and expense advances to employees in the ordinary course of
business and consistent with past practice);
(e) neither the Company nor any Company Subsidiary shall transfer, lease,
license, sell, mortgage, pledge, dispose of, or encumber any material asset,
other than in the ordinary course of business and consistent with past
practice;
(f) except as otherwise specifically provided in this Agreement, neither
the Company nor any Company Subsidiary shall (x) with respect to employees
or consultants who are executive officers, directors or Affiliates of the
Company (i) make or offer to make any change in the compensation payable or
to become payable to such individuals, (ii) enter into or amend any
employment, severance, termination or employee benefit plan or any other
agreement, contract, commitment, understanding or arrangement with such
individuals, or (iii) make any change in its existing borrowing or lending
arrangements for or on behalf of any such individuals pursuant to a Company
Benefit Plan or otherwise, (y) other than in the ordinary course of business
and consistent with past practice, with respect to employees or consultants
who are not executive officers, directors or Affiliates of the Company (i)
make or offer to make any change in the compensation payable or to become
payable to such consultants or employees, (ii) enter into or amend any
employment, severance, termination or employee benefit plan or any other
agreement, contract, commitment, understanding or arrangement with such
consultants or employees, or (iii) make any change in its existing borrowing
or lending arrangements for or on behalf of such consultants or employees
pursuant to a Company Benefit Plan or otherwise, or (z) make any loans
subsequent to the date hereof in excess of $200,000 in the aggregate, to its
officers, directors or employees;
(g) except as otherwise specifically contemplated by this Agreement or as
set forth in Section 6.1(g) of the Company Disclosure Letter, neither the
Company nor any Company Subsidiary shall (x) except payments and accruals
made in the ordinary course of business consistent with past practice (i)
pay or make any accrual or arrangement for payment of any pension,
retirement allowance or other employee benefit pursuant to any existing
plan, agreement or arrangement to any officer, director, employee or
Affiliate, (ii) pay, offer to pay or agree to pay or make any accrual or
arrangement for payment to any officers, directors, employees or Affiliates
of the Company or any Company Subsidiary of any amount relating to unused
vacation days, or (iii) amend in any material respect any such existing
plan, agreement or arrangement in a manner inconsistent with the foregoing,
or (y) (i) adopt or pay, grant, issue, accelerate or accrue salary or other
payments or benefits pursuant to any new pension, profit-sharing, bonus,
extra compensation, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay, retirement
or other employee benefit plan, agreement or arrangement, or any employment
or consulting agreement with or for the benefit of any director, officer,
employee, agent or consultant, or (ii) pay or make any accrual or
arrangement for payment of any amount in connection with any of the
foregoing in (y)(i) outside of the ordinary course consistent with past
practice;
(h) neither the Company nor any Company Subsidiary shall enter into any
contract or transaction involving total consideration in excess of $400,000
other than in the ordinary course of business consistent with past practice;
(i) neither the Company nor any Company Subsidiary shall revalue in any
material respect any of its assets, including writing down the value of
inventory or writing-off notes or accounts receivable, other than
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in the ordinary course of business consistent with past practice or as
required by a change in GAAP promulgated after the date of this Agreement;
(j) neither the Company nor any Company Subsidiary shall settle or
compromise any pending or threatened suit, action or claim that (i) relates
to the transactions contemplated hereby or (ii) the settlement or compromise
of which would involve more than $300,000 and does not obligate the Company
to take or refrain from taking any action other than the payment of such sum
or that would otherwise be material to the Company and Company Subsidiaries,
considering the Company together with the Company Subsidiaries as a whole,
or that relates to any matters concerning Company Intellectual Property;
(k) neither the Company nor any Company Subsidiary will adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or
any Company Subsidiary (other than the Merger);
(l) neither the Company nor any Company Subsidiary will (i) change any of
the accounting methods used by it unless required by a change in GAAP
promulgated after the date of this Agreement or (ii) make any material
election relating to Taxes, change any material election relating to Taxes
already made, adopt any material accounting method relating to Taxes, change
any material accounting method relating to Taxes unless required by a change
in GAAP or change in the Code or the regulations under the Code promulgated
after the date of this Agreement, enter into any closing agreement relating
to any material Taxes, settle any claim or assessment relating to any
material Taxes or consent to any claim or assessment relating to any
material Taxes or any waiver of the statute of limitations for any such
claim or assessment;
(m) neither the Company nor any Company Subsidiary will take, or agree to
commit to take, any action that would reasonably be expected to result in
any of the conditions set forth in Sections 7.1 and 7.2 not being satisfied,
or that would materially impair the ability of the Company, the Parent or
Merger Sub to consummate the Merger in accordance with the terms thereof or
materially delay such consummation; or
(n) neither the Company nor any Company Subsidiary will enter into any
agreement, contract, commitment, understanding or arrangement to do any of
the foregoing, or to authorize, recommend, propose or announce an intention
to do any of the foregoing.
Section 6.2 Interim Operations of the Parent. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement pursuant to its terms and the Effective Time, the Parent shall
not, prior to the Effective Time or the earlier termination of this Agreement,
without the prior written consent of the Company (which consent shall not be
unreasonably withheld or delayed):
(a) adopt a plan of complete or partial liquidation, dissolution, merger
or consolidation (other than any merger or consolidation in which the Parent
would not become a Subsidiary of any other Person), or enter into any other
transaction which would cause or would be reasonably likely to cause, a
material delay in consummation of the transactions contemplated hereby;
(b) adopt any amendments to its certificate of incorporation which would
materially adversely affect the terms and provisions of the Parent Common
Stock or the rights of the holders of such shares, or amend, modify or waive
any provisions of the Parent Rights Plan, or take any action to redeem the
Rights or render the Rights applicable to the Merger, or adversely affect
the rights of the holders of Shares;
(c) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock,
or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Parent, or except in
accordance with agreements existing as of the date hereof, repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock;
or
(d) take, or agree in writing or otherwise to take, any of the actions
described in this Section 6.2, or any other action which would cause or
would be reasonably likely to cause, any of the conditions set forth in
Section 7.1 or 7.3 not to be satisfied, or that would materially impair the
ability of the Parent or Merger Sub to consummate the Merger in accordance
with the terms thereof or materially delay such consummation.
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Section 6.3 Access; Confidentiality. The Company shall (and shall cause
each Company Subsidiary to) afford to the officers, employees, accountants,
counsel, financing sources and other representatives of the Parent, reasonable
access during the period prior to the Effective Time, to all its properties,
books, contracts, commitments and records and, during such period, the Company
shall (and shall cause each Company Subsidiary to) furnish promptly to the
Parent (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the
requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as the Parent may reasonably
request, provided the Parent has complied with its obligations hereunder in all
material respects. Unless otherwise required by law, the Parent will hold any
such information which is nonpublic in confidence in accordance with the
provisions of the Confidentiality Agreement.
Section 6.4 Reasonable Efforts.
