<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1996
REGISTRATION NO. 333-09357
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PEERLESS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <S> <C>
CALIFORNIA 5008 95-3732595
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------
2381 ROSECRANS AVENUE
EL SEGUNDO, CA 90245
(310) 536-0908
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
EDWARD A. GAVALDON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2381 ROSECRANS AVENUE
EL SEGUNDO, CA 90245
(310) 536-0908
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
GREGORY C. SMITH, ESQ. LAIRD H. SIMONS, III, ESQ.
BRETT D. WHITE, ESQ. EILEEN DUFFY ROBINETT, ESQ.
COOLEY GODWARD CASTRO JEFFERY L. DONOVAN, ESQ.
HUDDLESON & TATUM FENWICK & WEST LLP
FIVE PALO ALTO SQUARE TWO PALO ALTO SQUARE
3000 EL CAMINO REAL PALO ALTO, CA 94306
PALO ALTO, CA 94306-2155 (415) 494-0600
(415) 843-5000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the
same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1996
PROSPECTUS
3,750,000 SHARES
[LOGO OF PEERLESS]
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
Of the 3,750,000 shares of Common Stock offered hereby, 2,500,000 shares are
being sold by the Company, 1,073,125 shares are being sold by the Selling
Stockholders and 176,875 shares are being sold by the Underwriters upon the net
exercise of warrants purchased by them from certain of the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the shares or warrants by the Selling Stockholders. See "Principal and Selling
Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company's Common Stock has been approved for quotation on
the Nasdaq National Market under the symbol PRLS, subject to official notice of
issuance.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS (3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- --------------------------------------------------------------------------------
Total (4)................ $ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) Includes $ from the sale of warrants to the Underwriters by certain
of the Selling Stockholders.
(4) The Company and certain Selling Stockholders have granted the Underwriters
a 30-day option to purchase up to an additional 562,500 shares of Common
Stock solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively.
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for the shares will be available
for delivery on or about , 1996 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
<PAGE>
[Description: The image will depict a circle entitled "Peerless Embedded
Imaging System" with arrows directed at digital document products, such as a
monochrome printer, multifunction product and color printer (with an
indication that the latter is under development).]
Peerless Systems Corporation A leader in embedded imaging systems
The evolution of digital document products which offer a combination of print,
copy, fax and scan functions has eroded the boundaries between the previously
distinct digital document product market sectors and created a need for a
common embedded imaging system solution. Peerless provides an advanced
software-based embedded imaging system for a variety of digital document
products, including networked monochrome printers, multifunction ("MFP"), and,
in the future, color products.
[Description: The image will depict a color electronic document, the text of
which says "Text, graphics and photographs now have more potential than ever
to be used in creative ways as affordable color laser technology becomes a
reality", displayed on a computer screen, identifying the photographic, text
and line art elements within the document. These elements are then represented
in a display list, operated on by the PeerlessPage Imaging Operating System
and a Peerless QuickPrint co-processor. The image then depicts the page of
text and graphics being segmented into bands, followed by the page emerging
from a printer, followed by the page as printed.]
Recognizes objects; text, line art, photographs. Converts recognized objects
to compact object-based display list. Processes display list in real-time
using software-based imaging technology. Transmits page continuously in bands.
Peerless embedded imaging systems can enable the page image to be processed in
real-time with reduced memory and processor requirements while providing
higher quality output and faster document production.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a document image as a collection of pixels, the
Peerless object-based image processing technology recognizes basic imaging
elements in the document, differentiating between text, line art and
photographs much as the human eye does. Peerless' software then creates a
compact display list of image objects as an intermediate representation of the
document to be printed. This display list is a more concise means of
representing the imaging information of the document, enabling complex imaging
data to be processed more quickly and with less memory, typically without
resorting to compression techniques that degrade the image. For high-
performance applications, the display list can be processed in real-time with
assistance from a Peerless-designed graphics co-processor embedded in the
digital document product. Peerless technology segments the page into a series
of bands which are then transmitted continuously to the digital document
product more efficiently and faster than many traditional imaging approaches.
Color technology under development.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Peerless logo is a trademark of the Company. The Company has applied for
registration of the PeerlessPage, PeerlessPrint, PSIO, QuickPrint and
WinEXPRESS trademarks. This Prospectus also includes trade names and
trademarks of companies other than the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
THE COMPANY
Peerless Systems Corporation ("Peerless" or the "Company") is a leading
provider of software-based embedded imaging systems to original equipment
manufacturers ("OEMs") of digital document products. Digital document products
include printers, copiers, fax machines, scanners and emerging color products,
as well as multifunction products ("MFPs") that perform a combination of these
imaging functions. In order to process digital text and graphics, digital
document products rely on a core set of imaging software and supporting
electronics, collectively known as an embedded imaging system. The Peerless
family of products and engineering services provides advanced embedded imaging
technologies that enable the Company's OEM customers to develop digital
printers, copiers and MFPs quickly and cost effectively. The Company markets
its solutions directly to customers such as Adobe, Canon, Digital Equipment
Corporation, IBM and Xerox.
To date, a majority of embedded imaging systems have been developed and
produced internally by OEMs. However, rapid changes in technology and end-user
requirements have created increased challenges for OEMs, particularly in the
area of embedded imaging systems. These changes include increased technical
complexity, the increased role of networking, the emergence of MFPs and the
demand for color imaging. As a result, OEMs increasingly are relying on outside
embedded imaging systems suppliers to provide their embedded imaging system
solutions.
The Company's embedded imaging system solution is based on its proprietary
object-based image processing technology that enables its OEMs to increase
print quality and speed while reducing cost. The Company has designed its real-
time, 32-bit PeerlessPage Imaging Operating System and supporting technology to
accelerate image processing and to enhance resolution. The multitasking
operating system also enables the Company to manage concurrent processing of
digital document product tasks for the MFP marketplace. The Company also has
designed its embedded imaging technology with a modular architecture that
addresses a broad spectrum of digital document product technologies and that
may be tailored to individual OEM requirements. Peerless offers its OEMs the
flexibility to add functionality, such as networking support, languages or
multifunction features and, in the future, color, to their digital document
products as their needs dictate. Peerless' scalable technology enables the
Company to serve both the low-cost and high-performance sectors of the market.
Peerless also offers engineering services to allow OEMs to outsource the
development of the entire embedded imaging system for a digital document
product. As a result, the Company provides OEMs with the ability to offer a
broadened array of digital document products, further leveraging their core
investment in the Company's embedded imaging system solution.
The Company's goal is to establish certain basic components of its embedded
imaging system solution, notably its imaging operating system and its Peerless
Standard Input/Output interface, as de facto standards for the digital document
product industry. The Company believes it can achieve reduced costs for its OEM
customers through multivendor acceptance of its standardized solutions.
The Company was incorporated in California on April 28, 1982, and will
reincorporate in Delaware concurrent with the closing of this offering. The
Company's principal offices are located at 2381 Rosecrans Avenue, El Segundo,
California 90245, and the Company's telephone number is (310) 536-0908.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,500,000 shares
Common Stock offered by the Selling
Stockholders................................... 1,250,000 shares (1)
Common Stock to be outstanding after the
offering....................................... 10,205,614 shares (2)
Use of proceeds................................. Repayment of indebtedness and
equipment lease lines, working
capital and other general corporate
purposes
Proposed Nasdaq National Market symbol.......... PRLS
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
YEARS ENDED DECEMBER 31,
------------------------------------------- JUNE 30, JULY 31,
1991 1992 1993 1994 1995 1995 (3) 1996 (3)
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues......... $ 4,988 $ 4,934 $ 5,241 $ 9,336 $10,413 $4,732 $7,088
Cost of revenues....... 2,175 3,351 5,436 5,675 5,254 2,432 3,361
Operating expenses..... 3,938 5,327 4,470 4,645 5,523 2,770 3,288
Income (loss) from
operations............ (1,125) (3,744) (4,665) (984) (364) (470) 439
Net income (loss)...... $(1,163) $(3,851) $(4,824) $(1,226) $ (639) $ (597) $ 222
Pro forma net income
(loss) per share (4).. $ (0.08) $ 0.04
Shares used in pro
forma per share
calculation (4)....... 7,085 8,637
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (5) AS ADJUSTED (5)(6)
-------- ------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 194 $ 194 $26,216
Working capital (deficit)....................... (2,630) (2,630) 24,147
Total assets.................................... 3,960 3,960 29,982
Long-term obligations........................... 4,202 1,132 853
Redeemable Preferred Stock...................... 5,938 -- --
Total stockholders' equity (deficit)............ (11,579) (2,571) 24,485
</TABLE>
- --------------------
(1) Includes 176,875 shares of Common Stock issuable upon the net exercise of
warrants to be sold to the Underwriters by certain of the Selling
Stockholders.
(2) Based on shares outstanding on July 31, 1996. Excludes (i) 1,490,957 shares
of Common Stock issuable upon exercise of options outstanding as of July
31, 1996 at a weighted average exercise price of $2.26 per share and (ii)
1,133,189 additional shares of Common Stock presently reserved for future
issuance under the Company's stock option and purchase plans. See
"Management--Employee Benefit Plans and Non-Plan Option Grants" and Note 9
of Notes to Financial Statements.
(3) The Company changed its fiscal year-end to January 31 commencing February
1, 1996. No data is provided for the month ended January 31, 1996.
(4) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net income (loss) per share and the number of
shares used in the pro forma per share calculation.
(5) As adjusted to give effect to the conversion of all outstanding Preferred
Stock and Debentures into Common Stock, the net exercise of all outstanding
warrants to purchase Common Stock and the change in par value of the
Company's capital stock.
(6) As adjusted to give effect to the exercise of options to purchase 10,666
shares of Common Stock to be sold in the offering by the Selling
Stockholders and the sale of the 2,500,000 shares of Common Stock offered
by the Company hereby after deducting the estimated underwriting discount
and offering expenses and the application of the net proceeds therefrom.
See "Use of Proceeds."
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and assumes (i) the
occurrence of a two-for-three reverse stock split, (ii) the reincorporation of
the Company from California to Delaware, (iii) an increase in the authorized
number of shares of Common Stock to 30,000,000 and a decrease in the authorized
number of shares of Preferred Stock to 5,000,000, (iv) the conversion of all
outstanding Preferred Stock into Common Stock at approximately a one-for-one
ratio, (v) the net exercise of warrants to purchase 1,133,351 shares of Common
Stock at a weighted average exercise price of $1.46 per share at an assumed
initial public offering price of $12.00 per share, resulting in the issuance of
995,671 shares of Common Stock, (vi) the conversion of all outstanding
Debentures into 1,169,518 shares of Common Stock and (vii) the exercise of
options to purchase 10,666 shares of Common Stock at a weighted average
exercise price of $0.53 per share.
4
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before purchasing the Common
Stock offered hereby. Except for the historical information contained herein,
the discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below and
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Prospectus.
History of Operating Losses; Accumulated Deficit. The Company recognized net
losses of approximately $1.2 million, $639,000 and $48,000 for the fiscal
years ended December 31, 1994 and 1995 and the seven months ended July 31,
1996, respectively. The Company's historical losses have resulted in an
accumulated deficit of approximately $13.0 million as of July 31, 1996.
Although the Company reported net income of approximately $222,000 for the six
months ended July 31, 1996, there can be no assurance that the Company will
maintain profitability on a quarterly basis or achieve profitability on an
annual basis in the future. For these reasons, the Company believes that
deferred tax assets, including net operating losses and tax credit carry-
forwards, may not be utilized in the near term and has recorded a valuation
allowance for the full amount of the net deferred income tax asset. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Potential Fluctuations in Quarterly Results; Seasonality; Revenue
Reporting. The Company in the past has experienced, and in the future may
experience, significant fluctuations in quarterly operating results that have
been and may be caused by many factors including: initiation or termination of
arrangements between the Company and its existing and potential OEM customers;
the timing of introductions of new products or product enhancements by the
Company, its OEMs and their competitors; the phase-out or early termination of
OEM products incorporating the Company's technology; the size and timing of
engineering services contracts, one-time software licensing transactions and
recurring licensing fees; the size and timing of and fluctuations in end-user
demand for the OEM products incorporating the Company's technology;
inventories of digital document products carried by the OEMs' distributors
that exceed current or projected end-user demand; performance by the Company
and its OEM customers pursuant to their plans and agreements; seasonal trends;
the mix of services provided or products sold and the gross margins
attributable to such services or products; competition and pricing; customer
order deferrals in anticipation of new products or product enhancements;
industry and technology developments; changes in the Company's operating
expenses; software bugs, product delays or other product quality problems;
currency fluctuations; and general economic conditions. For example, in recent
quarters the Company's quarterly revenues have been significantly affected by
the timing of one-time licensing transactions and by decreases in recurring
product licensing revenues resulting from the phase-out by the Company's OEMs
of products incorporating the Company's technology. The Company expects that
its operating results will continue to fluctuate significantly in the future
as a result of these and other factors. A substantial portion of the Company's
costs and expenses is related to costs of engineering services and
maintenance, other personnel costs, product development, facilities and
marketing programs. The level of spending for such costs and expenses cannot
be adjusted quickly and is based, in significant part, on the Company's
expectations of future revenues and anticipated OEM commitments. If such
commitments do not materialize or are terminated or, in any event, if revenues
are below expectations, the Company's quarterly and annual operating results
will be adversely affected, which could have a material adverse effect on the
price of the Company's Common Stock. For these and other reasons, it is likely
that in future quarters the Company's operating results from time to time may
be below the expectations of public market analysts and investors, which also
could have a material adverse effect on the price of the Company's Common
Stock.
The Company believes that its business may be subject to seasonal trends. In
the digital document product industry, it is not unusual for vendors to
experience an increase in demand in the fourth calendar quarter followed by a
significant decrease in the following quarter. As a result, the Company's
product
5
<PAGE>
licensing revenues associated with unit shipments by its OEMs may be subject
to similar fluctuations, although no assurance can be given that the Company's
OEMs will experience such fluctuations or as to the effect of such
fluctuations, if any, on the Company's revenues. In addition, because one or
more key OEM transactions, milestones or OEM product shipments that are
scheduled to be realized by the Company or its OEMs at the end of a quarter
may be delayed until the beginning of the next quarter, quarterly revenues are
subject to significant fluctuations.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. The Company is entitled to receive
certain non-refundable advances of proposed licensing fees during this initial
phase of the agreement, and becomes entitled to receive possible engineering
services and maintenance fees and substantial licensing fees upon approval, if
any, of acceptable product specifications and development schedules and, over
time, various other milestones. No assurance can be given as to the ability of
the Company to complete acceptable product specifications and development
schedules. Further, even in the event such specifications and schedules are
agreed to, no assurance can be given as to the ability of the Company to
perform in accordance with the terms of the agreement or as to the ability of
the manufacturer to continue developing, marketing and selling products
covered by the agreement, which is subject to termination by the manufacturer
upon notice and in the event of a material breach. If the agreement is
terminated for a material breach by the Company the manufacturer is entitled
to a return of the substantial majority of any licensing fees previously paid,
other than those attributable to per unit royalties. Thus, the achievement of,
or failure to achieve, certain milestones under this agreement, the
development and sale of, or failure to develop and sell, products under this
agreement, or the termination, with or without a material breach, of this
agreement, may cause the Company's revenues to fluctuate significantly from
quarter to quarter.
The recurring product licensing revenues reported by the Company are
dependent on the timing and accuracy of product sales reports received from
the Company's OEM customers. These reports are provided only on a calendar
quarter basis and, in any event, are subject to delay and potential revision
by the OEM. Therefore, the Company is required to estimate all of the
recurring product licensing revenues for the last month of each quarter and to
further estimate all of its quarterly revenues from an OEM when the report
from such OEM is not received in a timely manner. As a result, the Company may
be unable to estimate such revenues accurately prior to public announcement of
the Company's quarterly results. In such event, the Company subsequently may
be required to restate its recognized revenues or adjust revenues for
subsequent periods, which could have a material adverse effect on the
Company's operating results and the price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Market Success of Third Parties. With the exception of Adobe
Systems Incorporated ("Adobe"), substantially all of the Company's revenues in
recent years have been derived from OEMs. The Company's revenues are dependent
upon, among other things, the ability and willingness of these OEMs to timely
develop and promote digital document products that incorporate the Company's
technology. The ability and willingness of these OEMs to do so is based upon a
number of factors, such as: the timely development by the Company and the OEMs
of new products with new functionality, increased speed and enhanced
performance at acceptable prices to end users; development costs of the OEMs;
licensing and engineering fees of the Company; compatibility with emerging
industry standards; technological advances; patent and other intellectual
property issues; competition generally; and overall economic conditions. Many
of these factors are beyond the control of the Company and, to a lesser
extent, also may be beyond the control of any of the OEMs. Many of these OEMs
are concurrently developing and promoting products that do not incorporate the
Company's technology. In such cases, the OEMs may have profitability or other
incentives to promote internal solutions or competing products in lieu of
products incorporating the Company's technology. No assurance can be given as
to the ability or willingness of the Company's OEMs to continue developing,
6
<PAGE>
marketing and selling products incorporating the Company's technology. Since
the Company's business is entirely dependent on its relationships with its
OEMs, the inability or unwillingness of any of the Company's significant OEMs
to continue its relationship with the Company and to develop and promote
products incorporating the Company's technology would have a material adverse
effect on the Company's operating results.
Concentration of OEM Customers. Revenues from the Company's top four OEM
customers accounted for approximately 74% and 55% of the Company's total
revenues for the year ended December 31, 1995 and the six months ended July
31, 1996, respectively, and the Company anticipates that its revenues in the
future will be similarly concentrated with a limited number of OEM customers.
The Company's largest OEM customers vary to some extent from year to year as
product cycles end, contractual relationships expire and new products and
customers emerge. Many of the engineering services and licensing arrangements
with the Company's OEMs are provided on a project-by-project basis, are
terminable with limited or no notice, and, in certain instances, are not
governed by long-term agreements. There presently are only a limited number of
OEMs in the digital document product market to which the Company markets its
technology and services. Therefore, the ability of the Company to replace a
lost customer or offset a significant decrease in the revenues from a customer
may be significantly limited. In addition, the Company's larger OEMs at times
have required that the Company offer new technology directly to them prior to
offering it to other OEMs and have attempted to restrict the Company from
licensing the technology utilized by these OEMs to OEMs developing potentially
competing products. The Company also is subject to a credit risk associated
with the concentration of its accounts receivable from these OEMs. No
assurance can be given as to the ability or willingness of any of the
Company's OEMs to continue utilizing the Company's services and technology
consistent with past practice or at all, or as to the ability of the Company
in the future to sell its services and technology consistent with past
practice or at all to its existing or new OEMs. Any significant decrease in
sales of products by, or a reduction in licensing or engineering services to,
the Company's larger OEMs, any failure of the Company to replace its existing
OEMs or to enter into relationships with new OEM customers in accordance with
the Company's expectations, or any delay in or failure to make the payments
due to the Company from such OEMs could have a material adverse effect on the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risks Associated with Technological Change; Dependence on the Digital
Document Product Market. The market for the Company's products and services is
characterized by rapidly changing technology, evolving industry standards and
needs, and frequent new product introductions. The Company currently derives
substantially all of its revenues from the licensing of technology and the
sale of related engineering services that enable the printing and imaging of
digital documents, and the Company anticipates that these sources of revenue
will continue to account for substantially all of the Company's revenues for
the foreseeable future. The Company and its OEMs are required to develop and
release in a regular and timely manner new digital document products with
increased speed, enhanced resolution, reduced memory requirements,
multifunction capability, network compatibility and color imaging. The
acceptable amount of time to develop these products is continuing to decrease,
which increases the complexity for and costs to the Company and its OEMs. In
addition, the Company, its OEMs and their competitors from time to time may
announce new products, capabilities or technologies that may replace or
shorten the life cycles of the OEM products incorporating the Company's
technology. The Company's success will depend on, among other things: market
acceptance of the Company's technology and the digital document products of
the Company's OEM customers; the ability of the Company and its OEM customers
to meet industry changes and market demands in a timely manner; achievement of
new design wins by the Company followed by the OEMs' development of associated
new digital document products; and the regular and continued introduction of
new and enhanced technology and services by the Company and its OEMs on a
timely and cost-effective basis. There can be no assurance that the products
and technology of competitors of the Company or its OEMs will not render the
Company's technology or its OEMs' products noncompetitive or obsolete. Any
failure by the Company or its OEMs to anticipate or respond adequately to the
rapidly changing technology and evolving industry standards and needs, or any
significant delay in development or introduction of new and enhanced
7
<PAGE>
products and services, could result in a loss of competitiveness or revenues,
which could have a material adverse effect on the Company's operating results.
Risks Associated with Product Development; Product Delays. The Company in
the past has experienced delays in product development, and the Company may
experience similar delays in the future. Prior delays have resulted from
numerous factors such as changing OEM product specifications, difficulties in
hiring and retaining necessary personnel, difficulties in reallocating
engineering resources and other resource limitations, difficulties with
independent contractors, changing market or competitive product requirements
and unanticipated engineering complexity. In addition, the Company's software
and hardware have in the past and may in the future contain undetected errors
or failures that become evident upon product introduction or as product
production volumes increase. There can be no assurance, despite testing by the
Company and its OEMs, that errors will not be found, that the Company will not
experience development challenges resulting in unanticipated problems or
delays in the acceptance of products by the Company's OEMs or shipment of the
OEMs' products, or that the Company's new products and technology will meet
performance specifications under all conditions or for all anticipated
applications. Given the short product life cycles in the digital document
products market, any delay or unanticipated difficulty associated with new
product introductions or product enhancements could have a material adverse
effect on the Company's operating results.
Risks Associated with Developing Markets. A substantial portion of the
Company's recent development efforts has been directed at the development of
new embedded imaging technologies, particularly for MFP and color products.
The market for these products is new and rapidly evolving. The Company's OEMs
currently are selling monochrome network printers and MFPs incorporating the
Company's technology. Although certain of the Company's color technology is
currently available to OEM customers, once an agreement with an OEM is entered
into, the color technology must undergo further development, or customization,
before it can be incorporated into an OEM's specific digital document product.
The Company's OEMs have not yet shipped any color products incorporating the
Company's color technology. The Company's future success will be dependent to
a significant degree upon broad market acceptance of the technology under
development, particularly its MFP and color technology. This success will be
dependent in part on the ability of the Company's OEMs to develop new products
that provide the functionality, performance, speed and network connectivity
demanded by the market at acceptable prices, and to convince end users to
adopt MFP, color printing and other products for office and desktop use. There
can be no assurance that: the market for MFP, color printing and other
products proposed by the Company will develop; the Company will be able to
offer in a timely manner, if at all, its new technology; the Company's OEM
customers will choose the Company's technology for use in their MFPs, color
printers or other products; the Company's OEM customers will be successful in
developing such MFPs, color printers and other products; or such products will
gain market acceptance. The failure of any of these events to occur would have
a material adverse effect on the Company's operating results.
Competition. The market for embedded imaging systems for digital document
products is highly competitive and characterized by continuous pressure to
enhance performance, to introduce new features and to accelerate the release
of new products. The Company competes on the basis of technology expertise,
product functionality, development time and price. The Company's technology
and services primarily compete with solutions developed internally by OEMs.
Virtually all of the Company's OEMs have significant investments in their
existing solutions and have the substantial resources necessary to enhance
existing products and to develop future products. These OEMs have or may
develop competing embedded imaging systems technologies and may implement
these systems into their products, thereby replacing the Company's current or
proposed technologies, eliminating a need for the Company's services and
products and limiting future opportunities for the Company. The Company
therefore is required to persuade these OEMs to outsource the development of
their embedded imaging systems and to provide products and solutions to these
OEMs that cost-effectively compete with their internally developed products.
The Company also competes with software and engineering services provided in
the digital document product marketplace by other systems
8
<PAGE>
suppliers to OEMs. In this regard, the Company competes with, among others,
Xionics Document Technologies with respect to MFP embedded systems and
Electronics for Imaging with respect to color technologies.
As the industry continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance
or functionality. The Company anticipates increasing competition for its color
products under development, particularly as new competitors develop and enter
products in this market. Some of the Company's existing competitors, many of
its potential competitors and virtually all of the Company's OEMs have
substantially greater financial, technical, marketing and sales resources than
the Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the amount of royalties received
on new licenses and to reduce the cost of its engineering services in order to
maintain existing business and generate additional product licensing revenues,
which could reduce profit margins and result in losses and a decrease in
market share. No assurance can be given as to the ability of the Company to
compete favorably with the internal development capabilities of its current
and prospective OEM customers or with other third-party embedded imaging
system suppliers, and the inability to do so would have a material adverse
effect on the Company's operating results.
Dependence on Adobe Relationships. The Company has a set of relationships
with Adobe that address many critical aspects of the Company's OEM customers'
needs. The Company has licensed (for internal development purposes) from Adobe
the right to use Adobe's PostScript(R) Software to enable the Company's
products to be used with Adobe's PostScript Software, has licensed to Adobe
several of the Company's technologies and has developed technologies for Adobe
for which the Company receives royalties and engineering services fees, and is
currently seeking to license color matching technology from Adobe. A number of
the agreements governing relationships with Adobe are in the process of being
finalized, and no assurances can be given that such agreements will be
finalized in accordance with the parties' current intent or at all. The
Company derives significant revenue and significant competitive and cost
advantages from its relationship with Adobe. Therefore, the termination or
limitation of the Company's relationships with Adobe would have a material
adverse effect on the Company's operating results.
Dependence on Sole Source Providers. The Company is dependent on two
independent parties, Motorola and Intel, each of which provides unique
application specific integrated circuits ("ASICs") incorporating the Company's
imaging technology to certain of the Company's OEMs. In addition, the Company
is dependent upon Emulex to provide network interface cards incorporating the
Company's technology to the Company's OEMs. These sole source providers are
subject to materials shortages, excess demand, reduction in capacity and/or
other factors that may disrupt the flow of goods to the Company's customers
and thereby adversely affect the Company's customer relationships. Any such
disruption could limit or delay production or shipment of the products
incorporating the Company's technology, which could have a material adverse
effect on the Company's operating results.
Dependence on Intellectual Property Rights; Risk of Infringement; Trademark
Disputes. The Company's success is heavily dependent upon its proprietary
technology. To protect its proprietary rights, the Company relies on a
combination of patent, copyright, trade secret and trademark laws,
nondisclosure and other contractual restrictions. The Company holds two
patents issued in the United States, one of which is also issued in France,
Germany and Great Britain. The issued patents relate to techniques developed
by the Company for generating output for continuous synchronous raster output
devices such as laser printers using a smaller amount of memory than would be
required without using the Company's technology. One of the two U.S. patents
was issued on March 26, 1996 and the other patent was issued on April 16,
1996. The patent term of the U.S. patents is 17 years from the issue date,
subject to the payment of required maintenance fees. The patents granted in
France, Germany and Great Britain were issued on February 14, 1996. The term
of the European patents is 20 years from the filing date of August 2, 1991,
subject to an opposition period that will expire on November 14, 1996 and
payment of required renewal fees. The Company has one patent
9
<PAGE>
application pending in Japan and six patent applications pending in the United
States. There can be no assurance that patents held by the Company will not be
challenged or invalidated, that patents will issue from any of the Company's
pending applications or that any claims allowed from existing or pending
patents will be of sufficient scope or strength (or issue in the countries
where products incorporating the Company's technology may be sold) to provide
meaningful protection or any commercial advantage to the Company. In any
event, effective protection of intellectual property rights may be unavailable
or limited in certain countries. The status of United States patent protection
in the software industry is not well defined and will evolve as the United
States Patent and Trademark Office grants additional patents. Patents have
been granted, and patents may be issued, to third parties that relate to
fundamental technologies related to the Company's technology.
As part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, OEMs and strategic
partners and limits access to and distribution of its software and other
proprietary information. Despite these efforts, the Company may be unable to
effectively protect its proprietary rights and, in any event, enforcement of
the Company's proprietary rights may be expensive. The Company's source code
also is protected as a trade secret. However, the Company from time to time
licenses its source code to OEMs, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology increasingly may become the subject of infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, regardless of merit, could
be time consuming, result in costly litigation, cause product shipment delays
or require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse
effect on the Company's operating results. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In
addition, the Company may lack sufficient resources to initiate a meritorious
claim. In the event of an adverse ruling in any litigation regarding
intellectual property, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to
infringing or substituted technology. The failure of the Company to develop,
or license on acceptable terms, a substitute technology if required could have
a material adverse affect on the Company's operating results.
The Company is aware of an unrelated corporation that is using the name
"Peerless Systems Corporation," and the Company is in discussions with this
corporation regarding the rights of both entities to use the name. Although
the Company believes that it has prior right to the name, the other
corporation has disputed the Company's position. No assurance can be given as
to the ability of the Company to continue to use the name nor can any
assurance be given as to the ability of the Company to acquire a license to or
an assignment of the name from the corporation on reasonable terms or at all.
The inability of the Company to do so could have a material adverse effect on
the Company's operating results. In any event, the prosecution of claims or
other litigation relating to the dispute could result in substantial costs to
the Company, which also could have a material adverse effect on the Company's
operating results.
Dependence on Key Personnel. The Company is largely dependent upon the
skills and efforts of its senior management and other officers and key
employees, some of whom only recently have joined the Company. Two of the
Company's co-founders and senior management personnel recently resigned as
executive officers of the Company in connection with the transition process
initiated in January 1995 when
10
<PAGE>
the current Chief Executive Officer was hired, and although the Company
believes such resignations will not materially impact the management of the
Company, no assurance can be given that the loss of such senior management
will not have a material adverse impact on the Company's operating results.
The Company believes that its future success will depend in large part upon
its ability to attract and retain highly skilled managerial, engineering,
sales, marketing and operations personnel, many of whom are in great demand.
Competition for such personnel recently has increased significantly. The
Company does not maintain any key person life insurance policies. The loss of
key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on the Company's operating results. See
"Management."
International Activities. Revenues from sales to the Company's customers
outside the United States accounted for 26%, 41% and 41% of the Company's
total revenues for the fiscal years ended December 31, 1994 and December 31,
1995 and the six months ended July 31, 1996, respectively. Therefore, the
Company is substantially dependent on its international business activities.
Further, the Company expects that sales to customers located outside the
United States may increase in absolute dollars in the future. The
international market for products incorporating the Company's technology is
highly competitive, and the Company expects to face substantial competition in
this market from established and emerging companies and technologies developed
internally by its OEM customers. Risks inherent in the Company's international
business activities also include currency fluctuations, the imposition of
government controls, tailoring of products to local requirements, trade
restrictions, changes in tariffs and taxes, and the burdens of complying with
a wide variety of foreign laws and regulations, any of which could have a
material adverse effect on the Company's operating results. Although all of
the Company's contracts are, and the Company expects that its future contracts
will be, denominated in U.S. dollars, there can be no assurance that its
contracts with international OEM customers in the future will be denominated
in U.S. dollars. In the event that one or more contracts are denominated in
foreign currencies, the Company will be subject to additional risks associated
with currency fluctuations, which could have a material adverse effect on the
Company's operating results.
No Prior Public Market; Determination of Public Offering Price; Possible
Volatility of Stock Price. Prior to this offering, there was no public market
for the Common Stock, and there can be no assurance that an active trading
market will develop or be sustained upon completion of this offering. The
initial public offering price will be determined by negotiation among the
Company, the Selling Stockholders and the representatives of the Underwriters
based on a number of factors, including market valuations of other companies
engaged in activities similar to those of the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors
deemed relevant. The initial public offering price may not be indicative of
the market price of the Common Stock following completion of this offering.
The trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products by the Company or its competitors, developments
or disputes with respect to proprietary rights, general trends in the
industry, overall market conditions and other factors. In addition, the stock
market historically has experienced extreme price and volume fluctuations,
which have particularly affected the market price of securities of many high
technology companies and which at times have been unrelated or
disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the market price of the Common Stock. See
"Underwriting."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price of the Company's Common Stock. Upon completion of this
offering, the Company will have outstanding an aggregate of 10,205,614 shares
of Common Stock, assuming (i) the exercise of warrants to purchase 1,133,351
shares of Common Stock on a cashless basis, resulting in the issuance of
995,671 shares of Common Stock, (ii) no exercise of the Underwriters' over-
allotment option and (iii) no exercise of options to purchase 1,490,957 shares
of Common Stock outstanding as of July 31, 1996. Of these shares, all of the
shares of Common Stock sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company as that term is defined in
11
<PAGE>
Rule 144 under the Securities Act ("Affiliates"). The remaining 6,455,614
shares of Common Stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144 or 701 promulgated under the Securities Act. As a result of
contractual restrictions and the provisions of Rules 144 and 701, additional
shares will be available for sale to the public as follows: (i) approximately
5,678 Restricted Shares will be eligible for immediate sale on the date of
this Prospectus; (ii) approximately 12,964 Restricted Shares will be eligible
for sale beginning 90 days after the date of this Prospectus; (iii)
approximately 5,419,835 Restricted Shares (plus approximately 628,625 shares
of Common Stock issuable to employees and consultants pursuant to stock
options that are then vested) will be eligible for sale upon expiration of the
lock-up agreements 180 days after the date of this Prospectus; and (iv) the
remaining 1,017,137 Restricted Shares will be eligible for sale beginning
October 1997 upon expiration of their two-year holding period. Any shares
subject to the lock-up agreements may be released at any time without notice
by Hambrecht & Quist LLC. The Company intends to register all of the shares of
Common Stock issuable under its stock option plans. In addition, the holders
of approximately 5,858,256 shares of Common Stock will have certain rights to
registration of these shares under the Securities Act. See "Description of
Capital Stock--Registration Rights" and "Shares Eligible For Future Sale."
Unspecified Use of Proceeds. The Company expects to use approximately
$500,000 of the net proceeds from this offering for the repayment of
indebtedness under its revolving line of credit, and approximately $500,000 to
repay certain equipment lease lines. The Company plans to use the remaining
proceeds of this offering for working capital and other general corporate
purposes. The Company may also use a portion of the net proceeds from the
offering to acquire or invest in complementary businesses, products or
technologies, although the Company has no present plans or commitments and is
not currently engaged in any negotiations with respect to such transactions.
Consequently, the Company will have significant discretion as to the use of
virtually all of the net proceeds to the Company from this offering. Pending
such uses, the Company intends to invest the net proceeds to the Company from
this offering in interest-bearing deposit accounts, certificates of deposit or
similar short-term, investment-grade financial instruments. See "Use of
Proceeds."
Control by Existing Stockholders. Upon the completion of this offering, the
current officers, directors and their affiliates and five percent stockholders
will beneficially own approximately 37.8% of the outstanding shares of the
Common Stock of the Company. Accordingly, such persons, if they act together,
likely will have effective control over the Company through their ability to
control the election of directors and all other matters that require action by
the Company's stockholders, irrespective of how other stockholders may vote.
Such persons could prevent or delay a change in control of the Company, which
may be favored by a majority of the remaining stockholders. The ability to
prevent or delay a change in control of the Company also may have an adverse
effect on the market price of the Common Stock. See "Management--Executive
Officers and Directors," "Principal and Selling Stockholders" and "Description
of Capital Stock."
Effect of Anti-takeover Provisions. Certain provisions of the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws") and
certain provisions of Delaware law following the offering could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that investors might be willing to pay
in the future for the Company's Common Stock. These provisions will permit the
issuance of "blank check" preferred stock by the Board of Directors without
stockholder approval, require super-majority approval to amend certain
provisions in the Charter and Bylaws, require that all stockholder actions be
taken at duly called annual or special meetings and not by written consent,
and impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. Furthermore,
the Company will be subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 could also
have the effect of delaying or preventing a change of control of the Company.
See "Description of Capital Stock."
12
<PAGE>
Immediate and Substantial Dilution. Purchasers of Common Stock in this
offering will experience immediate and substantial dilution. To the extent
outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $12.00 per share, after deducting the estimated underwriting
discount and offering expenses payable by the Company, are estimated to be
approximately $27.1 million ($29.2 million if the Underwriters' over-allotment
option is exercised in full). The Company will not receive any proceeds from
the sale of the shares being sold by the Selling Stockholders.
The Company expects to use approximately $500,000 of the net proceeds for
the repayment of indebtedness under its revolving line of credit, which bears
interest at the bank's prime interest rate plus 2% and is due in May 1997, and
approximately $500,000 to repay certain equipment lease lines with effective
interest rates ranging between 16% and 27% and with expiration dates through
1999. The Company plans to use the remaining net proceeds of this offering for
working capital and other general corporate purposes. The Company also may use
a portion of the net proceeds from the offering to acquire or invest in
complementary businesses, products or technologies, although the Company has
no present plans or commitments and is not currently engaged in any
negotiations with respect to such transactions. Pending such uses, the Company
intends to invest the net proceeds in interest-bearing deposit accounts,
certificates of deposit or similar short-term, investment grade financial
instruments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
during any period for which financial information is provided in this
Prospectus. Under the terms of the Company's revolving line of credit, the
Company currently is prohibited from paying dividends on its Common Stock. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future even after the
prohibition on paying dividends under the revolving line of credit is no
longer effective.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization assuming the
conversion of all outstanding Preferred Stock and Debentures into Common
Stock, the exercise of all outstanding warrants to purchase shares of Common
Stock on a cashless basis and a change in the par value of the Company's
capital stock and (iii) the pro forma capitalization as adjusted to give
effect to the sale of the 2,500,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $12.00 per share
(after deducting the estimated underwriting discount and offering expenses)
and application of the net proceeds therefrom and the exercise of options to
purchase 10,666 shares of Common Stock at a weighted average of $0.53 per
share to be sold in the offering by the Selling Stockholders. This table
should be read in conjunction with the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1996
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debentures (1)................................. $ 3,070 $ -- $ --
Redeemable Preferred Stock (2)................. 5,938 -- --
Stockholders' equity (deficit):
Preferred Stock, no par value actual, $.001
par value pro forma; actual outstanding as
set forth above;
5,000,000 shares authorized pro forma, no
shares issued or outstanding, pro forma and
pro forma as adjusted....................... -- -- --
Common Stock, no par value actual, $.001 par
value pro forma;
30,000,000 shares authorized pro forma;
2,882,885 shares issued and outstanding
actual; 7,694,948 shares issued and
outstanding pro forma; 10,205,614 shares
issued and outstanding pro forma as adjusted
(3)......................................... 1,005 8 10
Additional paid-in capital................... 889 10,894 37,948
Deferred Compensation........................ (425) (425) (425)
Accumulated deficit.......................... (13,048) (13,048) (13,048)
-------- -------- --------
Total stockholders' equity (deficit)....... (11,579) (2,571) 24,485
-------- -------- --------
Total capitalization..................... $ (2,571) $ (2,571) $ 24,485
======== ======== ========
</TABLE>
- ---------------------
(1) See Note 5 of Notes to Financial Statements for a description of the
Debentures.