(a) Prior to the Closing, upon the terms and subject to the conditions of
this Agreement, the Parent, Merger Sub and the Company agree to use reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, all things necessary, proper or advisable (subject to any applicable
laws) to consummate the Merger and make effective the Merger and the other
Transactions as promptly as practicable including, (i) the preparation and
filing of all forms, registrations and notices required to be filed to
consummate the Merger and the other Transactions and the taking of such actions
as are necessary to obtain any requisite approvals, consents, orders,
exemptions or waivers by any third party or Governmental Entity and (ii) the
satisfaction of the other parties' conditions to Closing. In addition, no party
hereto shall take any action after the date of this Agreement to materially
delay the obtaining of, or result in not obtaining, any permission, approval or
consent from any Governmental Entity necessary to be obtained prior to Closing.
Notwithstanding the foregoing or any other covenant in this Agreement, in
connection with the receipt of any necessary approvals under the HSR Act,
neither the Company nor any of the Company Subsidiaries shall be entitled to
divest or hold separate or otherwise take, or commit to take, any action that
limits the Parent's or the Surviving Corporation's freedom of action with, or
their ability to retain, the Company or any Company Subsidiary or any material
portions thereof or any of the businesses, product lines, properties or assets
of the Company or any Company Subsidiary, without the Parent's prior written
consent (which may be withheld in the Parent's sole and absolute discretion).
(b) Prior to the Closing, each party shall promptly consult with the other
parties hereto with respect to, provide any necessary information with respect
to, and provide the other parties (or their respective counsel) with copies of,
all filings made by such party with any Governmental Entity or any other
information supplied by such party to a Governmental Entity in connection with
this Agreement, the Merger and the other Transactions, except to the extent any
such information is sensitive competitive information. Each party hereto shall
promptly inform the other of any communication from any Governmental Entity
regarding any of the Transactions. If any party hereto or Affiliate thereof
receives a request for additional information or documentary material from any
such Governmental Entity with respect to any of the Transactions, then such
party shall endeavor in good faith to make, or cause to be made, as soon as
reasonably practicable and after consultation with the other parties, an
appropriate response in compliance with such request. To the extent that
transfers, amendments or modifications of permits (including environmental
permits) are required as a result of the execution of this Agreement or
consummation of any of the Transactions, the Company shall and shall cause the
Company Subsidiaries to use reasonable best efforts to effect such transfers,
amendments or modifications.
(c) The Company and the Parent shall file as soon as practicable
notifications under the HSR Act and respond as promptly as practicable to any
inquiries received from the Federal Trade Commission and the Antitrust Division
of the Department of Justice for additional information or documentation and
respond as promptly as practicable to all inquiries and requests received from
any State Attorney General or other Governmental Entity in connection with
antitrust matters. Concurrently with the filing of notifications under the HSR
Act or as soon thereafter as practicable, the Company and the Parent shall each
request early termination of the HSR Act waiting period.
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(d) Nothing in this Agreement shall be deemed to require the Parent or any
of its Subsidiaries to (x) divest or hold separate any material assets or
otherwise materially restrict its conduct of business or (y) commence any
litigation against any entity in order to facilitate the consummation of any of
the Transactions or to defend against any litigation brought by any
Governmental Entity seeking to prevent the consummation of any of the
Transactions. Without limiting the foregoing, the Parent and the Company agree,
and shall cause each of their respective Subsidiaries, to cooperate and to use
their respective reasonable best efforts to obtain any government clearances
required for the Merger (including through compliance with the HSR Act and any
applicable foreign government reporting requirements) and to respond to any
requests for information from any Governmental Entity, including any so-called
"Second Request" under the HSR Act.
Section 6.5 No Solicitation of Competing Transaction.
(a) Neither the Company nor any Affiliate of the Company shall (and the
Company shall cause the officers, directors, employees, representatives and
agents of the Company, each Affiliate of the Company, and their respective
investment bankers, financial advisers, attorneys, accountants and other
agents, not to), directly or indirectly, encourage, solicit, participate in or
initiate or resume (including by way of furnishing or disclosing non-public
information), or take any action designed to facilitate, any discussions,
inquiries, negotiations or any other action that could be expected to lead to
the making of any proposals with respect to or concerning any Competing
Transaction. Nothing contained in this Section 6.5 or any other provision of
this Agreement shall prohibit the Company or the Company's board of directors
from (i) taking and disclosing to the Company's stockholders a position with
respect to a tender or exchange offer by a third party pursuant to Rule 14d-9
or Rule l4e-2 under the Exchange Act, or (ii) making such disclosure to the
Company's stockholders as, in the good faith judgment of the board of directors
of the Company, after consultation with outside counsel, is required under
applicable law; provided, that the Company may not, except as permitted by
Section 6.5(b), withdraw or modify, or propose to withdraw or modify, its
position with respect this Agreement or to the Merger or approve or recommend,
or propose to approve or recommend any Competing Transaction, or enter into any
agreement with respect to any Competing Transaction. Upon execution of this
Agreement, the Company will immediately cease any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. Notwithstanding the foregoing, prior to receipt of the
Company stockholder approval of the Merger and adoption of this Agreement, the
Company may furnish information concerning its business, properties or assets
to any corporation, partnership, Person or other entity or group pursuant to
appropriate confidentiality agreements (which shall be no more permissive than
the Confidentiality Agreement and shall permit the disclosure contemplated by
this Section 6.5(a)), and may negotiate and participate in discussions and
negotiations with such entity or group concerning a Competing Transaction if
such entity or group has, on an unsolicited basis and without violation of this
Section 6.5, submitted a bona fide written proposal to the board of directors
of the Company relating to any such transaction which the board determines in
good faith, after consultation with its outside legal and financial advisors,
is or may reasonably be expected to lead to a Superior Proposal.
The Company will promptly (and in any event within 24 hours) notify the
Parent of the existence of any proposal, discussion, negotiation or inquiry of
the type referred to in this Section 6.5(a) received by the Company, any
Company Subsidiary or any of their respective representatives, and the Company
will promptly (and in any event within 24 hours) communicate to the Parent the
material terms of any proposal, discussion, negotiation or inquiry which it,
any Company Subsidiary or any of their respective representatives may receive
and the identity of the party making such proposal or inquiry or engaging in
such discussion or negotiation. The Company will promptly provide to the Parent
any non-public information concerning the Company provided any other party
which was not previously provided to the Parent.
(b) Except as set forth in this Section 6.5(b), neither the Company's board
of directors nor any committee thereof shall effect a Change in Company
Recommendation. Notwithstanding the foregoing, prior to receipt of the Company
stockholder approval of the Merger and adoption of this Agreement, the
Company's board of directors may withdraw or modify its approval or
recommendation of this Agreement or the Merger, approve or
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recommend a Superior Proposal, or terminate this Agreement and enter into an
agreement in accordance with Section 8.1(c)(ii), in each case at any time after
48 hours following the Parent's receipt of written notice from the Company
advising the Parent that the board of directors of the Company has received a
Superior Proposal which it intends to accept, specifying the material terms and
conditions of such Superior Proposal, and identifying the Person making such
Superior Proposal. Nothing in this Agreement shall permit the Company to enter
into any agreement, arrangement or understanding with any third party making or
proposing to make a Competing Transaction providing for the payment of fees or
reimbursement of expenses if the Parent makes a proposal in response to such
Superior Proposal, other than in an agreement entered into in accordance with
the preceding sentence concurrently with termination of this Agreement pursuant
to Section 8.1(c)(ii).