(2) See Note 8 of Notes to Financial Statements for a description of the
Redeemable Preferred Stock.
(3) Excludes, except as set forth above, 1,490,957 shares of Common Stock
issuable upon the exercise of options outstanding as of July 31, 1996 at
a weighted average exercise price of $2.26 per share and 1,133,189 shares
of Common Stock reserved for future issuance under the Company's stock
option and purchase plans. See "Management--Employee Benefit Plans and
Non-Plan Option Grants" and Note 9 of Notes to Financial Statements.
14
<PAGE>
DILUTION
As of July 31, 1996, the Company had a pro forma net tangible book value of
approximately $(2,571,000), or $(0.33) per share. Pro forma net tangible book
value per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of pro forma shares of Common Stock
outstanding. Without taking into account any further adjustment in net
tangible book value after July 31, 1996, other than to give effect to the
2,500,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $12.00 per share (after deducting the
estimated underwriting discount and offering expenses), the pro forma net
tangible book value as of July 31, 1996 would have been $24,485,000 or $2.40
per share. This represents an immediate increase in net tangible book value of
$2.73 per share to existing stockholders and an immediate dilution of $9.60
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $12.00
Pro forma net tangible book value per share before the
offering................................................... $(0.33)
Increase per share attributable to new investors............ 2.73
------
Pro forma net tangible book value per share after the
offering..................................................... 2.40
------
Dilution per share to new investors........................ $ 9.60
======
</TABLE>
The following table summarizes, on a pro forma basis as of July 31, 1996,
the differences between the existing stockholders and the new investors with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)...... 7,705,614 75.5% $ 9,619,296 24.3% $ 1.25
New investors (1).............. 2,500,000 24.5 30,000,000 75.7 12.00
---------- ----- ----------- -----
Total...................... 10,205,614 100.0% $39,619,296 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by existing stockholders to 6,455,614 shares or
approximately 63.3% (6,114,166 shares or approximately 58.6% if the
Underwriters' over-allotment option is exercised in full) of the total
shares of Common Stock outstanding after this offering and will increase
the number of shares held by new investors to 3,750,000 shares or
approximately 36.7% (4,312,500 shares or approximately 41.4% if the
Underwriters' over-allotment option is exercised in full) of the total
shares of Common Stock outstanding after this offering. See "Principal and
Selling Stockholders."
The above computations assume (i) the net exercise of warrants to purchase
1,133,351 shares of Common Stock at a weighted average of $1.46 per share at
the assumed initial public offering price of $12.00 per share, resulting in
the issuance of 995,671 shares of Common Stock, (ii) the conversion of all
outstanding Debentures into 1,169,518 shares of Common Stock, (iii) the
exercise of options to purchase 10,666 shares of Common Stock by the Selling
Stockholders at a weighted average exercise price of $0.53 per share (42,912
shares at a weighted average exercise price of $0.91 per share if the
Underwriter's over-allotment option is exercised in full) and (iv) other than
as specifically noted, no exercise of the Underwriters' over-allotment option.
The above computations assume no exercise of options to purchase 1,490,957
shares of Common Stock outstanding as of July 31, 1996 at a weighted average
exercise price of $2.26 per share, except as otherwise noted. To the extent
such options are exercised, there will be further dilution to investors.
15
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1993, 1994
and 1995 and the month ended January 31, 1996 and the balance sheet data at
December 31, 1994 and 1995 and January 31, 1996 are derived from, and should
be read in conjunction with, the audited Financial Statements and Notes
thereto included elsewhere in this Prospectus. The statement of operations
data for the years ended December 31, 1991 and 1992 and the balance sheet data
at December 31, 1991, 1992 and 1993 are derived from the audited financial
statements not included in this Prospectus. The statement of operations data
for the six months ended June 30, 1995 and July 31, 1996 and the balance sheet
data at July 31, 1996 are derived from unaudited financial statements that
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and operating results for such periods. Operating
results for interim periods are not necessarily indicative of results to be
expected for the full years. The Company changed its fiscal year end to
January 31 commencing February 1, 1996. No dividends were paid during the
periods indicated. The data set forth below are qualified in their entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------- MONTH ENDED ----------------
JANUARY 31, JUNE 30, JULY 31,
1991 1992 1993 1994 1995 1996 (1) 1995 (1) 1996 (1)
------- ------- ------- ------- ------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product licensing..... $ 1,969 $ 1,457 $ 1,586 $ 4,394 $ 4,774 $ 329 $2,420 $2,438
Engineering services
and maintenance...... 3,019 3,477 3,655 4,942 5,639 396 2,312 4,650
------- ------- ------- ------- ------- ----- ------ ------
Total revenues....... 4,988 4,934 5,241 9,336 10,413 725 4,732 7,088
------- ------- ------- ------- ------- ----- ------ ------
Cost of revenues:
Product licensing..... 4 122 341 218 143 5 74 65
Engineering services
and maintenance...... 2,171 3,229 5,095 5,457 5,111 564 2,358 3,296
------- ------- ------- ------- ------- ----- ------ ------
Total cost of
revenues............ 2,175 3,351 5,436 5,675 5,254 569 2,432 3,361
------- ------- ------- ------- ------- ----- ------ ------
Gross margin........ 2,813 1,583 (195) 3,661 5,159 156 2,300 3,727
------- ------- ------- ------- ------- ----- ------ ------
Operating expenses:
Research and
development.......... 1,699 2,388 1,766 1,767 2,088 127 1,077 1,038
Sales and marketing... 1,667 1,904 1,656 1,878 2,142 156 1,080 1,164
General and
administrative....... 572 1,035 1,048 1,000 1,293 119 613 1,086
------- ------- ------- ------- ------- ----- ------ ------
Total operating
expenses............ 3,938 5,327 4,470 4,645 5,523 402 2,770 3,288
------- ------- ------- ------- ------- ----- ------ ------
Income (loss) from
operations............ (1,125) (3,744) (4,665) (984) (364) (246) (470) 439
Interest expense, net.. 3 49 96 118 176 17 65 167
------- ------- ------- ------- ------- ----- ------ ------
Income (loss) before
provision for income
taxes................. (1,128) (3,793) (4,761) (1,102) (540) (263) (535) 272
Provision for income
taxes................. 35 58 63 124 99 7 62 50
------- ------- ------- ------- ------- ----- ------ ------
Net income (loss)...... $(1,163) $(3,851) $(4,824) $(1,226) $ (639) $(270) $ (597) $ 222
======= ======= ======= ======= ======= ===== ====== ======
Pro forma net income
(loss) per share (2).. $ (0.08) $ 0.04
======= ======
Shares used in pro
forma per share
calculation (2)....... 7,085 8,637
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- JANUARY 31, JULY 31,
1991 1992 1993 1994 1995 1996 1996
------- ------- -------- -------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 931 $ 540 $ 771 $ 393 $ 1,184 $ 722 $ 194
Working capital
(deficit)............. 790 (1,734) (2,447) (3,192) (2,307) (2,608) (2,630)
Total assets........... 2,812 2,404 3,221 3,541 4,185 4,041 3,960
Long-term obligations.. 156 1,628 2,296 2,594 4,299 4,286 4,202
Redeemable Preferred
Stock................. 2,589 2,789 6,422 6,645 5,931 5,932 5,938
Total stockholders'
equity (deficit)...... (1,435) (5,486) (10,528) (11,941) (11,596) (11,867) (11,579)
</TABLE>
- -------------
(1) The Company changed its fiscal year-end to January 31, beginning February
1, 1996.
(2) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net income (loss) per share and the number of
shares used in the pro forma per share calculation.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the discussions in
this Prospectus contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors" as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
The Company, founded in April 1982, is a leading provider of software-based
embedded imaging systems to original equipment manufacturers ("OEMs") of
digital document products. The Peerless family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively.
As of July 31, 1996, the Company had an accumulated deficit of approximately
$13.0 million. The Company changed its fiscal year-end from December 31 to
January 31, commencing February 1, 1996, in order to better align the timing
of the Company's financial reporting with the timing of receipt of royalty
information by the Company from its OEMs. No analysis is provided for the
month ended January 31, 1996. Information for the six months ended July 31,
1996 is compared with the information for the six months ended June 30, 1995
in accordance with the Company's historical accounting presentation. See "Risk
Factors--History of Operating Losses; Accumulated Deficit" and "--
International Activities."
The Company's revenues are comprised of product licensing fees and
engineering services and maintenance fees related to the Company's embedded
imaging software and supporting electronics technologies provided to OEMs
located primarily in the United States and Japan. The Company's major
customers currently include, among others, Adobe and OEM customers Canon, IBM
and Xerox. A significant portion of the Company's revenues in recent years has
been concentrated with a limited number of OEM customers, and the Company
anticipates that its revenues in the future will be similarly concentrated. In
1995 and the six months ended July 31, 1996, the Company's top four OEM
customers accounted for approximately 74% and 55% of total revenues,
respectively. See "Risk Factors--Concentration of OEM Customers."
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time licensing fees. Recurring licensing revenues
are derived from per unit fees paid quarterly by the Company's OEMs upon
shipment or manufacture of products incorporating the Company's technology.
Recurring licensing revenues are derived to a lesser extent from arrangements
in which the Company enables its products to be used with third-party
technology such as certain arrangements with Adobe. The Company's one-time
licensing fees are paid by OEMs for access to the Company's software, which in
turn generates recurring licensing revenues if the software is incorporated
into OEM products that are subsequently developed and shipped.
The Company's engineering services revenues are derived primarily from
adapting the Company's software and supporting electronics to specific OEM
requirements. The Company provides its engineering services to OEMs seeking an
embedded imaging solution for their digital document products. The Company's
maintenance revenues are derived from software maintenance agreements.
Maintenance revenues constitute a very small portion of engineering services
and maintenance revenues.
The Company recognizes its recurring product licensing revenues on a royalty
basis generally when the Company's OEM customers ship products that
incorporate the Company's technology. The Company recognizes its one-time
licensing revenues for software licenses upon shipment and acceptance by the
Company's OEMs. The Company recognizes engineering services revenues over the
course of the development work on a percentage-of-completion basis.
Maintenance revenues are recognized ratably over the term of the maintenance
contract, which generally is twelve months. Licensing revenues are recognized
in accordance with Statement of Position 91-1 "Software Revenue Recognition."
The recurring product
17
<PAGE>
licensing revenues reported by the Company are dependent on the timing and
accuracy of product sales reports received from the Company's OEM customers.
These reports are provided only on a calendar quarter basis and, in any event,
are subject to delay and potential revision by the OEM. Therefore, the Company
is required to estimate all of the recurring product licensing revenues for
the last month of each quarter and to further estimate all of its quarterly
revenues from an OEM when the report from such OEM is not received in a timely
manner. As a result, the Company may be unable to estimate such revenues
accurately prior to public announcement of the Company's quarterly results. In
such event, the Company subsequently may be required to restate its recognized
revenues or adjust revenues for subsequent periods, which could have a
material adverse effect on the Company's operating results and the price of
the Company's Common Stock. See "Risk Factors--Potential Fluctuations in
Quarterly Results; Seasonality; Revenue Reporting."
The Company frequently receives payments from its OEMs in advance of
recognition of the associated revenues, and, in many cases, the Company
receives guaranteed minimum payments in advance of per unit licensing
royalties. These amounts are recorded as deferred revenue. Deferred revenue
consists of prepayments of product licensing revenues and payments received in
advance for engineering services and maintenance to be performed.
Revenues from sales to the Company's customers outside the United States
accounted for 26%, 41% and 41% of the Company's revenue for the fiscal years
ended December 31, 1994 and December 31, 1995 and the six months ended July
31, 1996, respectively. Therefore, the Company is substantially dependent on
its international business activities. Although all of the Company's contracts
are, and the Company expects that its future contracts will be, denominated in
U.S. dollars, there can be no assurance that its contracts with international
OEM customers in the future will be denominated in U.S. dollars. In the event
that one or more contracts are denominated in foreign currencies, the Company
will be subject to additional risks associated with currency fluctuations,
which could have a material adverse effect on the Company's operating results.
See "Risk Factors--International Activities."
The Company has a history of operating losses, including a cumulative net
loss of $6.7 million for the three year period ending December 31, 1995 and a
net loss of $48,000 for the seven months ended July 31, 1996, which have
contributed to an accumulated deficit of approximately $13.0 million at July
31, 1996. Although the Company has reported net income for the fourth quarter
ended December 31, 1995 and for the six months ended July 31, 1996, there can
be no assurance that the Company will achieve taxable income in the future.
Therefore, the Company believes that deferred tax assets, including net
operating losses and tax credit carry-forwards, may not be utilized in the
near term and has recorded a valuation allowance for the full amount of the
net deferred income tax asset.
The Company anticipates that the sale of the Common Stock in this offering
will constitute a "change in ownership" as described in Section 382 of the
Internal Revenue Code, which will limit the utilization of net operating
losses and tax credit carry-forwards in future periods.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statements of operations to
total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------------------
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------------- ------------------
JUNE 30, JULY 31,
1993 1994 1995 1995 1996
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product licensing................. 30.3% 47.1% 45.8% 51.1% 34.4%
Engineering services and mainte-
nance............................ 69.7 52.9 54.2 48.9 65.6
----- ----- ----- ----- -----
Total revenues.................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Product licensing................. 6.5 2.3 1.4 1.6 0.9
Engineering services and
maintenance...................... 97.2 58.5 49.1 49.8 46.5
----- ----- ----- ----- -----
Total cost of revenues............ 103.7 60.8 50.5 51.4 47.4
----- ----- ----- ----- -----
Gross margin...................... (3.7) 39.2 49.5 48.6 52.6
----- ----- ----- ----- -----
Operating expenses:
Research and development.......... 33.7 18.9 20.0 22.8 14.6
Sales and marketing............... 31.6 20.1 20.5 22.8 16.5
General and administrative........ 20.0 10.7 12.4 13.0 15.3
----- ----- ----- ----- -----
Total operating expenses.......... 85.3 49.7 52.9 58.6 46.4
----- ----- ----- ----- -----
Income (loss) from operations...... (89.0) (10.5) (3.4) (10.0) 6.2
Interest expense, net.............. 1.8 1.3 1.7 1.4 2.4
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes...................... (90.8) (11.8) (5.1) (11.4) 3.8
Provision for income taxes......... 1.2 1.3 1.0 1.3 0.7
----- ----- ----- ----- -----
Net income (loss).................. (92.0)% (13.1)% (6.1)% (12.7)% 3.1%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1995 and July 31, 1996
The Company's total revenues were $7.1 million in the six months ended July
31, 1996 and $4.7 million in the six months ended June 30, 1995. The Company's
product licensing revenues for the six months ended July 31, 1996 and the six
months ended June 30, 1995 remained constant at $2.4 million, with an increase
in recurring licensing revenues being offset by a decrease in one-time
licensing revenues. Recurring licensing revenues increased as a result of an
increase in the number of products incorporating the Company's technology
being shipped by the Company's OEM customers. One-time licensing revenues
decreased on a period-to-period basis due to the unusually large amount of
revenues generated from one-time licensing transactions signed in the earlier
comparative period by the Company's Japanese OEM customers, which the Company
believes was attributable to the then favorable exchange rate. The Company's
engineering services and maintenance revenues for the six months ended July
31, 1996 increased 101% to $4.7 million from $2.3 million in the six months
ended June 30, 1995, primarily due to an increase in monochrome and color
design projects under development. This increased rate of growth in
engineering services and maintenance revenues accounted for the increase in
engineering services and maintenance revenues as a percentage of total
revenues between these comparison periods.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. During this initial phase, the
Company will receive certain non-refundable advances of proposed licensing
fees. If this initial phase results in the development of acceptable product
specifications and development schedules, the agreement provides for the
license of Peerless technologies to, and the development of technologies for,
this manufacturer. If the license and development portions of the agreement
become effective, they will provide for the possible payment to the Company of
additional engineering services and maintenance fees and substantial licensing
fees. No assurance can be given as to the ability of the Company to complete
acceptable product specifications. Further, even in the event such
specifications are agreed to, no assurance can be given as to the ability of
the
19
<PAGE>
Company to perform in accordance with the terms of the agreement or as to the
ability of the manufacturer to continue developing, marketing and selling
products covered by the agreement, which is subject to termination by the
manufacturer upon notice. See "Business--Technology--Technology Partners."
The Company's cost of revenues includes product licensing costs as well as
engineering services and maintenance costs. Cost of engineering services and
maintenance is comprised primarily of salaries and benefits for engineering
personnel and materials, an allocation of corporate facilities overhead and an
allocation of engineering management and administrative staff expenses. Gross
margin as a percentage of total revenues increased to approximately 53% for
the six months ended July 31, 1996 from 49% for the six months ended June 30,
1995. The gross margin percentage increased despite a change in the mix of
revenues to include a greater proportion of engineering services revenues
(which have lower gross margins than product licensing revenues), as the
margins associated with the engineering services revenues increased
significantly between such periods due to certain projects with unusually low
cost of revenues during the six months ended July 31, 1996. The Company
expects that gross margins on engineering services and maintenance revenues
will decrease in future periods from the level experienced in the six months
ended July 31, 1996. Maintenance costs constitute a very small portion of the
engineering services and maintenance costs.
The Company's research and development expenses are comprised primarily of
employee salaries and benefits, an allocation of engineering management and
administrative staff expenses and an allocation of the corporate facilities
overhead. Research and development expenses decreased slightly to $1.0 million
for the six months ended July 31, 1996 from $1.1 million for the six months
ended June 30, 1995. Research and development expenses decreased slightly in
spite of an increase in research and development headcount, principally
associated with the Company's color development efforts, as this increase was
offset by a decrease in quality assurance expenses relating to research and
development. The Company anticipates that its research and development
expenses may increase in absolute dollars as the Company devotes increased
efforts to its color products, MFP technology, PC-based driver software and
new page description languages.
The Company's sales and marketing expenses are comprised primarily of
employee salaries and benefits, commissions and bonuses, advertising and
promotional expenses, the cost of operating the Japan sales office and an
allocation of the corporate facilities overhead. Sales and marketing expenses
for the six months ended July 31, 1996 increased 8% to $1.2 million from $1.1
million in the six months ended June 30, 1995, primarily due to hiring of
additional sales and marketing personnel and added promotional activities. The
Company anticipates that its sales and marketing expenses may increase in
absolute dollars as additional sales and marketing personnel are hired to
allow the Company to address new market opportunities.