Section 6.6 Publicity. The initial press release with respect to the
execution of this Agreement shall be a joint press release reasonably
acceptable to each of the Parent and the Company. Thereafter, until the
Effective Time, or the date this Agreement is terminated pursuant to Article 8
(whichever occurs first), neither the Company, the Parent nor any of their
respective Affiliates shall issue or cause the publication of any press release
or other announcement with respect to the Merger, this Agreement or the other
Transactions without prior consultation with the other party, except as advised
by outside counsel is required by law or by any listing agreement with a
national securities exchange or trading market, in which case, prior
consultation with the other party will be made to the extent reasonably
practicable.
Section 6.7 Notification of Certain Matters. Each Party shall give prompt
notice to the other party, of (a) the occurrence or non-occurrence of any event
the occurrence or non-occurrence of which caused or would reasonably be
expected to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect at or prior to the Effective
Time and (b) any material failure of such party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.7 shall not limit or otherwise affect the remedies of the other party.
Section 6.8 Directors' and Officers' Insurance and Indemnification.
(a) For six years after the Effective Time, the Surviving Corporation (or
any successor to the Surviving Corporation) shall indemnify, defend and hold
harmless each Indemnified Party against all losses, claims, damages,
liabilities, costs, fees and expenses, including reasonable fees and
disbursements of counsel and judgments, fines, losses, claims, liabilities and
amounts paid in settlement (provided, that any such settlement is effected with
the written consent of the Parent or the Surviving Corporation) arising out of
actions or omissions occurring at or prior to the Effective Time to the full
extent required under applicable Delaware law, the terms of the Company's
certificate of incorporation, bylaws or indemnity agreements in the form filed
as exhibits to Company SEC Documents, each as in effect at the date hereof;
provided, that if any claim or claims are asserted or made within such six-year
period, all rights to indemnification in respect of any such claim or claims
shall continue until disposition of any and all such claims. For a period of
six years following the Effective Time, the Surviving Corporation (and its
successors) shall establish and maintain from and after the Effective Time
provisions in its certificate of incorporation and bylaws concerning the
indemnification and exoneration of the Company's former and current officers,
directors, employees, and agents that are no less favorable to those persons
than the provisions of the certificate of incorporation and bylaws of the
Company as in effect as of the date hereof.
(b) Prior to or concurrent with the Effective Time, the Company shall
purchase a six year extension of the discovery period from the Effective Time
under the Company's current directors' and officers' liability insurance
policy; provided, however, that in no event shall the Company and the Surviving
Corporation together be required to expend in excess of $3 million for such six
year extension; provided, further, that prior to the execution of such
extension Parent shall be given the opportunity to review any material
enhancements to such extension as compared to the Company's current directors'
and officers' liability insurance policy; and provided, further, that if the
Company is unable to obtain the amount of insurance required by this sentence
of this
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Section 6.8(b) for such aggregate premiums, the Company shall obtain as much
insurance as can be obtained for aggregate premiums not in excess of $3
million. If for any reason the coverage described in the previous sentence
should not be in full effect, the Parent or the Surviving Corporation shall
maintain the Company's existing officers' and directors' liability insurance
for a period of not less than six years after the Effective Date; provided,
that the Parent may substitute therefor policies of coverage and amounts
containing terms no less favorable to such former directors or officers as
currently in effect for directors and officers of the Parent; provided,
further, that in no event shall the Parent or the Surviving Corporation be
required to pay aggregate premiums under this Section 6.8(b) in excess of 150%
of the premium paid by the Parent for coverage of its directors and officers in
the twelve months prior to the date of this Agreement; and provided, further,
that if the Parent or the Surviving Corporation is unable to obtain the amount
of insurance required by this sentence of this Section 6.8(b) for such
aggregate premiums, the Parent or the Surviving Corporation shall obtain as
much insurance as can be obtained for aggregate premiums not in excess of 150%
of the premium paid by the Parent for coverage of its directors and officers in
the twelve months prior to the date of this Agreement.
(c) The rights of each Indemnified Party hereunder shall be in addition to,
and not in limitation of, any other rights such Indemnified Party may have
under the certificate of incorporation or bylaws of the Company, any other
indemnification arrangement, the DGCL or otherwise. The provisions of this
Section 6.8 shall survive the consummation of the Merger and expressly are
intended to benefit each of the Indemnified Parties. In the event that the
Surviving Corporation or any of its successors or assigns (i) consolidates with
or merges into any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers or
conveys all or substantially all of its properties and assets to any person,
then, and in each such case, proper provision shall be made so that the
successors or assigns of the Surviving Corporation, as the case may be, shall
succeed to the obligations set forth in this Section 6.8. The Surviving
Corporation shall pay all expenses, including reasonable attorney's fees and
costs, that may be incurred by any Indemnified Person in enforcing the
indemnity contained in this Section 6.8.
Section 6.9 State Takeover Laws. Notwithstanding any other provision in
this Agreement, in no event shall the approval of the Transactions by the board
of directors of the Company under section 203 of the DGCL be withdrawn, revoked
or modified by the board of directors of the Company. If any state takeover
statute becomes or is deemed to become applicable to the Agreement, the
acquisition of Shares pursuant to the Merger or the other Transactions, the
Company or the applicable Company Subsidiary shall take all action necessary to
render such statute inapplicable to all of the foregoing. If under the Parent
Rights Plan (i) a Person will become an "Acquiring Person" and (ii) "Share
Acquisition Date" or "Distribution Date" will occur in each case, as a result
of the approval, execution and delivery of this Agreement and the Voting
Agreement and the consummation of the transactions contemplated by this
Agreement, Parent shall take all action necessary to prevent the foregoing and
render such Parent Rights Plan inapplicable to all of the foregoing.
Section 6.10 Preparation of the Registration Statement and the Proxy
Statement/Prospectus; Stockholders' Meeting.
(a) As soon as practicable following the date of this Agreement, the Parent
and the Company shall prepare the Proxy Statement/Prospectus and the Parent
shall prepare and file with the SEC the Registration Statement, in which the
Proxy Statement/Prospectus will be included as a prospectus. Each of the Parent
and the Company shall use reasonable best efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing. Subject to the terms of this Agreement, the
Company will use reasonable best efforts to cause the Proxy
Statement/Prospectus to be mailed to the Company's stockholders as promptly as
practicable after the Registration Statement is declared effective under the
Securities Act. The Parent shall also take any action required to be taken
under any applicable state securities laws in connection with the issuance of
shares of the Parent Common Stock in the Merger and the conversion of Company
Options into options to acquire Parent Common Stock, and the Company shall
furnish all information concerning the Company and the holders of Company
Common Stock and Company Options as may reasonably be requested in connection
with any such action. No filing of, or amendment or supplement to, the
Registration Statement or the
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Proxy Statement/Prospectus will be made by the Parent without the Company's
prior consent (which shall not be unreasonably withheld) and without providing
the Company the opportunity to review and comment thereon; provided that with
respect to documents filed by a party which are incorporated by reference in
the Registration Statement or Proxy Statement/Prospectus, this right of
approval shall apply only with respect to information relating to the other
party or its business, financial condition or results of operations; and
provided further that the Company, in connection with a change in the
recommendation of its board of directors, or as otherwise required, may amend
or supplement the Proxy Statement/Prospectus or Registration Statement
(including by incorporation by reference). The Parent will advise the Company
promptly after it receives notice thereof, of the time when the Registration
Statement has become effective or any supplement or amendment has been filed,
the issuance of any stop order, the suspension of the qualification of the
share of Parent Common Stock issuable in connection with the Merger for
offering or sale in any jurisdiction, or any request by the SEC for amendment
of the Proxy Statement/Prospectus or the Registration Statement or comments
thereon and responses thereto or requests by the SEC for additional
information. If at any time prior to the Effective Time, any information
relating to the Parent or the Company, or any of their respective Affiliates,
officers or directors, should be discovered by the Parent or the Company which
should be set forth in an amendment or supplement to any of the Registration
Statement or the Proxy Statement/Prospectus, so that any of such documents
would not include any misstatement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and
an appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the stockholders of the Company and the Parent.
(b) The Company shall, as promptly as practicable after the Registration
Statement is declared effective under the Securities Act, duly give notice of,
convene and hold a meeting (the "Company Stockholders' Meeting") of its
stockholders entitled to vote thereon in accordance with the DGCL for the
purpose of obtaining the approval of the Company's stockholders and shall,
subject to the provisions of Section 6.5(b), through its board of directors,
recommend to its stockholders the adoption of this Agreement.
(c) The Parent shall, as promptly as practicable after the Registration
Statement is declared effective under the Securities Act, duly give notice of,
convene and hold a meeting (the "Parent Stockholders' Meeting") of its
stockholders entitled to vote thereon in accordance with the DGCL for the
purpose of obtaining the approval of the Parent's stockholders and shall,
through its board of directors, recommend to its stockholders the approval of
this Agreement.
Section 6.11 Tax Treatment. Each of the Parent, the Company and their
respective Subsidiaries shall use commercially reasonable efforts to cause the
Merger to qualify as a reorganization within the meaning of Section 368(a) of
the Code, and to obtain the opinions of counsel referred to in Sections 7.2(e)
and 7.3(e). Neither the Parent, nor the Company, nor their respective
Subsidiaries, shall take any action which could reasonably be expected to cause
the Merger to fail to qualify as a reorganization within the meaning of section
368(a) of the Code.
Section 6.12 Conveyance Taxes. The Company and the Parent shall cooperate
in the preparation, execution and filing of all Tax Returns, questionnaires,
applications or other documents regarding Taxes, transfer, recording,
registration and/or other fees which become payable in connection with the
transactions contemplated by this Agreement that are required or permitted to
be filed on or before the Effective Time.
Section 6.13 Exemption from Liability Under Section 16(b).
(a) The board of directors of Parent, or a committee thereof consisting
exclusively of Non-Employee Directors (as such term is defined for purposes of
Rule 16b-3(b) under the Exchange Act), shall adopt a resolution in advance of
the Effective Time providing that the receipt by Company Insiders of Parent
Common Stock in exchange for shares of Company Common Stock pursuant to the
Transactions is intended to be exempt pursuant to Rule 16b-3 under the Exchange
Act.
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(b) The board of directors of the Company (or a committee thereof
exclusively consisting of Non-Employee Directors) shall adopt a resolution in
advance of the Effective Time that exempts the disposition of Company equity
securities by Company Insiders pursuant to the Transactions from the
short-swing profits liability provisions of Section 16 of the Exchange Act by
reason of Rule 16b-3.
Section 6.14 Affiliate Legends. Section 6.14 of the Company Disclosure
Letter sets forth a list of those persons who are, in the Company's reasonable
judgment, as of the date of this Agreement, "affiliates" of the Company within
the meaning of Rule 145 promulgated under the Securities Act (together with
Persons who after the date of this agreement become "affiliates" of the Company
within the meaning of Rule 145 promulgated under the Securities Act, the "Rule
145 Affiliates"). Parent shall be entitled to place appropriate legends on the
certificates evidencing any shares of Parent Common Stock to be received by
Rule 145 Affiliates of the Company in the Merger reflecting the restrictions
set forth in Rule 145 promulgated under the Securities Act and to issue
appropriate stop transfer instructions to the transfer agent for Parent Common
Stock. The Company shall use commercially reasonable efforts to cause each of
the Rule 145 Affiliates to enter into an affiliate agreement with Parent (the
"Rule 145 Affiliate Agreements") substantially in the form set forth in Section
6.14 of the Company Disclosure Letter.
Section 6.15 Service Credit. Following the Effective Time, the Parent will
give each employee of the Company who continues as an employee of the Company
or the Parent after the Effective Time (a "Continuing Employee") full credit
for prior service with the Company or the Company Subsidiaries for purposes of
(a) eligibility and vesting under any Parent Benefit Plans, (b) determination
of benefits levels under any Parent Benefit Plan or policy relating to vacation
or severance and (c) determination of "retiree" status under any Parent Benefit
Plan, in each case for which the Continuing Employee is otherwise eligible and
in which the Continuing Employee is offered participation, but except where
such crediting would (i) result in a duplication of benefits or (ii) otherwise
cause Parent or any Parent Subsidiary or any Parent Benefit Plan or trust
relating thereto to accrue or pay for benefits that relate to any time period
prior to the Continuing Employee's participation in the Parent Benefit Plan.
Section 6.16 Acquisitions of Company Stock. Except as contemplated by the
Voting Agreement, from the date of this Agreement through the earlier of the
Effective Time or the termination of this Agreement in accordance with its
terms, the Parent will not acquire beneficial ownership of any shares of
Company Common Stock or otherwise acquire the right to vote shares of Company
Common Stock without the Company's prior written consent.
Section 6.17 Parent Board of Directors. Parent shall take all necessary
action to cause Richard A. Kay to be appointed to the Board of Directors of
Parent as of the Effective Time to serve until the next annual election of
members of the Board of Directors of Parent. In connection with such election,
Parent shall take all necessary action to include Richard A. Kay as a nominee
for the Board of Directors of Parent recommended by such Board of Directors for
election by the Parent's stockholders.