The Company's general and administrative expenses are comprised primarily of
salaries, benefits and bonuses paid to its executive and administrative staff,
fees paid to the Company's external auditors, counsel and other corporate
consultants, and an allocation of the corporate facilities overhead. General
and administrative expenses for the six months ended July 31, 1996 increased
77% to $1.1 million from $613,000 in the six months ended June 30, 1995,
primarily due to the hiring of additional management and administrative
personnel and the enhancement of information systems. The Company anticipates
that its general and administrative expenses may increase in absolute dollars
to the extent its business grows and as a result of becoming a public company.
The Company anticipates the recognition of deferred compensation expense of
$452,000 for the difference between the exercise price and the deemed fair
value of the underlying Common Stock for options to purchase 561,909 shares of
Common Stock granted during the six months ended July 31, 1996. Of the total
expense, the Company recognized $27,000 as a compensation expense during the
six months ended July 31, 1996. The remaining deferred compensation expense
generally will be amortized over the ensuing two- to 60-month periods of the
options. See Note 9 of Notes to Financial Statements.
20
<PAGE>
Years Ended December 31, 1993, 1994 and 1995
The Company's total revenues were $10.4 million in 1995, $9.3 million in
1994 and $5.2 million in 1993. The Company's product licensing revenues
increased to $4.8 million in 1995 from $4.4 million in 1994 and $1.6 million
in 1993. The increase from 1993 to 1994 was primarily due to an increase in
recurring licensing fees as a result of a significant increase in the quantity
of products incorporating the Company's technology shipped by the Company's
OEM customers. The increase from 1994 to 1995 was primarily due to a number of
one-time software licenses that were entered into during the period. The
Company's engineering services and maintenance revenues increased to $5.6
million in 1995 from $4.9 million in 1994 and $3.7 million in 1993. The
increase from 1993 to 1994 and from 1994 to 1995 was primarily due to
additional custom design projects.
The Company's gross margin as a percentage of total revenues increased to
50% in 1995 from 39% in 1994, which had increased from (4)% in 1993. These
increases were due primarily to a greater percentage of the revenues being
derived from product licensing fees in 1994 as compared to 1993, as well as
increases in the gross margin associated with engineering services and
maintenance revenues in both 1994 and 1995. In addition, cost of revenues has
decreased as products on which the Company paid a per unit royalty were
phased-out, and as engineering services costs were leveraged over a larger
number of design projects. Maintenance costs constituted a very small portion
of engineering services and maintenance costs.
The Company's research and development expenses increased to $2.1 million in
1995 from $1.8 million in 1994 and $1.8 million in 1993. The increase from
1994 to 1995 was primarily due to the initiation of the color technology
development efforts.
The Company's sales and marketing expenses increased to $2.1 million in 1995
from $1.9 million in 1994 and $1.7 million in 1993. The increase from 1993 to
1994 was primarily due to the growth of the Japan sales activity as OEM
accounts in Japan were added. The increase from 1994 to 1995 was primarily due
to the hiring of additional sales staff and added trade show and promotional
activity as the Company's color technology development efforts were announced.
The Company's general and administrative expenses increased to $1.3 million
in 1995 from $1.0 million in 1994 and $1.0 million in 1993. The increase from
1994 to 1995 was primarily due to hiring of additional management personnel.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents the unaudited quarterly statements of
operations for the Company both in absolute dollars and as a percentage of
total revenues. These statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation of the information for the periods
presented. The operating results for any quarter should not be relied upon as
indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (1)
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, APRIL 30, JULY 31,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product licensing..... $1,224 $1,196 $ 804 $1,550 $1,013 $1,425
Engineering services
and maintenance...... 1,146 1,166 1,489 1,838 2,318 2,332
------ ------ ------ ------ ------ ------
Total revenues....... 2,370 2,362 2,293 3,388 3,331 3,757
------ ------ ------ ------ ------ ------
Cost of revenues:
Product licensing..... 43 31 29 41 33 32
Engineering services
and maintenance...... 1,147 1,211 1,341 1,411 1,615 1,681
------ ------ ------ ------ ------ ------
Total cost of
revenues............ 1,190 1,242 1,370 1,452 1,648 1,713
------ ------ ------ ------ ------ ------
Gross margin............ 1,180 1,120 923 1,936 1,683 2,044
------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development.......... 512 565 601 410 422 616
Sales and marketing... 483 597 516 546 597 567
General and
administrative....... 304 309 331 346 500 586
------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,299 1,471 1,448 1,302 1,519 1,769
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (119) (351) (525) 634 164 275
Interest expense, net... 35 30 47 66 71 96
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes.................. (154) (381) (572) 568 93 179
Provision for income
taxes.................. 14 48 21 16 18 32
------ ------ ------ ------ ------ ------
Net income (loss)....... $ (168) $ (429) $ (593) $ 552 $ 75 $ 147
====== ====== ====== ====== ====== ======
PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Product licensing..... 51.6% 50.6% 35.1% 45.7% 30.4% 37.9%
Engineering services
and maintenance...... 48.4 49.4 64.9 54.3 69.6 62.1
------ ------ ------ ------ ------ ------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------
Cost of revenues:
Product licensing..... 1.8 1.3 1.3 1.2 1.0 0.9
Engineering services
and maintenance...... 48.4 51.3 58.5 41.7 48.5 44.7
------ ------ ------ ------ ------ ------
Total cost of
revenues............ 50.2 52.6 59.8 42.9 49.5 45.6
------ ------ ------ ------ ------ ------
Gross margin............ 49.8 47.4 40.2 57.1 50.5 54.4
------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development.......... 21.6 23.9 26.2 12.1 12.7 16.4
Sales and marketing... 20.4 25.3 22.5 16.1 17.9 15.1
General and
administrative....... 12.8 13.1 14.4 10.2 15.0 15.6
------ ------ ------ ------ ------ ------
Total operating
expenses............ 54.8 62.3 63.1 38.4 45.6 47.1
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (5.0) (14.9) (22.9) 18.7 4.9 7.3
Interest expense, net... 1.5 1.3 2.1 1.9 2.1 2.5
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes.................. (6.5) (16.2) (25.0) 16.8 2.8 4.8
Provision for income
taxes.................. 0.6 2.0 0.9 0.5 0.5 0.9
------ ------ ------ ------ ------ ------
Net income (loss)....... (7.1)% (18.2)% (25.9)% 16.3% 2.3% 3.9%
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) The Company changed its fiscal year-end to January 31 commencing February
1, 1996. No information is included for the month ended January 31, 1996.
22
<PAGE>
Product licensing fees decreased in the quarters ended June 30, 1995 and
September 30, 1995 due to the phase-out of a product by one of the Company's
primary OEMs. The increase in the quarter ended December 31, 1995 included a
one-time license fee of approximately $400,000. The decrease in the quarter
ended April 30, 1996 reflects the non-recurrence of such license fees and a
phase-out of a product by one of the Company's OEMs. The increase in the
quarter ended July 31, 1996 reflects an increase in the number of products
incorporating the Company's technology being shipped by the Company's OEM
customers.
The Company's research and development expenses in the quarter ended July
31, 1996 increased due to increased research and development headcount,
principally due to the Company's color technology development efforts.
The Company's sales and marketing expenses increased in the quarter ended
June 30, 1995 due to heightened public relations activities and increased
travel expenses.
The Company in the past has experienced, and in the future may experience,
significant fluctuations in quarterly operating results that have been and may
be caused by many factors including: initiation or termination of arrangements
between the Company and its existing and potential OEM customers; the timing
of introductions of new products or product enhancements by the Company, its
OEMs, and their competitors; the phase-out or early termination of OEM
products incorporating the Company's technology; the size and timing of
engineering services orders, one-time software licensing transactions and
recurring licensing fees; the size and timing of and fluctuations in end-user
demand for the OEM products incorporating the Company's technology; inventory
of digital document products carried by the OEM customers' distributors that
exceeds current or projected end-user demand; performance by the Company and
its OEM customers pursuant to their plans and agreements; seasonal trends; the
mix of services provided or products sold and the gross margins attributable
to such services or products; competition and pricing; customer order
deferrals in anticipation of new products or product enhancements; industry
and technology developments; changes in the Company's operating expenses;
software bugs, product delays or other product quality problems; currency
fluctuations and general economic conditions. For example, in recent quarters
the Company's quarterly revenues have been significantly affected by the
timing of one-time licensing transactions and by decreases in recurring
product licensing revenues resulting from the phase-out by OEMs of products
incorporating the Company's technology. The Company expects that its operating
results will continue to fluctuate significantly in the future as a result of
these and other factors. A substantial portion of the Company's costs and
expenses is related to costs of engineering services and maintenance, other
personnel costs, product development, facilities and marketing programs. The
level of spending for such costs and expenses cannot be adjusted quickly and
is based, in significant part, on the Company's expectations of future
revenues and anticipated OEM commitments. If such commitments do not
materialize or are terminated or, in any event, if revenues are below
expectations, the Company's quarterly and annual operating results will be
adversely affected, which could have a material adverse effect on the price of
the Company's Common Stock. See "Risk Factors--Potential Fluctuations in
Quarterly Results; Seasonality; Revenue Reporting."
LIQUIDITY AND CAPITAL RESOURCES
Since 1990, the Company has funded its operations and investments in
equipment primarily through the private sale of Preferred Stock totaling
approximately $6.0 million, convertible debt financing totaling approximately
$3.1 million, deferred revenue, equipment leases of approximately
$2.2 million, cash advances from a development partner and bank borrowing.
Since inception, the Company has received approximately $2.0 million from the
development partner, and as of July 31, 1996, the Company had utilized,
through royalty and other arrangements, approximately $1.0 million of the $2.0
million advance. The Company has a revolving line of credit, collateralized by
all of the Company's assets other than those subject to lease financing and
other loan agreements. The maximum amount available under the line of credit
is the lesser of $1.5 million or a percentage of the Company's outstanding
accounts receivable and current royalty receivables. The interest rate on this
line of credit is the bank's prime rate (8.25% at July 31, 1996) plus 2%.
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In fiscal 1993, 1994, 1995 and the six months ended July 31, 1996, the
Company's net cash used by operating activities was $1.5 million, $571,000,
$1.3 million and $902,000, respectively. During the six months ended July 31,
1996, net cash used by operating activities consisted primarily of a decrease
in deferred revenues offset in part by an increase in accounts payable and by
net income.
In fiscal 1993, 1994, 1995 and the six months ended July 31, 1996, the
Company's investing activities have consisted primarily of purchases of
property and equipment. Property and equipment expenditures totaled $79,000,
$39,000, $47,000 and $50,000 for such periods, respectively. The Company's
principal commitments, as of July 31, 1996, were $2.9 million on the lease on
its premises in El Segundo, $500,000 of outstanding principal on its revolving
line of credit and $690,000 on its capital and operating leases.
Cash decreased by $528,000 from January 31, 1996 to July 31, 1996 due to
increased cash used for operations and in preparation for the initial public
offering. Accounts receivable remained constant during this period, despite an
increase in revenues, due to a $1.2 million reduction in deferred revenues
between these periods as advance payments for engineering services and license
fees were recognized as revenues. Net property and equipment increased by
$205,000 primarily as a result of equipment acquired under capital leases.
Accounts payable increased by $224,000 reflecting increased costs of
operations and an extension of payments. During this period, the Company
borrowed approximately $500,000 against its line of credit to cover cash
requirements.
Cash increased by $791,000 from December 31, 1994 to December 31, 1995
resulting from the issuance of $3.1 million of convertible debentures,
repayment of the Company's line of credit, and cash used by operations.
Accounts receivable decreased over this period, despite an increase in
revenues, due to a $767,000 reduction in deferred revenues between these
periods as advance payments for engineering services and license fees were
recognized as revenues. Unbilled receivables increased by $200,000 during this
period due to timing differences between revenue recognition and milestone
billings on engineering services contracts. Net property and equipment
increased by $210,000 primarily as a result of equipment acquired under
capital leases. Accounts payable decreased by $117,000, despite increased
revenues, reflecting a paydown of payables due to an improved cash position.
At July 31, 1996, the Company had $194,000 in cash and cash equivalents,
$751,000 available under its revolving line of credit and $431,000 available
under its equipment lease line. The Company's working capital deficit as of
July 31, 1996 was $2.6 million, principally due to the Company's $2.8 million
of deferred revenue. The Company intends to repay its line of credit and
certain equipment lease lines with a portion of the net proceeds from this
offering. The Company currently believes that the net proceeds from the sale
of the Common Stock offered by the Company hereby together with funds from
current and anticipated operations will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next 18
months.
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BUSINESS
OVERVIEW
The Company is a leading provider of software-based embedded imaging systems
to OEMs of digital document products. Digital document products include
printers, copiers, fax machines, scanners and emerging color products, as well
as MFPs that perform a combination of these imaging functions. In order to
process digital text and graphics, digital document products rely on a core
set of imaging software and supporting electronics, collectively known as an
embedded imaging system. The Peerless family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively. The Company markets its solutions directly to customers
such as Adobe, Canon, Digital Equipment Corporation, IBM and Xerox.
INDUSTRY BACKGROUND
Embedded Imaging Systems
Today's office environment is increasingly dependent on a variety of
electronic imaging products such as printers, copiers, fax machines and
scanners, collectively known as digital document products. These products also
are becoming common in the home environment. Historically, most electronic
imaging products in the office environment have been standalone, monochrome
(black-and-white) machines, based on analog technology and dedicated to a
single print, copy, fax or scan function. However, with the proliferation of
personal computers, desktop publishing software and network computing,
documents increasingly are being created, stored and transmitted digitally,
thereby creating the need for digital document production.
Digital documents are becoming increasingly complex and may include digital
text, line art or photographic images. In order to process and render these
documents, digital document products rely upon a core set of imaging software
and supporting electronics collectively known as an embedded imaging system.
With advances in digital imaging engines such as laser printing engines in the
mid-1980s, a common imaging technology foundation for multiple market sectors
is emerging. To date, a majority of embedded imaging systems have been
developed and produced internally by digital document product manufacturers
such as Hewlett-Packard ("HP"), Xerox and Canon. The market for embedded
imaging systems represents a small portion of the worldwide market for digital
document products which the Company estimates, based in part upon data and
projections provided by International Data Corporation ("IDC"), to have been
approximately $24 billion in 1995.
Developments in the Digital Document Products Market
Rapid changes in technology and end-user requirements have created increased
challenges for digital document product manufacturers, particularly in the
area of embedded imaging systems. These changes include increased technical
complexity, the increased role of networking, the emergence of MFPs and the
demand for color imaging. As a result, OEMs increasingly are relying on
outside embedded imaging systems suppliers to provide their embedded imaging
system solutions.
Increased Technical Complexity. Initially, the software written for embedded
imaging systems supported only monochrome, single-function, low-resolution
capabilities. This software was relatively simple and resided on a low-end 8-
bit microprocessor platform. However, as technology and end-user requirements
have evolved, the embedded imaging task has become significantly more complex.
Today, digital imaging engines operate at resolutions of 600 dots per inch or
more, require the support of a variety of document handling options, operate
at increased speeds and are beginning to offer high-quality color output. In
addition, computers and applications software create increasingly
sophisticated documents that incorporate complex graphical content. The data
files for these digital documents can be very large and, if left in raw form,
can overwhelm the memory and processing power of the digital document product.
In response, embedded imaging systems have
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evolved from 8-bit to 32-bit platforms that often must employ special
techniques to manage large data files and minimize memory costs. Most embedded
imaging systems use compression techniques to reduce the size of data files,
which can result in reduced image quality. The increased complexity of digital
document products, the rapid pace of technological change and the increased
memory requirements have created increased challenges for digital document
product manufacturers, particularly in the core areas of image processing and
operating system architecture.
Increased Role of Networking. Within the office environment, digital
document products increasingly are deployed in a networked configuration.
According to projections by IDC, 62% of laser printers sold in the United
States in 1995 were estimated to have been connected to enterprise networks,
and this percentage is expected to increase to 78% by 1999. Because multiple
local area network protocols and network operating systems are deployed in the
corporate network environment, networked digital document products must
support a broad array of networking technologies to maximize accessibility by
various user groups. The network environment is also changing rapidly and
becoming increasingly complex, with a growing requirement for remote network
management that extends across both local area networks and wide area
networks. In addition, because the majority of office digital document
products are networked, the image processing intelligence may be partitioned
and located anywhere within the network: at the site of document or image
origination; at a server; or, as is typically the case today, inside the
digital document product itself. In some instances, such as printing to a
remote location, it can be advantageous to perform image pre-processing and
compression at the document origination site, prior to transmission over
usage-sensitive facilities. In order to accommodate the emerging needs of the
networked office environment, an optimal embedded imaging system must employ a
modular architecture capable of serving and managing distributed corporate
resources.
Emergence of Multifunction Products. The advent of MFPs has eroded the
boundaries between the previously distinct printer, copier, fax and scanner
market sectors. MFPs, ranging from small home products to large office
devices, offer several of these functions for significantly less cost than
would otherwise be incurred by purchasing these products separately. Each of
the dominant vendors in the printer, copier and fax markets now has introduced
MFPs, which have required each of them to broaden its imaging expertise. At
the same time, the need for concurrent processing of multiple digital document
product functions has created the need for real-time, multitasking operating
system support.
Demand for Color Imaging. Although many office computers have color
displays, and the graphical content available to office users via the World
Wide Web makes heavy use of color, most digital document products found in
today's office environment generate monochrome output. In the 1990s, color
laser printers have been introduced into the office marketplace. Many of these
have been limited by unit costs in excess of $7,500, printing speeds measured
in minutes per page for complex images, and output that does not support
photoquality requirements. In the small office/home office market, most inkjet
printers now support color but are typically limited by output speeds of one
or less pages per minute. Although digital document engine manufacturers have
developed contone (photoquality) hardware technology that is now capable of
supporting high speed photoquality color printing, the output produced by
today's digital document products, in many cases, continues to be limited by
existing embedded imaging systems. Today's embedded imaging systems are
challenged by the transition from monochrome to contone color output because
the simultaneous implementation of four planes of color coupled with up to
eight bits per pixel increases the digital document data stream by a factor of
up to thirty-two. As a result, there is need for embedded imaging systems that
can support the accelerated performance requirements of color output.
Increased Reliance on Outsourcing. In addition to the engineering challenges
generated by changing technology, digital document product manufacturers
increasingly are subject to a variety of market pressures. Competition in the
marketplace, coupled with end-user demand for greater performance at reduced
cost and shortening product life cycles, has created a growing need to reduce
time-to-market and engineering costs. Digital document product manufacturers
increasingly are electing to outsource imaging software and supporting
electronics design to embedded imaging systems suppliers in order to include
new imaging technologies and minimize development time and cost. The increased
role of networking, the emergence of
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MFPs, the demand for color imaging and the increased technical complexity
associated with products meeting these market changes have accelerated this
trend towards outsourcing. As digital document product manufacturers move to
incorporate imaging technologies from outside suppliers, their internal
resources are freed to focus on their core competencies in product
differentiation, marketing and distribution. Additionally, there has been no
established comprehensive embedded imaging system standard for the digital
document product industry to date. However, as the digital document product
market sectors converge and as the complexity of imaging technology
intensifies, the Company believes digital document product manufacturers will
realize a significant competitive advantage by utilizing a single open
embedded imaging system standard across all digital document product market
sectors.