ARTICLE 7
CONDITIONS
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any and all of which may be waived in whole or in part by
the Company, the Parent or Merger Sub, as the case may be, to the extent
permitted by applicable law:
(a) This Agreement shall have been adopted by the requisite vote of the
holders of the shares of Company Common Stock in order to consummate the
Merger and this Agreement shall have been approved by the requisite vote
under the rules and regulations of the NNM by the stockholders of the Parent.
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(b) No statute, rule or regulation shall have been enacted or promulgated
by any Governmental Entity which prohibits the consummation of the Merger,
and there shall be no order or injunction of a court of competent
jurisdiction in effect precluding consummation of the Merger; provided,
however, that each of the parties to this Agreement shall have used
commercially reasonable efforts to prevent the entry of such restraints and
to appeal as promptly as possible any such restraints that may be entered.
(c) The applicable waiting periods under the HSR Act shall have expired
or been terminated.
(d) The Registration Statement shall have become effective under the
Securities Act and no stop order or proceedings seeking a stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been
threatened in writing by the SEC or shall have been initiated by the SEC.
(e) All consents of any Governmental Entity or third party, the failure
of which to obtain would reasonably be expected to have a Material Adverse
Effect with respect to the Surviving Corporation, shall have been obtained.
Section 7.2 Conditions to the Parent's and Merger Sub's Obligations to
Effect the Merger. The obligations of the Parent and Merger Sub to consummate
the Merger shall be subject to the satisfaction on or prior to the Closing Date
of each of the following conditions, any and all of which may be waived in
whole or in part by the Parent and Merger Sub, to the extent permitted by
applicable law.
(a) The representations and warranties of the Company set forth in this
Agreement shall be true and correct (i) as of the date of this Agreement
(except to the extent such representations and warranties are specifically
made as of a particular date, in which case such representations and
warranties shall be true and correct as of such date) and (ii) as of the
Effective Time as though made on and as of the Effective Time (except (x) to
the extent such representations and warranties are specifically made as of a
particular date, in which case such representations and warranties shall be
true and correct as of such date, (y) for changes contemplated by this
Agreement and (z) where the failures to be true and correct (without regard
to any materiality, Company Material Adverse Effect or knowledge
qualifications contained therein), individually or in the aggregate, have
not had, and are not reasonably be expected to have, a Company Material
Adverse Effect).
(b) The Company shall have complied in all material respects with its
obligations under this Agreement.
(c) The Parent shall have received an officer's certificate duly executed
by each of the Chief Executive Officer and Chief Financial Officer of the
Company to the effect that the conditions set forth in Sections 7.2(a) and
7.2(b) have been satisfied.
(d) The Parent shall have received an opinion of Brobeck, Phleger &
Harrison LLP, in form and substance reasonably satisfactory to the Parent,
dated as of the date during which the Effective Time occurs, substantially
to the effect that, on the basis of facts, representations and assumptions
set forth in such opinion, for United States federal income tax purposes,
the Merger will constitute a "reorganization" within the meaning of section
368(a) of the Code. In rendering such opinion, Brobeck, Phleger & Harrison
LLP shall receive and may rely upon representations contained in
certificates of the Company, the Parent and Merger Sub.
(e) The holders of less than five percent of the outstanding Shares at
the Effective Time shall have validly delivered to the Company a demand for
appraisal rights with respect thereto, and shall not have voted in favor of
the Merger or otherwise failed to perfect or effectively withdrawn or lost
such rights under Section 262 of the DGCL.
Section 7.3 Conditions to the Company's Obligations to Effect the
Merger. The obligations of the Company to consummate the Merger shall be
subject to the satisfaction on or prior to the Closing Date of each of
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the following conditions, any and all of which may be waived in whole or in
part by the Company, to the extent permitted by applicable law.
(a) The representations and warranties of Parent and Merger Sub set forth
in this Agreement shall be true and correct (i) as of the date of this
Agreement (except to the extent such representations and warranties are
specifically made as of a particular date, in which case such
representations and warranties shall be true and correct as of such date)
and (ii) as of the Effective Time as though made on and as of the Effective
Time (except (x) to the extent such representations and warranties are
specifically made as of a particular date, in which case such
representations and warranties shall be true and correct as of such date,
(y) for changes contemplated by this Agreement and (z) where the failures to
be true and correct (without regard to any materiality, Parent Material
Adverse Effect or knowledge qualifications contained therein), individually
or in the aggregate, have not had, and are not reasonably likely to have, a
Parent Material Adverse Effect).
(b) Each of the Parent and Merger Sub shall have complied in all material
respects with its obligations under this Agreement.
(c) The Company shall have received an officer's certificate duly
executed by the Chief Financial Officer of the Parent to the effect that the
conditions set forth in Sections 7.3(a) and 7.3(b) have been satisfied.
(d) The Company shall have received an opinion of Hale and Dorr LLP, in
form and substance reasonably satisfactory to the Company, dated as of the
date during which the Effective Time occurs, substantially to the effect
that, on the basis of facts, representations and assumptions set forth in
such opinion, for United States federal income tax purposes, the Merger will
constitute a "reorganization" within the meaning of section 368(a) of the
Code. In rendering such opinion, Hale and Dorr LLP shall receive and may
rely upon representations contained in certificates of the Company, the
Parent and Merger Sub.
(e) The shares of Parent Common Stock issuable to the stockholders of the
Company as contemplated by Article 3 shall have been approved for listing on
the NNM, subject to official notice of issuance.
ARTICLE 8
TERMINATION
Section 8.1 Termination. This Agreement may be terminated or abandoned at
any time prior to the Effective Time, whether before or after stockholder
approval hereof:
(a) By the mutual written consent of the Parent and the Company,
(b) By either of the Company or the Parent:
(i) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action (which order, decree, ruling or other
action the parties hereto shall use their commercially reasonable
efforts to lift), which permanently restrains, enjoins or otherwise
prohibits the Merger and such order, decree, ruling or other action
shall have become final and non-appealable; or
(ii) if the Merger shall not have been consummated by July 15, 2002;
provided that if on such date all conditions to the consummation of the
Merger and the other transactions contemplated hereby have been
satisfied or are capable of being satisfied other than the expiration of
any waiting period under the HSR Act, this Agreement may be terminated
pursuant to this Section 8.1(b)(ii) only if the Merger shall not have
been consummated by September 16, 2002, provided, however, that the
right to terminate this Agreement pursuant to this Section 8.1(b)(ii)
shall not be available to any party whose failure to perform any of its
obligations under this Agreement results in the failure of the Merger to
be consummated by such time; or
(iii) if at a Company Stockholders' Meeting (including any
adjournments thereof) convened and held pursuant to this Agreement, the
approval of this Agreement and the Merger by the Company's
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stockholders shall not have been obtained, provided, however, that the
Company's right to terminate this Agreement under this Section
8.1(b)(iii) shall not be available to the Company if the Company has not
complied with its obligations under Section 6.10(b); or
(iv) if at a Parent Stockholders' Meeting convened and held pursuant
to this Agreement, the approval of the Parent's stockholders of the
issuance of shares of the Parent Common Stock hereunder shall not have
been obtained, provided, however, that the Parent's right to terminate
this Agreement under this Section 8.1(b)(iv) shall not be available to
the Parent if the Parent has not complied with its obligations under
Section 6.10(c).
(c) By the Company:
(i) if the Parent or Merger Sub shall have breached in any material
respect any of their respective representations, warranties, covenants
or other agreements contained in this Agreement, which breach cannot be
or has not been cured within thirty days after the giving of written
notice of such material breach by the Company to the Parent, in either
case such that the conditions set forth in Section 7.3(a) or (b) would
not be satisfied as of the time of such termination; or
(ii) if (x) prior to adoption of this Agreement by the stockholders
of the Company, concurrently with, or promptly after, termination
pursuant to this Section 8.1(c)(ii) the Company enters into an agreement
providing for or authorizes or consummates a Superior Proposal, where in
the good faith judgment of the board of directors of the Company, after
consultation with independent legal counsel to the Company, the failure
to take such action would create a reasonable probability of a breach of
the Company's board of directors' fiduciary duties to the Company and
the Company's stockholders under applicable law, (y) the Company has
complied with the notice provisions of Section 6.5(b), and
(z) concurrently with effecting the termination pursuant to this Section
8.1(c)(ii), the Company pays the Termination Fee pursuant to Section
9.1(b)(i).
(d) By the Parent (on behalf of itself and Merger Sub):
(i) if, prior to the Effective Time, the Company's board of directors
shall have, whether or not permitted by this Agreement, made a Change in
the Company Recommendation; or
(ii) if prior to the Effective Time, the Company shall have reached
in any material respect any representation, warranty, covenant or other
agreement contained in this Agreement which cannot be or has not been
cured within thirty days after the giving of written notice by the
Parent to the Company, in either case such that the conditions set forth
in Section 7.2(a) or (b) would not be satisfied as of the time of such
termination.
Section 8.2 Effect of Termination. If this Agreement is terminated, there
shall be no liability on the part of any party to this Agreement except (a) for
fraud or intentional misstatement or (b) for material breach of this Agreement
prior to such termination. Only Sections 6.6, 8.1 and 8.2, Article 9 and the
Confidentiality Agreement shall survive the termination of this Agreement.
Section 8.3 Method of Termination. This Agreement may be terminated only
upon receipt of notice from the party desiring to terminate this Agreement that
(a) states that it is terminating this Agreement, (b) specifies the portion of
Section 8.1 pursuant to which such termination is being effected and (c)
recites that such termination has been approved by proper action of the board
of directors of such party.
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ARTICLE 9
MISCELLANEOUS
Section 9.1 Fees and Expenses.
(a) Except as specifically provided to the contrary in this Agreement,
including Section 9.1(b), all costs and expenses incurred in connection with
this Agreement and the consummation of the Transactions shall be paid by the
party incurring such expenses, but each of the Parent and the Company shall pay
one half of (x) the filing fee under the HSR Act and (y) the cost of printing
and mailing the Proxy Statement/Prospectus and the cost of printing the
Registration Statement.
(b) If
(i) the Company shall terminate this Agreement pursuant to Section
8.1(c)(ii), or
(ii) the Parent shall terminate this Agreement pursuant to Section
8.1(d)(i);
then the Company shall pay to the Parent an amount equal to the Termination
Fee. The Termination Fee shall be paid by wire transfer of immediately
available funds concurrently with the execution of an agreement referred to
in Section 8.1(c)(ii) or within one Business Day following receipt of notice
of the termination referred to in Section 9.1(b)(ii), whichever shall first
occur.
(iii) If this Agreement is terminated pursuant to Section 8.1(b)(iii)
then (a) within five Business Days of receipt of an invoice, the Company
shall pay to the Parent an amount equal to the actual and reasonably
documented out-of-pocket fees and expenses (provided that such reimbursable
out of pocket fees and expenses shall not exceed one-fifth of the
Termination Fee) incurred by the Parent or Merger Sub in connection with
this Agreement and the Transactions and (b) if prior to such termination
there shall have been publicly announced and not withdrawn a bona fide
Competing Transaction (but changing the fifteen percent amount in clauses
(ii) and (iii) of the definition of Competing Transaction to fifty percent)
and within twelve months of such termination of the Company shall enter into
a definitive agreement implementing any Competing Transaction (but changing
the fifteen percent amount in clauses (ii) and (iii) of the definition of
Competing Transaction to fifty percent), the Company shall, concurrently
with entering into such definitive agreement pay to the Parent the balance
of the Termination Fee. The Termination Fee shall be paid by wire transfer
of immediately available funds.
(iv) If (a) this Agreement is terminated by the Company pursuant to
Section 8.1(b)(ii), (b) the Company Stockholder Meeting shall not have been
convened, (c) prior to such termination there shall have been publicly
announced and not withdrawn a bona fide Competing Transaction (but changing
the fifteen percent amount in clauses (ii) and (iii) of the definition of
Competing Transaction to fifty percent) and (d) within twelve months of such
termination the Company shall enter into a definitive agreement implementing
any Competing Transaction (but changing the fifteen percent amount in
clauses (ii) and (iii) of the definition of Competing Transaction to fifty
percent), the Company shall, concurrently with entering into such definitive
agreement pay to the Parent the Termination Fee. The Termination Fee shall
be paid by wire transfer of immediately available funds.
(c) If this Agreement is terminated pursuant to Section 8.1(b)(iv), then the
Parent shall pay to the Company within five Business Days of receipt of an
invoice, an amount equal to the actual and reasonably documented out-of-pocket
fees and expenses (provided that such reimbursable out of pocket fees and
expenses shall not exceed one-fifth of the Termination Fee) incurred by the
Company in connection with this Agreement and the Transactions. Such amounts
shall be paid by wire transfer of immediately available funds.
Section 9.2 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the stockholders of the Company, by written
agreement of the parties, by action taken by their respective boards of
directors at any time
A-42
prior to the Closing Date with respect to any of the terms contained in this
Agreement; provided, however, that after the approval of this Agreement by the
stockholders of the Company, no such amendment, modification or supplement
shall reduce the amount or change the form of the consideration payable
pursuant to Article 3.
Section 9.3 Non-survival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time. The preceding sentence shall not limit any covenant or
agreement of the parties which by its terms contemplates performance after the
Effective Time.
Section 9.4 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by an internationally recognized overnight courier
service, such as Federal Express, to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) if to the Parent or Merger Sub, to:
Legato Systems, Inc.
2350 West El Camino Real
Mountain View, California 94040
Attention: President, Chief Executive Officer and General Counsel
Telecopy No.: (650) 210-7032
with a copy (which shall not constitute notice) to:
Brobeck, Phleger & Harrison, LLP
One Market, Spear Street Tower
San Francisco, California 94105
Attention: John W. Larson
Telecopy No.: (415) 442-1010
and
if to the Company, to:
OTG Software, Inc.