THE PEERLESS SOLUTION
Peerless is a leading provider of embedded imaging systems for the digital
document product market. The Company's family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively.
The Company's embedded imaging system solution is based on its proprietary
object-based image processing technology, which can reduce the size of digital
document product imaging files with virtually no noticeable loss of visual
quality. This proprietary technology enables the Company's OEM customers to
reduce memory cost and increase print quality and speed while eliminating or
reducing the need for the use of a compression technology. When optimized,
this component of the embedded imaging system can provide significant cost
savings and performance differentiation to digital document product
manufacturers.
The Company has designed its embedded imaging technology with a modular
architecture that addresses a broad spectrum of digital document product
technologies and that may be tailored to an individual OEM's requirements.
Peerless offers its OEMs the flexibility to add functionality, such as
networking support, languages or multifunction features and, in the future,
color, to their digital document products as their needs dictate. Peerless
also offers engineering services to allow OEMs to outsource the development of
the entire embedded imaging system for a digital document product. As a
result, the Company provides OEMs with the ability to offer a broadened array
of digital document products, further leveraging their core investment in the
Peerless imaging solution. The Company's imaging solutions include the
following technologies and services:
Real-time, Scalable, Multitasking and Distributed Operating System. The
Company has designed its real-time, 32-bit PeerlessPage Imaging Operating
System and supporting technology to accelerate image processing and to enhance
resolution. The scalable nature of the Company's technology enables it to
serve both the low-cost and high-performance sectors of the market. As a
result, the Company's solution has been licensed for a wide range of
applications, from personal printers to shared high speed digital document
products. The multitasking operating system employed in the Peerless imaging
solution also enables the Company to manage concurrent processing of digital
document product tasks for the MFP marketplace. Furthermore, the Peerless
imaging solution may be implemented to operate in a distributed fashion,
allowing for portions of the imaging processing task to take place in the
originating host computer, in the digital document product, or elsewhere in
the network. As a result, Peerless technology provides OEMs with the
flexibility to offer a range of performance and configuration options.
Standards-Based Language Offerings. The Company provides its OEMs with page
description languages ("PDLs") that conform to the most widely used standards
today, Adobe's PostScript Software and Hewlett-Packard's Printer Control
Language ("PCL"). The Company offers PeerlessPrint technology, which emulates
Hewlett-Packard's PCL. The Company also cooperates with Adobe to deliver
Adobe's PostScript Software. As a result, the Company's OEMs are able to
obtain a complete imaging solution, including PDLs, from a single source. In
addition, Peerless is developing a PC-based printing language, WinEXPRESS.
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ASIC Solutions. The Company designs application specific integrated circuit
("ASIC") solutions for the digital document product marketplace that provide a
silicon-based implementation of key components of its imaging software. The
Company has designed an integrated processor combining its basic digital
document product functionality with an industry-standard 32-bit
microprocessor. For the high-performance sector of the market, the Company
offers specialized co-processors that accelerate the Peerless imaging software
and incorporate controller functionality and imaging features to provide both
cost savings and performance enhancements.
Networking Solutions. The Company has designed a standardized networking
interface, the Peerless Standard Input/Output ("PSIO") interface, to enable
its digital document product OEMs to reduce custom development costs for their
networking solutions. In addition, Peerless supports a broad array of
networking protocols, allowing its OEM customers to address the majority of
end-user networking requirements. To accommodate the need for remote network
management of digital document products over LANs and across wide area
networks, including intranets, the Company supplies management information
block ("MIB") tables that may be utilized by open industry-standard network
management systems.
Engineering Services. For those OEMs that wish to outsource the development
of some or all of the embedded imaging system for a digital document product,
the Company offers engineering services to design a comprehensive solution.
This can include controller design and custom engineering for vendor-specific
features that complement the Company's standard imaging solutions.
PEERLESS STRATEGY
The Company's objective is to become the leading supplier of embedded
imaging systems technology for digital document products. Key elements of the
Company's strategy to accomplish this objective are as follows:
Maintain and Enhance Market Leadership Position. The Company's standardized
embedded imaging system has been adopted by major digital document product
vendors such as Canon, Digital Equipment Corporation, IBM and Xerox. The
Company believes that OEMs increasingly are demanding broad expertise and a
common embedded imaging systems foundation from embedded systems suppliers in
order to accelerate time-to-market and to allow them to focus on their core
competencies. The Company believes that its expertise and technology meet
these demands and intends to expand its customer base and assist its new and
existing OEMs in extending their product lines into new market sectors,
thereby achieving wider market penetration of the Company's family of imaging
solutions. The Company believes that its imaging technology can be extended to
additional markets other than digital document products and may pursue such
markets as they evolve.
Extend Technology Leadership. The Company's strategy is to continue to
introduce embedded imaging technology innovations designed to increase
performance, reduce cost and address a broader range of emerging digital
document product requirements, including MFP and color applications.
Furthermore, the Company's goal is to establish certain basic components of
its embedded imaging system solution, notably its imaging operating system and
its PSIO interface, as de facto standards for the digital document product
industry. The Company believes it can achieve reduced costs for its OEM
customers through multivendor acceptance of its standardized solutions.
Develop and Enhance Strategic Relationships. The Company intends to develop
and enhance its relationships with key participants in the digital document
product market. For example, the Company is a licensed third-party co-
developer of Adobe. The Company provides a high-performance, integrated Adobe
PostScript solution which permits its OEM customers to benefit from the entire
family of the Company's imaging products in a multiple language printing
environment. Adobe, as the sole limited partner of Adobe Ventures, L.P.,
currently has a significant equity position in the Company. See "Principal and
Selling Stockholders."
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Extend Product Line. The Company targets both the high-performance and the
low-cost sectors of the digital document product market. For the high-
performance sector, the Company focuses on direct OEM relationships with
digital document product vendors by offering its high-performance family of
imaging products complemented by semi-customized and/or turnkey solutions. The
Company is also extending its high-performance products into the MFP and, in
the future, color markets. For the low-cost sector, the Company has designed
ASICs that contain a standardized, basic set of document imaging software
coupled with a microprocessor core provided by a semiconductor manufacturer.
These ASICs are manufactured by companies such as Motorola, which market these
semiconductor solutions directly to OEMs addressing the low-cost sector of the
digital document product market.
Leverage Engineering Services. The Company provides engineering services to
its OEMs, when requested, to provide comprehensive solutions or to customize
the Company's technology in accordance with specific needs. In doing so, the
Company distinguishes itself from those third-party systems providers that do
not have the ability to provide comprehensive solutions and must limit their
sales to licensing of existing, generic technology. By providing engineering
services, the Company enhances its embedded imaging systems expertise which it
can then use to improve the technology for its standard products.
Implementation of the Company's strategy is subject to numerous risks and
uncertainties. See "Risk Factors--Dependence on Market Success of Third
Parties," "--Risks Associated with Technological Change; Dependence on the
Digital Document Product Market," "--Risks Associated with Product
Development; Product Delays," "--Risks Associated with Developing Markets" and
"--Competition."
TECHNOLOGY
The Company strives to develop for the embedded imaging systems marketplace
unique technologies that provide meaningful improvements in performance and
cost for Peerless' OEMs. The Company incorporates complementary technologies,
or makes its technologies compatible with third-party technologies, in order
to provide its customers with a more comprehensive imaging solution.
Object-Based Image Processing. Most embedded imaging systems utilize similar
methods of processing document imaging information. They convert a file that
represents a document page into a bitmap and then process all page elements as
a collection of pixels. Because bitmaps generate large files, the image
processing task can become time-consuming, requiring subsequent document pages
to be stored in memory while previous pages are being processed. To
accommodate memory limitations, file compression technologies are often
utilized. These compression technologies frequently result in a loss of
clarity and detail in the printed document and require significant processing
power.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a page image as a collection of pixels, the Peerless
object-based image processing technology recognizes basic imaging elements in
the document, differentiating between text, line art and photographs much as
the human eye does. Peerless' software then creates a display list of image
objects as an intermediate representation of the document to be printed. This
display list is a more concise means of representing the imaging information
of the document, enabling complex imaging data to be processed more quickly
and with less memory, typically without resorting to compression techniques
that degrade the image. For high-performance applications, the display list
can be processed in real-time with assistance from a Peerless-designed
graphics co-processor embedded in the digital document product. Because
Peerless technology can enable the page image to be processed in real-time,
concurrent with the transmission of the document print file, memory
requirements can be reduced and performance can be enhanced. Furthermore, the
image quality or resolution can be reduced to accommodate limitations in the
digital document product's memory, or progressively enhanced by installation
of additional digital document product memory. The Company's object-based
image processing technology provides more significant benefits as the image
processing workload increases, which occurs with increased resolution or a
transition from monochrome to color. The Company was recently issued two
patents covering certain aspects of its object-based imaging approach.
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Systems Architecture. Many embedded imaging systems in use today were custom
designed for a specific range of digital document product imaging requirements
in dedicated applications. In contrast, the Company's imaging solution
implements a general-purpose imaging architecture. The Company has developed
standardized interfaces for the Company's family of solutions that enable the
Peerless imaging solution to be ported to a variety of platforms, languages
and applications. For example, the standardized PeerlessPage interface
provides the ability to support multiple printing languages, and the
PeerlessPage Imaging Operating System is both platform- and device-independent
and able to accommodate a variety of print engines and controller
architectures. The Company has also developed an applications interface that
enables the support of features such as spooling, stored macros, stored forms,
electronic collation and stapling.
The Company's architecture employs a modular and layered structure to
accommodate segmentation of the Peerless imaging solution. The Company
believes that this modular architecture will become increasingly important to
its competitive position as the imaging industry evolves. For example, the
ability to partition portions of the Peerless embedded imaging solution into
separate modules that can reside in independent locations on the network
allows the Company to address emerging applications such as host-based
printing.
Technology Partners. As part of its technology strategy, the Company has
established relationships that permit it to offer to its customers
complementary technologies through technology partners. For example, Peerless
has licensed (for internal development purposes) the right to use Adobe's
PostScript Software to enable the Company's products to be used with Adobe's
PostScript Software, and the Company's relationship with Adobe permits the
Company to offer a convenient and optimized Adobe PostScript-enabled solution.
Furthermore, the Company has a relationship with Emulex which enables the
Company to support network printing under a wide range of networking
technologies. In addition, the Company incorporates font rasterizers into its
imaging solution to enable its OEMs to license font technology from providers
such as Agfa and Bitstream.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. During this initial phase, the
Company will receive certain non-refundable advances of proposed licensing
fees. If this initial phase results in the development of acceptable product
specifications and development schedules, the agreement provides for the
license of Peerless technologies to, and development of technologies for, this
manufacturer.
If the license and development portions of agreement become effective, they
will provide for the possible payment to the Company of additional engineering
services and maintenance fees and substantial licensing fees. The agreement
provides that the manufacturer may terminate the relationship for any reason
upon sixty days notice and with notice in the event of a material breach. If
the agreement is terminated for a material breach by the Company, the
manufacturer is entitled to a return of the substantial majority of the
licensing fees previously paid other than those attributable to per unit
royalties. No assurance can be given as to the ability of the Company to
complete acceptable product specifications, which is the trigger for the
effectiveness of the license and development portions of the agreement. If
completed, no assurance can be given as to the ability of the Company to
perform in accordance with the terms of the agreement or as to the ability or
willingness of the manufacturer to continue developing, marketing and selling
proposed products covered by the agreement. The failure to timely complete
acceptable product specifications, or, if completed, the termination of the
agreement or the inability or unwillingness of the Company or the manufacturer
to perform in accordance with the terms of the agreement or as presently
anticipated by the Company, would have a material adverse effect on the
Company's future prospects and operating results.
For a discussion of certain risks relating to the Company's technology, see
"Risk Factors--Dependence on Adobe Relationships," "Dependence on Sole Source
Providers" and "--Dependence on Intellectual Property Rights; Risk of
Infringement; Trademark Disputes."
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CUSTOMERS AND MARKETS
Customers
Peerless markets its imaging products to OEMs manufacturing digital document
products for the high-performance sector of the office market and to
semiconductor OEMs in the low-cost sector of the office and personal use
market. With the exception of Adobe, the Company has derived substantially all
of its revenues in recent years from direct sales to digital document product
OEMs. OEM customers and their digital document products incorporating the
Company's technologies include:
<TABLE>
<CAPTION>
SELECTED PEERLESS OEM CUSTOMERS
- ---------------------------------------------------------------------------------
OEM
CUSTOMER OEM PRODUCTS DESCRIPTION PEERLESS PRODUCTS INCLUDED
- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
Canon GP-55F, GP-30F 30ppm MFP PeerlessPage,
Multi-PDL-A1 PeerlessPrint5E, Adobe
PostScript Integration
---------------------------------------------------------------------
LBP-1260 Plus 12ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration,
QuickPrint 1600, PSIO
---------------------------------------------------------------------
Laser Shot 8ppm Kanji Laser PeerlessPage, Adobe
LBP-730 Printer PostScript Integration,
QuickPrint 1700, PSIO
- ---------------------------------------------------------------------------------
Digital 5100 8ppm Laser Printer PeerlessPage,
Equipment PeerlessPrint5E, Adobe
PostScript Integration, PSIO
---------------------------------------------------------------------
Corporation LN17 17ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration, PSIO
- ---------------------------------------------------------------------------------
IBM Network Printer 12, 17, 24ppm Laser PeerlessPage,
12, 17, 24 Printers PeerlessPrint5E, Adobe
PostScript Integration,
QuickPrint 1700, PSIO,
Peerless Printer MIB
- ---------------------------------------------------------------------------------
Xerox 4505, 4510, 4520 5, 10, 20ppm Laser PeerlessPage,
Printers PeerlessPrint5E, Adobe
PostScript Integration, PSIO
---------------------------------------------------------------------
DocuPrint 4517 17ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration, PSIO
</TABLE>
For a discussion of certain risks relating to the Company's reliance on its
OEM customers, see "Risk Factors--Dependence on Market Success of Third
Parties" and "--Concentration of OEM Customers."
The Company's business primarily involves marketing its products and
services to a limited number of OEMs as opposed to numerous end-users or
customers. The Company views these arrangements as being in the ordinary
course of business.
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Markets
High-Performance Digital Document Product Market. The high-performance
sector of the digital document product market is characterized by digital
document products ranging in price from approximately $1,000 to in excess of
$20,000 each. These products typically offer high performance differentiated
by customized features. In many cases, digital document product manufacturers
demand turnkey, customized embedded imaging solutions that include imaging
software, controller design and network interface card design. As a result of
these unique requirements, Peerless typically addresses the high-performance
sector of the digital document product market via direct OEM relationships
with individual digital document product manufacturers. The Company's major
digital document product manufacturer customers, based on percentage of total
revenues, in the calendar year 1995 and the six months ended July 31, 1996,
included: Xerox, with 25% and 13%, respectively; Canon, with 22% and 19%,
respectively; and IBM, with 15% and 14%, respectively. Many of the services
and licensing arrangements with the Company's OEMs are provided on a project-
by-project basis, are terminable with limited or no notice, and, in certain
instances, are not governed by long-term agreements.
Small Office/Home Office Market. The low-cost sector of the digital document
product market, sometimes called the Small Office/Home Office ("SOHO") market,
is characterized by digital document products with prices under $1,000 that
typically emphasize price/performance over customized features. In most
instances, it is not cost effective for digital document product manufacturers
to invest in a customized embedded imaging solution in addressing this market.
For the SOHO market, Peerless has designed a family of ASICs that embed basic
components of the Company's imaging software into semiconductor firmware.
Peerless has licensed these designs to semiconductor manufacturers, such as
Motorola, that have the rights to manufacture and sell these ASICs directly to
digital document product manufacturers. Motorola sells a Peerless-based
printing ASIC, the 68322, and pays Peerless a royalty on each ASIC sold. See
"Risk Factors--Dependence on Sole Source Providers."
For a discussion of certain risks relating to the Company's customers and
markets, see "Risk Factors--Dependence on Market Success of Third Parties" and
"--Concentration of OEM Customers."
PEERLESS PRODUCTS AND SOLUTIONS
Peerless provides comprehensive solutions for embedded imaging system
applications. The Company delivers its products to its OEM customers in two
ways: licensing of the Company's standard imaging products for the OEM
customer's internal product development; and turnkey product development
whereby the Company provides the additional engineering services necessary to
integrate the appropriate standard products into a complete embedded imaging
system solution optimized to the OEM's specific requirements.
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Products
The following table describes the Company's products and products under
development and their applicable solutions.
<TABLE>
<CAPTION>
PEERLESS PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
- ---------------------------------------------------------------------------------
APPLICABLE SOLUTIONS
- ---------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MONO-
PRODUCT DESCRIPTION CHROME MFP COLOR
Operating System
PeerlessPage Imaging Operating System X X
---------------------------------------------------------------
MFP Extensions *
---------------------------------------------------------------
Contone Color Extensions *
Page Description Languages
HP PCL 5E Compatible Language
PeerlessPrint5E Interpreter X X
- ---------------------------------------------------------------------------------
PeerlessPrint5C HP PCL 5C Compatible Color Language
Interpreter *
- ---------------------------------------------------------------------------------
HP PCL 6 Compatible Language
PeerlessPrint6 Interpreter * *
- ---------------------------------------------------------------------------------
Adobe PostScript High Performance Integration of
Integration Adobe PostScript into PeerlessPage X X *
- ---------------------------------------------------------------------------------
WinEXPRESS Windows-based Printer Language * *
- ---------------------------------------------------------------------------------
Color WinEXPRESS Windows-based Color Printer Language * *
PC Software
PeerlessPrint Windows 95 / Windows 3.1 Printer
Drivers Drivers * * *
ASICs and Integrated Processors
QuickPrint 1600 Imaging ASIC/Coprocessor X
- ---------------------------------------------------------------------------------
QuickPrint 1700 Enhanced Imaging ASIC/Coprocessor X * *
- ---------------------------------------------------------------------------------
QuickPrint Color
1800 Contone Imaging ASIC/Coprocessor * * *
- ---------------------------------------------------------------------------------
MC 68322 Integrated Printing Processor X X
Networking Technology
Peerless Standard
I/O Interface
(PSIO) Networking Card Interface X * *
- ---------------------------------------------------------------------------------
Peerless Printer Intranet Printer Management/Status
MIBs Reporting X * *
</TABLE>
X=Shipping
*=Under development
Development and commercialization of the Company's products and technology
is subject to numerous risks and uncertainties, including risks associated
with technological change, product development delays and difficulties,
developing markets and dependence on the Company's OEMs, strategic
relationships and the digital document product market. No assurance can be
given that such products incorporating the Company's technology will be
developed and shipped in a timely manner or at all. See "Risk Factors."