2600 Tower Oaks Blvd
Attention: President, Chief Executive Officer and General Counsel
Telecopy No.: (240) 747-6200
with a copy (which shall not constitute notice) to:
Hale and Dorr LLP
11951 Freedom Drive
Reston, Virginia 20190
Attention: David Sylvester
Donald L. Toker, Jr.
Telecopy No.: (703) 654-7100
Section 9.5 Counterparts. This Agreement may be executed in one or more
counterparts (whether delivered by facsimile or otherwise), each of which shall
be considered one and the same agreement and shall become effective when two or
more counterparts have been signed by each of the parties and delivered to the
other parties.
Section 9.6 Entire Agreement; No Third Party Beneficiaries. This
Agreement, the Voting Agreements, and the Confidentiality Agreement (including
the documents and the instruments referred to herein and
A-43
therein): (a) constitute the entire agreement and supersede all prior
agreements, negotiations, arrangements and understandings, whether written,
electronic or oral, among the parties with respect to the subject matter hereof
and thereof, and (b) except as provided in Section 6.7 are not intended to
confer upon any Person other than the parties hereto and thereto any rights or
remedies hereunder.
Section 9.7 Severability. Any term or provision of this Agreement that is
held by a court of competent jurisdiction or other authority to be invalid,
void or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the invalid, void or unenforceable term or
provision in any other situation or in any other jurisdiction. If the final
judgment of a court of competent jurisdiction or other authority declares that
any term or provision hereof is invalid, void or unenforceable, the parties
agree that the court making such determination shall have the power to and
shall, subject to the discretion of such court, reduce the scope, duration,
area or applicability of the term or provision, to delete specific words or
phrases, or to replace any invalid, void or unenforceable term or provision
with a term or provision that is valid and enforceable and that comes closest
to expressing the intention of the invalid or unenforceable term or provision.
Section 9.8 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the State of
Delaware (without regard to any conflict of laws rules thereof which would
cause the laws of any other jurisdiction to be applied).
Section 9.9 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States or
the Court of Chancery of and for the County of New Castle, the State of
Delaware, this being in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties (a) consents to submit
itself to the personal jurisdiction of the Court of Chancery of and for the
County of New Castle, the State of Delaware in the event any dispute arises out
of this Agreement or any of the Transactions, (b) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court and (c) agrees that it will not bring any action
relating to this Agreement or any of the Transactions in any court other than
the Court of Chancery of and for the County of New Castle, the State of
Delaware. EACH PARTY UNCONDITIONALLY AND IRREVOCABLY WAIVES AND AGREES NOT TO
ASSERT ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN CONNECTION WITH THIS AGREEMENT
OR ANY OF THE TRANSACTIONS.
Section 9.10 Extension, Waiver. At any time prior to the Effective Time,
the parties to this Agreement may (a) extend the time for the performance of
any of the obligations or other acts of the other parties to this Agreement,
(b) waive any inaccuracies in the representations and warranties of the other
parties contained in this Agreement or in any document delivered pursuant to
this Agreement or (c) subject to Section 9.2, waive compliance by the other
parties with any of the agreements or conditions contained in this Agreement.
Any agreement on the part of a party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of those rights.
Section 9.11 Assignment. Neither this Agreement not any of the rights,
interests or obligations hereunder shall be assigned by any of the parties to
this Agreement (whether by operation of law or otherwise) without the prior
written content of the other parties to this Agreement. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors and
permitted assigns.
A-44
IN WITNESS WHEREOF, each of the Parent, Merger Sub and the Company have
caused this Agreement to be signed by their respective duly authorized officers
as of the date first written above.
LEGATO SYSTEMS, INC.
By: /s/ DAVID B. WRIGHT
-----------------------------
David B. Wright
Chairman, President and Chief
Executive Officer
ORION ACQUISITION SUB CORP.
By: /s/ ANDREW J. BROWN
-----------------------------
Andrew J. Brown
President
OTG SOFTWARE, INC.
By: /s/ RICHARD A. KAY
-----------------------------
Richard A. Kay
Chairman, President and Chief
Executive Officer
A-45
Annex B
[LOGO] JP MORGAN H&Q
February 20, 2002
The Board of Directors
Legato Software, Inc.
2350 West El Camino Real
Mountain View, CA 94040
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to Legato Systems, Inc. (the "Company") of the consideration to be paid
by the Company in the proposed merger (the "Merger") of OTG Software, Inc. (the
"Merger Partner") with and into a wholly owned subsidiary of the Company
("Merger Sub"). Pursuant to the Agreement and Plan of Merger (the "Agreement"),
by and among the Company, Merger Sub and the Merger Partner, the Merger Partner
will become a wholly-owned subsidiary of the Company, and each issued and
outstanding share of common stock of the Merger Partner (the "Merger Partner
Common Stock"), other than shares of Merger Partner Common Stock held in
treasury or owned by the Company and its subsidiaries and Dissenting Shares (as
defined in the Agreement), will be converted into the right to receive (a)
0.6876 of a fully paid and non-assessable share of the Company's common stock,
par value $.0001 per share (the "Company Common Stock"), and (b) an amount in
cash equal to $2.50 per share without interest, less any required withholding
tax.
In arriving at our opinion, we have (i) reviewed the draft of the Agreement
dated February 20, 2002; (ii) reviewed certain publicly available business and
financial information concerning each of the Merger Partner and the Company and
the industry in which they operate; (iii) compared the proposed financial terms
of the Merger with the publicly available financial terms of certain
transactions involving companies we deemed relevant and the consideration
received for such companies; (iv) compared the financial and operating
performance of the Merger Partner and the Company with publicly available
information concerning certain other companies we deemed relevant and reviewed
the current and historical market prices of each of the Merger Partner Common
Stock and the Company Common Stock and certain publicly traded securities of
such other companies; (v) reviewed external Wall Street projections, as
adjusted by members of the managements of the Merger Partner and the Company
relating to their respective businesses (the "Forecasts"); and (vi) performed
such other financial studies and analyses and considered such other information
as we deemed appropriate for the purposes of this opinion.
In addition, we have held discussions with certain members of the management
of each of the Merger Partner and the Company with respect to certain aspects
of the Merger, and the past and current business operations of the Merger
Partner and the Company, respectively, the financial condition and future
prospects and operations of the Merger Partner and the Company, respectively,
the effects of the Merger on the financial condition and future prospects of
the Company, and certain other matters we believed necessary or appropriate to
our inquiry.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by the Merger Partner and the
Company, or otherwise reviewed by us, and we have not assumed any
responsibility or liability therefor. We have not conducted any valuation or
appraisal of any assets or liabilities, nor have any such valuations or
appraisals been provided to us. In relying on the Forecasts provided to us, we
have assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management
as to the expected future results of operations and financial condition of the
Merger Partner and the Company, respectively, to which such Forecasts relate.
We have also assumed that the Merger will qualify as a
B-1
tax-free reorganization for United States federal income tax purposes and that
the other transactions contemplated by the Agreement will be consummated as
described in the Agreement. We have relied as to all legal matters relevant to
rendering our opinion upon the advice of counsel. We have further assumed that
the definitive agreement will conform in all material respects to the draft of
the Agreement we received and that all material governmental, regulatory or
other consents and approvals necessary for the consummation of the Merger will
be obtained without any adverse effect on the Merger Partner or the Company or
on the contemplated benefits of the Merger.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect this opinion
and that we do not have any obligation to update, revise, or reaffirm this
opinion. Our opinion is limited to the fairness, from a financial point of
view, to the Company of the consideration to be paid in the proposed Merger and
we express no opinion as to the underlying decision by the Company to engage in
the Merger. We are expressing no opinion herein as to the price at which the
Company Common Stock will trade at any future time.
We have acted as financial advisor to the Company with respect to the
proposed Merger and will receive a fee from the Company for our services. We
will also receive an additional fee if the proposed Merger is consummated. In
the ordinary course of our businesses, we and our affiliates may actively trade
the debt and equity securities of the Company or the Merger Partner for our own
account or for the accounts of customers and, accordingly, we may at any time
hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid in the proposed Merger is fair,
from a financial point of view, to the Company.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any stockholder of the Company
or the Merger Partner as to how such stockholder should vote with respect to
the Merger or any other matter. This opinion may not be disclosed, referred to,
or communicated (in whole or in part) to any third party for any purpose
whatsoever except with our prior written approval. This opinion may be
reproduced in full in any proxy or information statement mailed to stockholders
of the Company but may not otherwise be disclosed publicly in any manner
without our prior written approval.
Very truly yours,
J.P. MORGAN SECURITIES INC.
B-2
Annex C
Goldman, Sachs & Co. | 85 Broad Street | New York, New York 10004
Tel: 212-902-1000 [LOGO OF GOLDMAN SACHS]
PERSONAL AND CONFIDENTIAL
-------------------------
February 20, 2002
Board of Directors
OTG Software, Inc.
2600 Tower Oaks Blvd
Rockville, Maryland 20852
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.01
per share (the "Shares"), of OTG Software, Inc. (the "Company") of the Merger
Consideration (as defined below) to be received by such holders pursuant to the
Agreement and Plan of Merger, dated as of February 20, 2002 (the "Agreement"),
among Legato Systems, Inc. ("Legato"), Orion Acquisition Sub Corp., a
wholly-owned subsidiary of Legato ("Merger Sub"), and the Company. Pursuant to
the Agreement, the Company will be merged with and into Merger Sub and each
outstanding Share will be converted into 0.6876 shares of Common Stock, par
value $0.0001 per share (the "Legato Shares"), of Legato and $2.50 in cash
(collectively, the "Merger Consideration").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in performing financial analyses with respect to businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for estate, corporate and
other purposes. We are familiar with the Company having acted as its financial
advisor in connection with, and having participated in certain of the
negotiations leading to, the Agreement. We also have provided certain
investment banking services to Legato from time to time, including having acted
as Legato's financial advisor in connection with its acquisition of
Intelliguard Software, Inc. in April 1999. In addition, we may provide
investment banking services to Legato in the future. Goldman, Sachs & Co.
provides a full range of financial advisory and securities services and, in the
course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative securities, of the
Company or Legato for its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-1, including the prospectus
contained therein dated March 10, 2000, of the Company filed in connection with
the initial public offering of the Shares; the Annual Report to Stockholders
and Annual Report on Form 10-K of the Company for the year ended December 31,
2000, a draft, dated January 28, 2002, of the Annual Report on Form 10-K of the
Company for the year ended December 31, 2001, and Annual Reports to
Stockholders and Annual Reports on Form 10-K of Legato for the five years ended
December 31, 2000; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of the Company and Legato; certain other communications
from the Company and Legato to their respective stockholders; and certain
internal financial analyses and forecasts for the Company and Legato prepared
by their respective managements, including certain
C-1
OTG Software, Inc.
February 20, 2002
Page Two
cost savings and operating synergies projected by the managements of the
Company and Legato to result from the transaction contemplated by the
Agreement. We also have held discussions with members of the senior managements
of the Company and Legato regarding their assessment of the strategic rationale
for, and the potential benefits of, the transaction contemplated by the
Agreement and the past and current business operations, financial condition and
future prospects of their respective companies, including discussions with
members of the senior management of the Company regarding their assessment of
the risks and uncertainties of the Company achieving the internal financial
forecasts prepared by the management of the Company and with the Company and
its outside counsel regarding the claims described in Section 5.9 of the Parent
Disclosure Letter referred to in the Agreement, including the possible outcomes
of such claims. In addition, we have reviewed the reported price and trading
activity for the Shares and the Legato Shares, compared certain financial and
stock market information for the Company and Legato with similar information
for certain other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business combinations in the
software industry specifically and in other industries generally and performed
such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting, tax, legal and other information discussed with or reviewed by us
and have assumed such accuracy and completeness for purposes of rendering this
opinion. In addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of the Company or Legato or any of their
subsidiaries and we have not been furnished with any such evaluation or
appraisal. We have assumed that the Company and Legato will obtain all material
governmental, regulatory or other consents, waivers and approvals in connection
with the consummation of the transactions contemplated by the Agreement which,
if not obtained, would result in an adverse effect on the Company or Legato or
on the expected benefits of the transaction contemplated by the Agreement. We
note that certain provisions of the Agreement have the effect that the Shares
owned by the Company Major Stockholders (as defined in the Agreement) in the
aggregate will be converted into the Merger Consideration multiplied by the
number of such Shares but that the allocation of such aggregate consideration
among the Company Major Stockholders may result in an individual Company Major
Stockholder receiving a different consideration allocation than 0.6876 Legato
Shares and $2.50 in cash per Share; we express no view regarding such
provisions of the Agreement. Our advisory services and the opinion expressed
herein are provided for the information and assistance of the Board of
Directors of the Company in connection with its consideration of the
transaction contemplated by the Agreement and such opinion does not constitute
a recommendation as to how any holder of Shares should vote with respect to
such transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Merger
Consideration to be received by the holders of Shares pursuant to the Agreement
is fair from a financial point of view to such holders.
Very truly yours,
/s/ Goldman, Sachs & Co.
------------------------
(GOLDMAN, SACHS & CO.)
C-2
Annex D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(S) 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264
of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to (S)(S) 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
D-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder's shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving or resulting
corporation within 10 days thereafter shall notify each of the holders of
any class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include in
such notice a copy of this section. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal
of such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constitutent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any
class or series of stock of such constitutent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constitutent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the notice is
given.
D-2
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw such stockholder's demand for appraisal and
to accept the terms offered upon the merger or consolidation. Within 120
days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor of
the merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the stockholders shown on
the list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that
such stockholder is not entitled to appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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