Operating System. PeerlessPage is a complete imaging operating system
including a high-performance real-time operating system kernel, printing
engine driver, object-based image processing model, graphics library, font
management, hard disk management, print job management and user control panel
interface. Color extensions to PeerlessPage are currently under development to
support the unique requirements of
33
<PAGE>
contone color printers, including contone image processing and industry
standard color matching support. Extensions to support MFPs are under
development to provide scanner management, electronic collation, and print,
copy and fax multitasking capability.
Page Description Languages. The Company provides a complete range of
printing language products including PeerlessPrint5E, which provides
compatibility with HP's PCL 5e language utilized in their LaserJet 4, 5P, 5L
and 5Si line of laser printer products, as well as enhancements to support
higher resolutions and added paper handling options. PeerlessPrint5C,
currently under development, is being designed to provide compatibility with
HP's PCL 5C utilized in their Color LaserJet color laser and high-end Inkjet
products. Also under development is PeerlessPrint6, which will provide
compatibility with HP's latest PCL 6 language utilized in their LaserJet 5
laser printer. As a third-party co-developer, the Company provides an
optimized, high-performance integration of Adobe PostScript language into the
PeerlessPage system for customers that separately license PostScript from
Adobe. The Company's WinEXPRESS and Color WinEXPRESS languages, also under
development, are being designed to provide an intelligent windows-based
printing solution for low-cost monochrome and color printers and MFPs. See
"Risk Factors--Dependence on Adobe Relationships."
PC Software. The Company is currently developing PeerlessPrint drivers that
are being designed to optimize the network printing process under Windows 95
and Windows 3.1 environments.
ASICs and Integrated Processors. The Company's QuickPrint line of imaging
ASIC co-processors integrates basic components of the Company's imaging system
into a silicon solution to reduce product costs and enhance performance. The
QuickPrint 1600 incorporates Peerless' object-based imaging technology for
monochrome printing solutions. The QuickPrint 1700 incorporates the latest
object-based imaging technology and supports non-contone color printing
solutions. The Company currently is developing the QuickPrint Color 1800,
which is being designed to incorporate the Company's contone imaging model to
significantly reduce the memory and processing power required for contone
color laser printers and enhance printing of grey scale images in monochrome
printers. The MC68322 integrated processor was developed in conjunction with
Motorola to provide a single silicon solution for low-cost laser printers and
MFPs.
Networking Technology. The Company's Peerless Standard I/O Interface
("PSIO") provides a high speed multi-protocol networking interface for printer
network interface cards. Peerless Printer MIB tables have been developed to
utilize the open Simple Network Management Protocol ("SNMP") industry standard
to enable management of printers over LANs and Intranets.
Solutions
The Company's products can be integrated to provide a wide range of scalable
solutions:
Monochrome Solution. The Company's monochrome solution targets low-cost
networkable office laser printers with printing speeds from 1 to 40 pages per
minute and printing resolutions from 600 to 1200 dots per inch. The Company's
contone imaging technology, currently under development, will be utilized to
provide photographic quality image printing on future monochrome products.
Multifunction Solution. The Company's MFP imaging solutions target OEM
requirements from lower cost networkable inkjet and laser-based MFP products,
currently under development, to high speed copier-based MFP products. These
solutions combine the Company's networkable imaging products with MFP-specific
extensions to facilitate printing, copying, faxing and scanning by the same
digital document product. The Company's solutions provide multifunction
capability, but the Company does not provide stand-alone fax or copier
solutions. Solutions support printing speeds from 1 to 40 pages per minute.
Color Solution. The Company's color imaging solutions, currently under
development, target OEM requirements for networkable color laser printers.
These solutions are being designed to support color printing speeds from 1 to
10 pages per minute, 600 to 1200 dots per inch resolution and photographic
contone color
34
<PAGE>
quality. The Company's proprietary object-based image processing technology is
expected to reduce memory requirements for printing contone pages while
simultaneously accelerating the document production process.
SALES AND MARKETING
The Company markets its products directly to the leading OEMs that sell
digital document products into the worldwide market. The Company directs most
of its sales efforts through a sales office in Japan and its headquarters in
California. Sales to European digital document products manufacturers are
conducted out of the Company's California headquarters.
The Company markets directly to OEMs and through focused public relations
and branding programs. Direct OEM marketing consists of development of sales
collateral, mailers, trade show attendance and sales support. The Company
focuses its public relations effort on media read by OEM customers. The
Company directs its branding programs at building the Company's brand
awareness. These programs consist of public relations and Peerless product
branding on its silicon and software products.
PRODUCT DEVELOPMENT AND ENGINEERING SERVICES
The Company's product development activities are located at the Company's
headquarters in El Segundo, California. As of July 31, 1996, the Company
employed approximately 60 software and hardware design engineers, project
managers and support staff. The primary activities of these employees are new
product development, enhancement of existing products, product testing and
technical documentation development. Accordingly, the Company's engineering
personnel are divided into two primary development areas: research and
development, which focuses on development and enhancement of the Company's
core technologies; and engineering services, which focuses on customized
design activities.
The Company's research and development efforts focus on ongoing development
of the Company's product family, including MFP and advanced color imaging
technologies. In addition, as applications evolve and become standardized, the
research and development efforts harness the expertise acquired from the
performance of engineering services to add standard application modules to the
Company's product family. See "Risk Factors--Risks Associated with Developing
Markets."
The Company believes that its engineering services efforts provide the
Company with a competitive advantage for its core product development by
defining needs for new products, guiding future enhancements and testing new
implementations. The engineering services personnel work closely with OEMs
that desire a turnkey solution, developing customized interfaces and
applications specific to individual OEMs. The Company typically receives a fee
for such engineering services. As part of its corporate strategy, the Company
leverages its engineering services capability to penetrate emerging market
sectors where applications and interfaces have not fully evolved. As market
sectors mature and applications become standardized, the engineering services
requirement typically diminishes.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
patent, copyright, trade secret and trademark laws, nondisclosure and other
contractual restrictions. The Company holds two patents issued in the United
States, one of which is also issued in France, Germany and Great Britain. The
issued patents relate to techniques developed by the Company for generating
output for continuous synchronous raster output devices such as laser printers
using a smaller amount of memory than would be required without using the
Company's technology. One of the two U.S. patents was issued on March 26, 1996
and the other patent was issued on April 16, 1996. The patent term of the U.S.
patents is 17 years from the issue date subject to the payment of required
maintenance fees. The patents granted in Great Britain, France and Germany
were issued on February 14, 1996. The term of the European patents is 20 years
from the filing date of August 2, 1991,
35
<PAGE>
subject to an opposition period that will expire November 14, 1996 and payment
of required renewal fees. The Company has one patent application pending in
Japan and six patent applications pending in the United States. There can be
no assurance that patents held by the Company will not be challenged or
invalidated, that patents will issue from any of the Company's pending
applications or that any claims allowed from existing or pending patents will
be of sufficient scope or strength (or issue in the countries where products
incorporating the Company's technology may be sold) to provide meaningful
protection or any commercial advantage to the Company. In any event, effective
protection of intellectual property rights may be unavailable or limited in
certain countries. The status of United States patent protection in the
software industry is not well defined and will evolve as the United States
Patent and Trademark Office grants additional patents. Patents have been
granted to fundamental technologies in software after the development of an
industry around such technologies, and patents may be issued, to third parties
that relate to fundamental technologies related to the Company's technology.
As part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, OEMs and strategic
partners and limits access to and distribution of its software and other
proprietary information. Despite these efforts, the Company may be unable to
effectively protect its proprietary rights and, in any event, enforcement of
the Company's proprietary rights may be expensive. The Company's source code
also is protected as a trade secret. However, the Company from time to time
licenses its source code to OEMs, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology increasingly may become the subject of infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, regardless of merit, could
be time consuming, result in costly litigation, cause product shipment delays
or require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse
affect on the Company's operating results. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In
addition, the Company may lack sufficient resources to initiate a meritorious
claim. In the event of an adverse ruling in any litigation regarding
intellectual property, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to
infringing or substituted technology. The failure of the Company to develop,
or license on acceptable terms, a substitute technology if required could have
a material adverse affect on the Company's operating results.
The Company is aware of an unrelated corporation that is using the name
"Peerless Systems Corporation," and the Company is in discussions with this
corporation regarding the rights of both entities to use the name. Although
the Company believes that it has prior right to the name, the other
corporation has disputed the Company's position. No assurance can be given as
to the ability of the Company to continue to use the name nor can any
assurance be given as to the ability of the Company to acquire a license to or
an assignment of the name from the corporation on reasonable terms or at all.
The inability of the Company to do so could have a material adverse effect on
the Company's operating results. In any event, the prosecution of claims or
other litigation relating to the dispute could result in substantial costs to
the Company, which also could have a material adverse effect on the Company's
operating results.
COMPETITION
The market for embedded imaging systems for digital document products is
highly competitive and characterized by continuous pressure to enhance
performance, to introduce new features and to accelerate
36
<PAGE>
the release of new products. The Company competes on the basis of technology
expertise, product functionality, development time and price. The Company's
technology and services primarily compete with solutions developed internally
by OEMs. Virtually all of the Company's OEMs have significant investments in
their existing solutions and have the substantial resources necessary to
enhance existing products and to develop future products. These OEMs have or
may develop competing embedded imaging systems technologies and may implement
these systems into their products, thereby replacing the Company's current or
proposed technologies, eliminating a need for the Company's services and
products and limiting future opportunities for the Company. The Company
therefore is required to persuade these OEMs to outsource the development of
their embedded imaging systems and to provide products and solutions to these
OEMs that cost-effectively compete favorably with their internally developed
products. The Company also competes with software and engineering services
provided in the digital document product marketplace by other systems
suppliers to OEMs. In this regard, the Company competes with, among others,
Xionics Document Technologies with respect to MFP embedded systems and
Electronics for Imaging with respect to color technologies.
As the industry continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance
or functionality. The Company anticipates increasing competition for its color
products under development, particularly as new competitors develop and enter
products in this market. Some of the Company's existing competitors, many of
its potential competitors and virtually all of the Company's OEMs have
substantially greater financial, technical, marketing and sales resources than
the Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the amount of royalties received
on new licenses and to reduce the cost of its engineering services in order to
maintain existing business and generate additional product licensing revenues,
which could reduce profit margins and result in losses and a decrease in
market share. No assurance can be given as to the ability of the Company to
compete favorably with the internal development capabilities of its current
and prospective OEM customers or with other third-party embedded imaging
system suppliers, and the inability to do so would have a material adverse
effect on the Company's operating results.
EMPLOYEES
As of July 31, 1996, the Company had a total of approximately 87 employees
and 11 independent contractors. Of the Company's employees, approximately 60
were in engineering, 15 were in finance and administration, and 12 were in
sales and marketing. None of the Company's employees is represented by a labor
union, and the Company has never experienced any work stoppage. The Company
considers its relations with its employees to be good. For a description of
certain risks associated with the Company's employees, see "Risk Factors--
Dependence on Key Personnel."
PROPERTIES
The Company leases its principal facilities, totalling approximately 30,000
square feet, in El Segundo, California. The lease expires in March 2001. The
Company also has office space in Japan. The Company believes that suitable
additional facilities or alternative space will be available in the future on
commercially reasonable terms as needed.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of July
31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Edward A. Gavaldon............. 51 President, Chief Executive Officer and
Chairman of the Board
Hoshi Printer.................. 54 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Vice President and Chief Technology
Reginald Cardin................ 49 Officer
Vice President, Sales and Field
David R. Fournier.............. 43 Operations
Thomas B. Ruffolo.............. 43 Vice President, Marketing
Stephen R. Butterfield......... 44 Vice President, Advanced Technology
Robert G. Barrett (1)(2)....... 51 Director
Paul D. Levy (1)............... 40 Director
Robert L. North (2)............ 60 Director
Lauren L. Shaw................. 52 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Edward A. Gavaldon has served the Company as President, Chief Executive
Officer and a director since January 1995 and as Chairman of the Board since
July 1996. Prior to joining the Company, Mr. Gavaldon worked at Xerox
Corporation for 23 years in various positions including: Manager, Strategy and
Programs for Printing Products; Chief Engineer, High Speed Laser Printers;
Vice President, Worldwide Marketing, Laser Printers; and most recently as Vice
President/General Manager in the Desktop Laser Printer Business Unit. Mr.
Gavaldon received an M.B.A. degree from the University of Southern California
and a B.A. degree in economics from the University of California at Los
Angeles.
Hoshi Printer has served the Company as Vice President, Finance and
Administration, Chief Financial Officer and Secretary since June 1996. Prior
to joining the Company, Mr. Printer was Chief Financial Officer of Neuron
Data, a software tools company, from July 1995 to May 1996; Soane
Technologies, a polymer technology company, from July 1994 to June 1995; and
Catalytica, an environmental technology company, from January 1990 to June
1994. Mr. Printer also worked at Xerox Corporation for over 17 years in
various positions including 6 years as Vice President of Finance. Mr. Printer
received an M.B.A. degree from Stanford University.
Reginald Cardin has served the Company as Vice President and Chief
Technology Officer since August 1995. Prior to joining the Company, Mr. Cardin
worked at IBM for over 20 years in various positions including Manager,
Presentation Integration and Programming Center Manager, Printing Systems. Mr.
Cardin received a B.A. degree in biology and English from Tufts University.
David R. Fournier has served the Company as Vice President, Sales and Field
Operations since January 1994 and served as Director of Sales from November
1991 to January 1994. Prior to joining the Company, Mr. Fournier held various
sales management positions at Hamilton/Avnet, a semiconductor and computer
systems distribution company, and Wyle Lab, a semiconductor and computer
systems distribution company.
Thomas B. Ruffolo has served the Company as Vice President, Marketing since
August 1994 and as Director of Marketing from August 1991 to August 1994.
Prior to joining the Company, Mr. Ruffolo was Director of Marketing at NewGen
Systems, a page printer manufacturer, which he co-founded in 1988. Mr. Ruffolo
received a B.S. degree in computer science from Colorado State University and
an M.B.A. degree from Pepperdine University.
38
<PAGE>
Stephen R. Butterfield, a co-founder of the Company, has served as the
Company's Vice President, Advanced Technology since April 1982 and as the
Company's Secretary from April 1982 until July 1996 and as a director until
1992. Prior to founding the Company, Mr. Butterfield held various technical
and management positions at AM Jacquard, an office automation and minicomputer
manufacturer, including Director of Engineering.
Robert G. Barrett has served the Company as a director since March 1991. He
is a founder and a Managing Partner of Battery Ventures, a venture capital
fund specializing in communication and software investment. Mr. Barrett serves
as a director of Brooktrout Technology, Inc., Marcam Corporation and several
privately held high technology companies. Mr. Barrett received a B.A. degree
in history and an M.B.A. degree from Harvard University.
Paul D. Levy has served the Company as a director since August 1996. Mr.
Levy has been President, Chief Executive Officer and a director of Rational
Software Corporation, a software tools company, since 1994 and was President
and co-founder of one of its predecessor corporations, Rational, from 1981.
Mr. Levy received a B.S. degree from the United States Air Force Academy and
received an M.S. degree in engineering-economic systems from Stanford
University.
Robert L. North has served the Company as a director since July 1996. Mr.
North has been Chief Executive Officer and a Director of HNC Software Inc., a
neural network technology company, since June 1987. For 21 years prior to that
time he was employed by TRW, Inc. Electronic Systems Group, most recently as
Vice President and General Manager. Prior to that time, he was a member of the
technical staff for the Satellite Central Office of Aerospace Corporation. Mr.
North received B.S. and M.S. degrees in electrical engineering from Stanford
University.
Lauren L. Shaw, a co-founder of the Company, has served as a director of the
Company since 1982 and as an executive officer and Chairman of the Board of
Directors from 1982 to August and July 1996, respectively. From the Company's
inception until 1995, Mr. Shaw also served as the Company's President and
Chief Executive Officer. Mr. Shaw also co-founded AM Jacquard, an office
automation and minicomputer manufacturer, where he served in various
capacities, including as Vice President of Software Development and Vice
President and Assistant General Manager. Mr. Shaw received a B.S. degree in
mathematics from Milliken University.
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected or until their earlier resignation or
removal. Officers are appointed to serve, subject to the discretion of the
Board of Directors, until their successors are appointed. There are no family
relationships among the current directors and officers of the Company.
Two of the Company's co-founders and senior management personnel recently
resigned as executive officers of the Company in connection with the
transition process initiated in January 1995 when the current Chief Executive
Officer was hired, and although the Company believes such resignations will
not materially impact the management of the Company, no assurance can be given
that the loss of such senior management will not have a material adverse
impact on the Company's operating results.
BOARD COMMITTEES
The Audit Committee of the Board of Directors was formed in 1991 to review
the internal accounting procedures of the Company and to consult with and
review the services provided by the Company's independent public accountants.
The Compensation Committee of the Board of Directors was formed in 1991 to
review and recommend to the Board of Directors the compensation and benefits
of employees of the Company. The Compensation Committee also administers the
issuance of stock options and other awards under the Company's stock plans.
39
<PAGE>
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their services as member of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board of
Directors and Committee meetings. The Board of Directors has adopted
resolutions providing for the automatic grant, under the 1996 Plan (as defined
below), of: (i) an option to purchase 26,666 shares of Common Stock to each
non-employee director who is first elected to the Board of Directors after
completion of this offering; and (ii) an option to purchase 3,333 shares of
Common Stock on the date of each annual stockholder meeting beginning in 1997
to each non-employee director who has served continuously as a non-employee
director for at least six months immediately prior to such annual meeting. The
options vest at a rate of 25% on the first anniversary of the date of grant
and 1/48th of the shares subject to the option each month thereafter for the
following three years. In July/August 1996, the Board also approved grants of
options to purchase an aggregate of 26,666 shares of Common Stock to each of
Messrs. Barrett, North and Shaw at a weighted average exercise price of $10.00
per share and to Mr. Levy at an exercise price of $11.00 per share, subject in
each case to similar vesting terms as those described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee presently consists of Robert G. Barrett and
Robert L. North, who were not at any time during the fiscal year ended
December 31, 1995, or at any other time, officers or employees of the Company.
Mr. Shaw served on the Compensation Committee until July 1996 and during such
time also served as Chairman of the Board and an executive officer. The
Company has entered into an agreement with Mr. Shaw in connection with his
resignation as an executive officer of the Company. Barbara Renshaw, formerly
an executive officer and director of the Company, is Mr. Shaw's wife. See
"Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the Company's other four most highly compensated
executive officers whose salary and bonus for the year ended December 31, 1995
were in excess of $100,000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------- ------------
AWARDS
------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ------------
<S> <C> <C> <C> <C>
Edward A. Gavaldon...................... 1995 $153,211 $18,125 354,293
President, Chief Executive Officer and
Chairman of the Board
Lauren L. Shaw (1)...................... 1995 156,600 21,750 --
Former Chairman of the Board and
Executive Officer
David R. Fournier....................... 1995 110,000 32,170(2) --
Vice President, Sales and Field
Operations
Stephen R. Butterfield.................. 1995 98,280 21,924 --
Vice President, Advanced Technology and
Former Secretary
Barbara R. Renshaw (1).................. 1995 98,280 21,924 --
Former Vice President, Software
Development and Treasurer
</TABLE>
- ---------------------
(1) Mr. Shaw resigned as an executive officer and Chairman of the Board, and
Ms. Renshaw resigned as an executive officer, subsequent to December 31,
1995. See "Certain Transactions" for a discussion of certain arrangements
with Mr. Shaw.
(2) Includes sales commissions.
40
<PAGE>
EMPLOYEE BENEFIT PLANS AND NON-PLAN OPTION GRANTS
Non-Plan Option Grants. Prior to the adoption of the 1992 Stock Option Plan
and 1996 Equity Incentive Plan, the Company granted, outside any employee
benefit plan, nonstatutory options to purchase 221,661 shares of Common Stock
of the Company. Of these options, options to purchase 44,332 shares of Common
Stock were outstanding, options to purchase 83,331 shares had been canceled or
had lapsed without being exercised and options to purchase 93,998 shares had
been exercised as of July 31, 1996.
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (the "1992
Plan") was adopted by the Board of Directors in September 1992, and was
subsequently amended in June 1993, October 1994 and April 1995. The Board has
authorized and reserved an aggregate of 1,055,000 shares of Common Stock for
issuance under the 1992 Plan.
The 1992 Plan provides for the grant of incentive stock options under the
Internal Revenue Code of 1986, as amended (the "Code"), to employees and
nonstatutory stock options to employees, directors and consultants of the
Company and its affiliates. The 1992 Plan provides that it will be
administered by the Board of Directors, or a committee appointed by the Board,
which determines recipients and types of options to be granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof. Currently, the 1992 Plan is administered by the Compensation
Committee of the Board of Directors.
The terms of stock options granted under the 1992 Plan generally may not
exceed ten years. The exercise price of options granted under the 1992 Plan is
determined by the Board of Directors, provided that (i) the exercise price for
a nonstatutory stock option cannot be less than 85% of the fair market value
of the Common Stock on the date of the option grant and (ii) the exercise
price for an incentive stock option cannot be less than 100% of the fair
market value of the Common Stock on the date of the option grant.
Options granted under the 1992 Plan vest at the rate specified in each
optionee's option agreement. No stock option may be transferred by the
optionee other than by will or the laws of descent or distribution or, for a
nonstatutory stock option, pursuant to a qualified domestic relations order.
An optionee whose relationship with the Company or any affiliate ceases for
any reason (other than by death or permanent and total disability) may
exercise options in the period following such cessation as may be determined
by the Board of Directors (not to exceed three months for an incentive stock
option). Options may be exercised for up to twelve months after an optionee's
relationship with the Company and any affiliate ceases due to death or
disability.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
Shares subject to stock options that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
options under the 1992 Plan.
Upon certain changes in control of the Company, all outstanding options
under the 1992 Plan shall either be assumed or substituted by the surviving
entity or shall continue in full force and effect. If the surviving entity
determines not to assume, continue or substitute such options, the options
shall terminate if not exercised prior to such change in control. Options
shall terminate if not exercised prior to a dissolution or liquidation of the
Company.
41
<PAGE>
As of July 31, 1996, the Company had granted options to purchase 1,094,136
shares of Common Stock under the 1992 Plan and an additional 126,266 shares
remained available for future grant. Of the options granted, options to
purchase 886,882 shares of Common Stock were outstanding, options to purchase
165,402 shares had been canceled or had lapsed without being exercised and
options to purchase 41,852 shares had been exercised. The 1992 Plan will
terminate in September 2002 unless sooner terminated by the Board of
Directors.
1996 Equity Incentive Plan. In May 1996, the Board adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The Company's 1996 Equity Incentive
Plan (the "Incentive Plan") was adopted by the Board of Directors in July 1996
as an amendment and restatement of the Company's 1996 Plan. The Board has
authorized and reserved an aggregate of 1,266,666 shares of Common Stock for
issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options, restricted stock purchase awards and
stock bonuses to employees, directors and consultants. The Incentive Plan
provides that it will be administered by the Board of Directors, or a
committee appointed by the Board, which determines recipients and types of
awards to be granted, including the exercise price, number of shares subject
to the award and the exercisability thereof.
The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors, provided that the exercise price
for an incentive stock option cannot be less than 100% of the fair market
value of the Common Stock on the date of the option grant and the exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the Common Stock on the date of the option grant. Options
granted under the Incentive Plan vest at the rate specified in each optionee's
option agreement.
No stock option may be transferred by the optionee other than by will or the
laws of descent or distribution, provided that the Board of Directors may
grant a nonstatutory stock option that is transferable and an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose relationship with the Company or any affiliate ceases
for any reason (other than by death or permanent and total disability) may
exercise options in the three-month period following such cessation (unless
such options terminate or expire sooner or later by their terms). Options may
be exercised for up to twelve months after an optionee's relationship with the
Company and its affiliates ceases due to death or disability (unless such
options expire sooner by their terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full (or vested in the case of restricted
stock awards) shall again become available for future grant of awards under
the Incentive Plan. The Board of Directors has the authority to reprice
outstanding options and to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares.
Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded
in consideration of past services without a
42
<PAGE>
purchase payment. Rights under a stock bonus or restricted stock bonus
agreement may not be transferred other than by will, the laws of descent and
distribution or a domestic relations order while the stock awarded pursuant to
such an agreement remains subject to the agreement.
Upon certain changes in control of the Company, all outstanding awards under
the Incentive Plan shall either be assumed or substituted by the surviving
entity or shall continue in full force and effect. If the surviving entity
determines not to assume, continue or substitute such awards, with respect to
person then performing services as employees, directors or consultants, the
time during which such awards may be exercised shall be accelerated and the
awards terminated if not exercised prior to such change in control.
As of July 31, 1996, the Company had granted options to purchase 561,909
shares of Common Stock under the Incentive Plan and an additional 726,923
shares remained available for future grant. Of the options granted, options to
purchase 559,743 shares of Common Stock were outstanding, options to purchase
2,166 shares had been canceled or had lapsed without being exercised and no
options had been exercised. The Incentive Plan will terminate in July 2006
unless sooner terminated by the Board of Directors. As of July 31, 1996, no
stock bonuses or restricted stock had been granted under the Incentive Plan.
The Board of Directors has adopted resolutions providing for the automatic
grant, under the 1996 Plan, of: (i) an option to purchase 26,666 shares of
Common Stock to each non-employee director who is first elected to the Board
of Directors after completion of this offering; and (ii) an option to purchase
3,333 shares of Common Stock on the date of each annual stockholder meeting
beginning in 1997 to each non-employee director who has served continuously as
a non-employee director for at least six months immediately prior to such
annual meeting. The options vest at a rate of 25% on the first anniversary of
the date of grant and 1/48th of the shares subject to the option each month
thereafter for the following three years. In July/August 1996, the Board also
approved grants of options to purchase an aggregate of 26,666 shares of Common
Stock to each of Messrs. Barrett, North and Shaw at a weighted average
exercise price of $10.00 per share and to Mr. Levy at an exercise price of
$11.00 per share, subject in each case to similar vesting terms as those
described above.
Employee Stock Purchase Plan. In July 1996, the Company's Board of Directors
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 300,000 shares of Common Stock. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the adoption of the Purchase Plan. The offering period for any
offering will be no more than 27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors and meet
eligibility standards established by the Board of Directors in accordance with
Code section 423. Employees who participate in an offering can have up to 15%
of their earnings withheld pursuant to the Purchase Plan and applied, on
specified dates determined by the Board of Directors, to the purchase of
shares of Common Stock. The price of Common Stock purchased under the Purchase
Plan will be equal to 85% of the lower of the fair market value of the Common
Stock on the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment with the Company and its affiliates.
In the event of certain changes of control, the Company and the Board of
Directors has discretion to provide that each right to purchase Common Stock
will be assumed or continue in full force and effect or a similar right
substituted by the successor corporation, or the Board may shorten the
offering period and provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to the change in control. The
Purchase Plan will terminate at the Board of Directors' discretion.
43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1995 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES OF TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EMPLOYEES EXERCISE FOR OPTION TERM(4)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------------
NAME GRANTED(1) 1995 (%)(2) ($/SH)(3) DATE 5% 10%
---- ---------- -------------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward A. Gavaldon...... 354,293 71.3% $1.43 01/04/05 $ 317,508 $ 804,629
</TABLE>
- ---------------------
(1) The options are incentive stock options with vesting based either on time
or on performance. Time-based vesting generally occurs over 60 months,
with 20% of the shares vesting annually. These options provide for
accelerated vesting of 60% of the shares upon the completion of an initial
public offering with the remaining shares to vest at a rate of 50%
annually over the next two years.
(2) Based on an aggregate of 496,749 options granted to employees of the
Company in 1995, including the indicated Named Executive Officer.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant, as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming that
the stock price on the date of grant as determined by the Board of
Directors appreciates at the indicated annual rate compounded annually for
the entire term of the option and the option is exercised and sold on the
last day of its term for the appreciated stock price. The 5% and 10%
assumed rates of appreciation are derived from the rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of the future Common Stock price.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the
Named Executive Officers at December 31, 1995. No Named Executive Officer
exercised stock options during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Edward A. Gavaldon...... 0/354,293 $0/$79,716
Lauren L. Shaw.......... 60/0 $65/$0
David R. Fournier....... 41,605/19,378 $25,006/$14,201
Stephen R. Butterfield.. 60/0 $65/$0
Barbara B. Renshaw...... 60/0 $65/$0
</TABLE>
- ---------------------
(1) Value realized and value of unexercised in-the-money options is based on
the fair market value of $1.65 per share of the Company's Common Stock,
minus the exercise price on December 31, 1995, multiplied by the number of
shares underlying the option.
44
<PAGE>
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Edward A.
Gavaldon. The agreement provides that Mr. Gavaldon will serve as Chief
Executive Officer and President. The agreement provides for payment of a base
salary of $175,000 with a bonus of up to $75,000 annually and participation in
the Company's benefit plans. The agreement also provides that all of Mr.
Gavaldon's outstanding options will be accelerated in the event of the
acquisition or change in control of the Company or a sale of all or
substantially all of the Company's assets. In the event that the Company
terminates Mr. Gavaldon without cause, the Company will be required to pay Mr.
Gavaldon his base salary and certain benefits for an additional one year
period and will accelerate the vesting of his options for at least an
additional six months. See "Certain Transactions" for a discussion of certain
arrangements between the Company and Lauren L. Shaw.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for
any breach of the directors' duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemptions, or (iv) for any
transaction from which the director derives any improper personal benefit. In
addition, the Company's Bylaws provide that any director or officer who was or
is a party or is threatened to be made a party to any action or proceeding by
reason of his or her services to the Company will be indemnified to the
fullest extent permitted by the Delaware Law.
The Company has entered into indemnification agreements with each of its
directors and executive officers pursuant to which the Company has agreed to
indemnify each of them against expenses and losses incurred for claims brought
against them by reason of their being a director or executive officer of the
Company. In addition, the Company maintains directors' and officers' liability
insurance.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or executive officer.
45
<PAGE>
CERTAIN TRANSACTIONS
In June, July and October 1993, the Company issued an aggregate of 1,501,177
shares of Series B Preferred Stock, and in December 1992 and June, July and
October 1993 the Company issued warrants to purchase an aggregate of 615,635
shares of Common Stock, to a group of accredited investors, including Lauren
L. Shaw, a director and principal stockholder of the Company, and his wife,
Barbara Renshaw, a principal stockholder and former director and executive
officer of the Company, who purchased 27,097 shares of Series B Preferred
Stock and warrants to purchase 11,200 shares of Common Stock, Battery Ventures
II, L.P. ("Battery Ventures"), a principal stockholder of the Company, which
purchased 263,070 shares of Series B Preferred Stock and warrants to purchase
106,666 shares of Common Stock, and Adobe, a principal stockholder of the
Company, which purchased 430,108 shares of Series B Preferred Stock and
warrants to purchase 177,777 shares of Common Stock, for cash and the
cancellation of indebtedness in the aggregate amount of $3,490,264. Robert G.
Barrett, a director of the Company, is a Managing Partner of ABF Partners II,
L.P., the general partner of Battery Ventures, and Adobe from time to time has
designated a representative to serve on the Company's Board of Directors.
Adobe currently holds its equity position in the Company as the sole limited
partner of Adobe Ventures L.P., a principal stockholder of the Company.
In September 1992 and June 1993, the Company entered into a Third Party
Development and License Agreement (the "Third Party Agreement") and a PCL
Development and License Agreement (the "PCL Agreement"), respectively, each of
which has been subsequently amended, with Adobe, a principal stockholder of
the Company. Under the Third Party Agreement, the Company licenses (for
internal development purposes) Adobe's PostScript Software from Adobe so that
the Company can port and support versions of the Company's products that may
be used in conjunction with Adobe's PostScript Software by Adobe's OEMs. The
Company has paid Adobe a fee for this license and may pay Adobe additional
fees for additional rights that Adobe may grant to the Company. In addition,
Adobe pays royalties to the Company in connection with the distribution by
Adobe's OEMs of products that the Company has enabled to be used with Adobe's
PostScript Software. The Third Party Agreement has a term of five years and is
renewable biannually thereafter. Under the PCL Agreement, the Company develops
versions of the Company's PCL products that can be used with Adobe's
PostScript Software, and Adobe licenses these products for sublicense to its
OEMs. In return for this license, Adobe pays royalties to the Company for each
such product that it causes to be shipped or delivered to end-users. The PCL
Agreement has a term of 20 years and is renewable annually thereafter. During
1993, 1994 and 1995 and the six months ended July 31, 1996, the Company
recognized revenues of $229,000, $623,000, $707,000 and $1,163,000,
respectively, arising from these license agreements and engineering services
arrangements with Adobe.
In October 1995, the Company issued $3,070,000 in aggregate principal amount
of its convertible debentures (the "Debentures") to private investors
including entities affiliated with Morgan Keegan & Company, Inc., a principal
stockholder of the Company, which purchased $2,000,000 principal amount of
Debentures, and Battery Ventures, which purchased $500,000 principal amount of
Debentures. The Debentures bear interest at 7% annually, mature in 2001 and
will convert into Common Stock at the rate of $2.63 per share upon the closing
of this offering.
In January 1995, the Company entered into an employment agreement with
Lauren L. Shaw, a director and principal stockholder of the Company, and the
Company amended this agreement in August 1996 in connection with Mr. Shaw's
resignation as an executive officer. In consideration for, among other things,
an agreement not to compete through 1998, the employment agreement, as
amended, provides, among other things, (i) that the Company will pay Mr. Shaw
$9,080 every two weeks through the earlier of the end of 1998 or 15 full
months after this offering (which would be extended if the shares to be sold
in this offering are cut back below certain minimum numbers), plus accrued and
unpaid vacation and other items, (ii) that the Company will pay Mr. Shaw $150
per hour for consulting services actually rendered to the Company and (iii)
that Mr. Shaw will have certain registration rights with respect to the shares
of the Company's Common Stock that he owns.
46
<PAGE>
In July 1996, the Company and Battery Ventures agreed to amend a warrant to
purchase 66,666 shares of Common Stock. The amendment increased the exercise
price, extended the term and included a limited release in favor of the
Company related to the exercise of the warrant.
The Company has also entered into an employment agreement with Edward A.
Gavaldon. See "Management--Employment Agreement."
The Company has entered into indemnification agreements with its directors
and executive officers. The Company has also entered into an indemnity
agreement with the Selling Stockholders pursuant to which the Company will
indemnify the Selling Stockholders for certain liabilities and costs incurred
in connection with this offering, and the Selling Stockholders will indemnify
the Company and its officers and directors for certain liabilities incurred in
connection with this offering.
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1996 and as adjusted to
give effect to the sale of the shares of Common Stock offered hereby, by (i)
each person (or group of affiliated persons) known to the Company to be the
beneficial owner of more than five percent of the Company's Common Stock, (ii)
each of the Company's directors, (iii) each Named Executive Officer, (iv) each
Selling Stockholder and (v) all of the Company's directors and executive
officers as a group. Unless otherwise specified, the address of all five
percent stockholders is the address of the Company set forth herein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO THE OFFERING (1) TO BE THE OFFERING(1)(2)
----------------------- SOLD IN -----------------------
NUMBER PERCENT THE OFFERING NUMBER PERCENT
------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
NAME AND ADDRESS
- ----------------
Battery Ventures II, L.P. (3).......... 1,617,048 21.0% -- 1,617,048 15.8%
Robert G. Barrett
Battery Ventures
200 Portland Street
Boston, MA 02114
Lauren L. Shaw and
Barbara B. Renshaw (4)(5).............. 1,518,275 19.7 874,708 643,567 6.3
Entities affiliated with
Morgan Keegan & Company, Inc. (6) ..... 761,904 9.9 152,381 609,523 6.0
Morgan Keegan Tower
Fifty Front Street
Memphis, TN 38103
Adobe Ventures L.P. (7)................ 596,840 7.7 -- 596,840 5.8
One Bush Street
San Francisco, CA 94104
Stephen R. Butterfield (8)............. 378,826 4.9 37,883 340,943 3.3
Edward A. Gavaldon (9)................. 215,608 2.7 -- 215,608 2.1
David R. Fournier (10)................. 60,860 * -- 60,860 *
Thomas B. Ruffolo (11)................. 52,036 * 5,203 46,833 *
Hoshi Printer (12)..................... 19,699 * -- 19,699 *
Reginald Cardin (13)................... 18,366 * 1,836 16,530 *
Paul D. Levy (14)...................... -- -- -- -- --
Robert L. North (15)................... -- -- -- -- --
All directors and
executive officers as a group
(9 persons) (16)...................... 3,880,718 48.4 919,630 2,961,088 28.2
OTHER SELLING
STOCKHOLDERS
- -------------
Steven K. Nelson (17).................. 230,100 3.0 23,010 207,090 2.0
Robert F. Hossley (18)................. 198,005 2.6 19,801 178,204 1.7
William Bailey (19).................... 165,480 2.1 16,548 148,932 1.5
Comdisco, Inc. (20).................... 116,513 1.5 58,257 58,256 *
Silicon Valley Bank (21)............... 34,665 * 17,333 17,332 *
William S. Wood (22)................... 32,502 * 10,666 21,836 *
Bayview Investors, Ltd. (23)........... 27,509 * 27,509 -- --
Larry Feldman (24)..................... 9,699 * 969 8,730 *
Cary Kimmel (25)....................... 6,366 * 636 5,730 *
First Portland Corporation (26) ....... 3,260 * 3,260 -- --
</TABLE>
- ---------------------
* Represents beneficial ownership of less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in
48
<PAGE>
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. Percentage of
beneficial ownership is based on 7,705,614 shares of Common Stock
outstanding as of July 31, 1996 and 10,205,614 shares of Common Stock
outstanding after completion of this offering. Beneficial ownership of
Common Stock issuable pursuant to outstanding warrants is calculated on a
net exercise basis at the assumed public offering price of $12.00 per
share.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
562,500 shares from the Company and the Selling Stockholders is not
exercised. If the over-allotment option is exercised in full, the Company
will sell 188,806 additional shares, and the following Selling
Stockholders will sell the following additional numbers of shares: Lauren
L. Shaw 1996 Trust (15,743); Barbara B. Renshaw 1996 Trust (15,743);
Renshaw/Shaw Charitable Remainder Trust (27,810); Morgan Keegan Merchant
Banking Fund II, L.P. (114,286); Morgan Keegan Merchant Banking Fund,
L.P. (38,095); Mr. Butterfield (38,117); Mr. Gavaldon (21,560); Mr.
Fournier (6,086); Mr. Nelson (7,667); Mr. Bailey (2,333); Comdisco, Inc.
(58,256); Silicon Valley Bank (17,332); and Mr. Wood (10,666).
(3) Includes beneficial ownership of 259,164 shares of Common Stock issuable
pursuant to the net exercise of warrants. Robert G. Barrett, a director
of the Company, is a Managing Partner of ABF Partners II, L.P., the
general partner of Battery Ventures. Mr. Barrett may be deemed to have
voting and investment power over the shares held by Battery Ventures. He
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(4) Represents (i) 65,000 shares held by Mr. Shaw, a director and former
executive officer and Chairman of the Board of the Company, individually;
(ii) 91,667 shares held by Barbara B. Renshaw, an employee and former
executive officer and director of the Company, individually; (iii)
118,275 shares held by Mr. Shaw and Ms. Renshaw, jointly (including
beneficial ownership of 90,703 shares of Common Stock issuable pursuant
to the net exercise of warrants); (iv) 308,333 shares held in the Lauren
L. Shaw 1996 Trust; (v) 308,333 shares held in the Barbara B. Renshaw
1996 Trust; and (vi) 626,667 shares held in the Renshaw/Shaw Charitable
Remainder Trust. Mr. Shaw disclaims beneficial ownership of shares held
by Ms. Renshaw, individually, and the shares held in the
Barbara B. Renshaw 1996 Trust. Ms. Renshaw disclaims beneficial ownership
of shares held by Mr. Shaw, individually, and shares held in the
Lauren L. Shaw 1996 Trust. Mr. Shaw and Ms. Renshaw are married.
(5) Of the shares held by Mr. Shaw and Ms. Renshaw: 65,000 shares are being
sold by Mr. Shaw, individually; 91,667 shares are being sold by Ms.
Renshaw, individually; 118,275 shares are being sold by Mr. Shaw and Ms.
Renshaw, jointly; and 599,766 shares are being sold by the Renshaw/Shaw
Charitable Remainder Trust.
(6) Represents (i) 573,333 shares of Common Stock held by Morgan Keegan
Merchant Banking Fund II, L.P., of which 114,286 shares are being sold in
this offering, and (ii) 188,571 shares of Common Stock held by Morgan
Keegan Merchant Banking Fund, L.P., of which 38,095 shares are being sold
in this offering.
(7) Includes beneficial ownership of 161,110 shares of Common Stock issuable
pursuant to the net exercise of warrants. Adobe is the sole limited
partner of Adobe Ventures L.P., and H&Q Adobe Ventures Management L.P.,
is the sole general partner of Adobe Ventures L.P.
(8) Includes 60 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Butterfield is Vice President, Advanced
Technology and former Secretary of the Company.
(9) Includes 70,858 shares issuable pursuant to options exercisable within 60
days of July 31, 1996 and 141,717 shares issuable upon completion of this
offering. Mr. Gavaldon is President, Chief Executive Officer and Chairman
of the Board of the Company.
(10) Includes 41,161 shares issuable pursuant to options exercisable within 60
days of July 31, 1996 and 16,666 shares issuable upon completion of this
offering. Mr. Fournier is Vice President, Sales and Field Operations of
the Company.
(11) Includes 10,000 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Ruffolo is Vice President, Marketing of the
Company.
49
<PAGE>
(12) Includes 16,666 shares issuable upon completion of this offering. Mr.
Printer is Vice President, Finance and Administration, Chief Financial
Officer and Secretary of the Company.
(13) Includes 15,333 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Cardin is Vice President and Chief Technology
Officer of the Company.
(14) Mr. Levy is a director of the Company.
(15) Mr. North is a director of the Company.
(16) Includes 137,412 shares issuable pursuant to options exercisable within
60 days of July 31, 1996, an additional 175,049 shares issuable pursuant
to options exercisable upon completion of this offering and 349,869
shares of Common Stock issuable upon the net exercise of warrants.
(17) Includes 260 shares issuable pursuant to options exercisable within 60
days of July 31, 1996 and 8,054 shares of Common Stock issuable pursuant
to the net exercise of warrants. Mr. Nelson is an employee of the
Company.
(18) Includes 200 shares issuable pursuant to options exercisable within 60
days of July 31, 1996 and 12,888 shares of Common Stock issuable pursuant
to the net exercise of warrants. Mr. Hossley is an employee of the
Company.
(19) Includes 260 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Bailey is an employee of the Company.
(20) Represents beneficial ownership of shares issuable pursuant to the net
exercise of warrants acquired in connection with equipment lease
transactions between the Company and Comdisco.
(21) Represents beneficial ownership of shares issuable pursuant to the net
exercise of warrants acquired in connection with bank line of credit
transactions extended by Silicon Valley Bank to the Company.
(22) Includes 21,836 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Wood was the former Chief Financial Officer of
the Company.
(23) Includes 7,322 shares of Common Stock issuable pursuant to the net
exercise of warrants.
(24) Includes 6,666 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Feldman is an employee of the Company.
(25) Includes 3,333 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Kimmel is an employee of the Company.
(26) Represents beneficial ownership of shares issuable pursuant to the net
exercise of warrants acquired in connection with equipment lease
transactions between the Company and First Portland Corporation.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value.
COMMON STOCK
As of July 31, 1996, there were 7,705,614 shares of Common Stock outstanding
held of record by approximately 104 stockholders. The holders of Common Stock
are entitled to one vote per share on all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the event of
the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive,
conversion, subscription or other rights. There are no redemption or sinking
funds provisions applicable to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable, and the shares of Common Stock
to be outstanding upon completion of this offering will be fully paid and non-
assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon such Preferred Stock,
including dividend rights, conversion rights, terms of redemption, liquidation
preference sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Upon completion of this offering, the holders (or their permitted
transferees) of approximately 5,858,256 shares of Common Stock ("Holders") are
entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933, as amended (the "Securities Act"). If the
Company proposes to register its Common Stock, subject to certain exceptions,
under the Securities Act, the Holders are entitled to notice of the
registration and are entitled to include, at the Company's expense, such
shares therein, provided that the managing underwriter has the right to limit
the number of such shares included in the registration. These rights will not
apply to this offering. In addition, certain of the Holders may require the
Company at its expense on no more than four occasions to file a registration
statement under the Securities Act with respect to their shares of Common
Stock. Such rights may not be exercised until 180 days after the completion of
this offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in control of the Company.
51
<PAGE>
The Company's Certificate of Incorporation and Bylaws also require that,
effective upon the closing of this offering, any action required or permitted
to be taken by stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer of the Company or by any person or persons
holding shares representing at least 10% of the outstanding capital stock. The
Company's Certificate of Incorporation also specifies that the authorized
number of directors may be changed only by resolution of the Board of
Directors. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management of the Company.
CALIFORNIA FOREIGN CORPORATION LAW
Pursuant to section 2115 ("Section 2115") of the California General
Corporation Law (the "California GCL"), under certain circumstance certain
provisions of the California GCL may be applied to foreign corporations
qualified to do business in California notwithstanding the law of the
jurisdiction where the corporation is incorporated. Such corporations are
referred to herein as "quasi-California" corporations. Section 2115 is
applicable to foreign corporations which have more than half of their voting
stock held by stockholders residing in California and more than half of their
business deriving from California, measured at the end of the Company's fiscal
year. If the Company were determined to be a quasi-California corporation, it
would have to comply with California law with respect to, among other things,
elections of directors and distributions to stockholders. Under the California
GCL, a corporation is prohibited from paying dividends unless (i) the retained
earnings of the corporation immediately prior to the distribution equals or
exceeds the amount of the proposed distribution; or (ii) (a) the assets of the
corporation (exclusive of certain non-tangible assets) equal or exceed 1 1/4
times its liabilities (exclusive of certain liabilities), and (b) the current
assets of the corporation at least equal its current liabilities, but if the
average pre-tax net earnings of the corporation before interest expense for
the two years preceding the distribution was less than the average interest
expense of the corporation for those years, the current assets of the
corporation must exceed 1 1/4 times its current liabilities. Following this
offering, the Company may become exempt from the application of Section 2115
in the event that more than half of the voting stock is held by stockholders
with residences outside of California.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Norwest
Shareholder Services.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 10,205,614 shares of Common Stock, assuming (i) the exercise of
warrants to purchase 1,133,351 shares of Common Stock on a cashless basis
resulting in the issuance of 995,671 shares of Common Stock, (ii) no exercise
of the Underwriters' over-allotment option and (iii) no exercise of options to
purchase 1,490,957 shares of Common Stock outstanding as of July 31, 1996. Of
these shares, the 3,750,000 shares of Common Stock sold in this offering will
be freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 6,455,614 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 promulgated under the
Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows: (i) approximately 5,678 Restricted Shares will be eligible for
immediate sale on the date of this Prospectus; (ii) approximately 12,964
Restricted Shares will be eligible for sale beginning 90 days after the date
of the Prospectus; (iii) approximately 5,419,835 Restricted Shares (plus
approximately 628,625 shares of Common Stock issuable to employees and
consultants pursuant to stock options that are then vested) will be eligible
for sale upon expiration of the lock-up agreements 180 days after the date of
this Prospectus; and (iv) the remaining 1,017,137 Restricted Shares will be
eligible for sale beginning October 1997 upon expiration of their two-year
holding period.
Upon completion of this offering, the holders of approximately 5,858,256
shares of Common Stock, or their transferees, will be entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Registration of such shares under the Securities Act would result in such
shares becoming freely tradeable without restriction under the Securities Act
(except for shares purchased by Affiliates) immediately upon the effectiveness
of such registration.
The Company's officers, directors and certain stockholders have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly offer, sell, contract to sell or otherwise dispose of
approximately 6,358,918 shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock during the 180-day period
commencing on the date of this Prospectus. The Company has agreed that it will
not, without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock during such 180-day period except for the sale of the shares
of Common Stock in this offering, the issuance of options and shares of Common
Stock pursuant to employee benefit plans set forth in this Prospectus, and the
issuance of shares of Common Stock upon exercise of warrants or options
presently outstanding. Any shares subject to the lock-up agreements may by
released at any time without notice by Hambrecht & Quist LLC.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least two years will be entitled to sell in any three-month
period a number of shares that does not exceed greater of (i) one percent of
the then outstanding shares of the Company's Common Stock or (ii) the average
weekly trading volume of the Company's Common Stock in the Nasdaq National
Market during the four calendar weeks immediately preceding the date on which
notice of the sale is filed
53
<PAGE>
with the Securities and Exchange Commission. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice, and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least three
years is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 and Rule 144(k) to become eligible for resale in the
public market. This proposal, if adopted, would substantially increase the
number of shares of Common Stock eligible for immediate resale following the
expiration of the lock-up agreements described above. No assurance can be
given concerning whether or when the proposal will be adopted by the
Commission.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Stock Plans and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at July 31, 1996, such registration
statement would cover approximately 2,624,146 shares. Such registration
statement is expected to be filed and to become effective as soon as
practicable after the date hereof. Shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock up agreements
described above. See "Management."
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below through their representatives, Hambrecht & Quist LLC,
Prudential Securities Incorporated and Wessels, Arnold & Henderson, L.L.C.,
have severally agreed to purchase from the Company and the Selling
Stockholders the following respective numbers of shares of Common Stock (which
include shares issuable by the Company pursuant to the net exercise of
warrants which the Underwriters have agreed to purchase from certain of the
Selling Stockholders):
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.........................................
Prudential Securities Incorporated............................
Wessels, Arnold & Henderson, L.L.C. ..........................
---------
Total......................................................... 3,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary
authority. After the initial public offering of the shares, the offering price
and other selling terms may be changed by the Representatives of the
Underwriters.
In connection with this offering, the Underwriters have agreed to purchase
from certain of the Selling Stockholders warrants to purchase shares of the
Company's capital stock which, when exercised on a net exercise basis at the
assumed initial public offering price of $12.00 per share, will result in the
issuance to the Underwriters of 176,875 shares of Common Stock, at a price
equal to the initial public offering price less the underwriting discount for
each share of Common Stock issuable pursuant to the net exercise thereof.
The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable no later than 30 days after the date of
this Prospectus, to purchase up to 562,500 additional shares of Common Stock
at the initial public offering price, less the underwriting discount, set
forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares of Common Stock offered hereby. The
Company and such Selling Stockholders will be obligated, pursuant to the
option,
55
<PAGE>
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company's officers and directors and certain stockholders have agreed
that they will not, without the prior written consent of Hambrecht & Quist
LLC, directly or indirectly, offer, sell or otherwise dispose of 6,358,918
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for shares of Common Stock during the 180-day period commencing on
the date of this Prospectus. The Company has agreed that it will not, without
the prior written consent of Hambrecht & Quist LLC, directly or indirectly,
sell, offer, or otherwise dispose of any shares of Common Stock, or any
securities convertible into, exchangeable or exercisable for shares of Common
Stock during such 180-day period except for the sale of the shares of Common
Stock in this offering, the issuance of options and shares of Common Stock
pursuant to employee benefit plans set forth in this Prospectus, and the
issuance of shares of Common Stock upon exercise of warrants or options
presently outstanding. Hambrecht & Quist LLC in its sole discretion may
release any of the shares subject to the lock-up at any time without notice.
H&Q Peerless Investors, L.P., a fund associated with Hambrecht & Quist LLC,
will own 177,090 shares, or 1.7%, of the outstanding capital stock of the
Company upon the closing of this offering. H&Q Adobe Ventures Management L.P.,
a fund associated with Hambrecht & Quist LLC, is the sole general partner of
Adobe Ventures, L.P., which will own 596,840 shares, or 5.8%, of the
outstanding capital stock of the Company, upon the closing of this offering.
Hambrecht & Quist LLC disclaims beneficial ownership of the shares held by H&Q
Peerless Investors, L.P. and Adobe Ventures L.P., except to the extent of any
pecuniary interest therein.
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price for the Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Underwriters. Among the factors to be considered in determining the initial
public offering price will be the market valuations of other companies engaged
in activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward Castro Huddleson & Tatum, Palo Alto, California
("Cooley Godward"). Certain legal matters related to the offering will be
passed upon for the Underwriters by Fenwick & West LLP, Palo Alto, California.
As of the date of this Prospectus, certain members of Cooley Godward
beneficially owned 14,919 shares of Common Stock of the Company.
EXPERTS
The statements of operations for the years ended December 31, 1993, 1994 and
1995 and for the one month period ended January 31, 1996 and the balance
sheets at December 31, 1994 and 1995 and January 31, 1996 included in this
Prospectus and in the Registration Statement of which this Prospectus is a
part have been included herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of such firm as
experts in accounting and auditing.
56
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. Statements contained in this Prospectus concerning the
contents of any contract or any other document are necessarily summaries of
such contracts or documents, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement
and the exhibits filed as a part thereof. A copy of the Registration
Statement, including exhibits thereto, may be inspected without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. In addition, the Commission maintains a World
Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Web site is: http://www.sec.gov.
57
<PAGE>
PEERLESS SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent Accountants................. F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Deficit......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Peerless Systems Corporation
We have audited the accompanying balance sheets of Peerless Systems
Corporation as of December 31, 1994 and 1995 and January 31, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1995 and the one
month period ended January 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peerless Systems Corporation
at December 31, 1994 and 1995 and January 31, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and the one month period ended January 31, 1996, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
July 25, 1996
F-2
<PAGE>
PEERLESS SYSTEMS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JANUARY 31, JULY 31, JULY 31,
1994 1995 1996 1996 1996
-------- -------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 393 $ 1,184 $ 722 $ 194
Trade accounts
receivable............. 2,481 1,746 2,013 2,008
Unbilled receivables.... 11 211 245 384
Prepaid expenses and
other current assets... 166 103 102 183
-------- -------- -------- --------
Total current assets.. 3,051 3,244 3,082 2,769
Property and equipment,
net...................... 299 509 532 737
Other assets.............. 191 432 427 454
-------- -------- -------- --------
Total assets.......... $ 3,541 $ 4,185 $ 4,041 $ 3,960
======== ======== ======== ========
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit.......... $ 1,095 $ 500 $ 500
Accounts payable........ 512 $ 395 $ 431 655 655
Accrued wages........... 570 594 623 557 557
Accrued compensated
absences............... 315 352 310 390 390
Other current
liabilities............ 305 74 209 122 122
Obligations under
capital leases, current
portion................ 154 154 255 255
Deferred rent, current
portion................ 180 76 76 76 76
Deferred revenue,
current portion........ 3,266 3,906 3,887 2,844 2,844
-------- -------- -------- -------- --------
Total current
liabilities.......... 6,243 5,551 5,690 5,399 5,399
Convertible notes payable. 3,070 3,070 3,070
Obligations under capital
leases................... 141 141 279 279
Deferred rent............. 398 299 291 252 252
Deferred revenue.......... 2,196 789 784 601 601
-------- -------- -------- -------- --------
8,837 9,850 9,976 9,601 6,531
-------- -------- -------- -------- --------
Commitments and
contingencies (Note 6)...
Series A convertible,
redeemable Preferred
Stock, 3,472 shares
authorized, 1,111 shares
issued and outstanding at
December 31, 1994, 1995,
January 31, 1996 and July
31, 1996 (aggregate
liquidation value of
$2,167, $1,667, $1,667
and $1,667 at
December 31, 1994, 1995,
January 31, 1996 and July
31, 1996, respectively),
no shares pro forma...... 3,214 2,482 2,482 2,484
-------- -------- -------- --------
Series B convertible,
redeemable Preferred
Stock, 6,400 shares
authorized, 1,501 shares
issued and outstanding at
December 31, 1994, 1995,
January 31, 1996 and July
31, 1996 (aggregate
liquidation value of
$2,327 at December 31,
1994, 1995, January 31,
1996 and July 31, 1996),
no shares pro forma...... 3,431 3,449 3,450 3,454
-------- -------- -------- --------
Stockholders' deficit:
Preferred Stock, $.001
par value, 5,000 shares
authorized, no shares
issued or outstanding,
pro forma..............
Common Stock, no par
value ($.001 par value
pro forma), 15,000
shares authorized
(30,000 shares pro
forma), 2,635, 2,837,
2,837 and 2,883 shares
issued and outstanding
at December 31, 1994,
1995, January 31, 1996
and July 31, 1996,
respectively, 6,699
shares pro forma....... 238 508 508 1,005 7
Additional paid-in
capital................ 889 889 889 10,895
Deferred compensation... (425) (425)
Accumulated deficit..... (12,179) (12,993) (13,264) (13,048) (13,048)
-------- -------- -------- -------- --------
Total stockholders'
deficit.............. (11,941) (11,596) (11,867) (11,579) (2,571)
-------- -------- -------- -------- --------
Total liabilities and
stockholders'
deficit.............. $ 3,541 $ 4,185 $ 4,041 $ 3,960 $ 3,960
======== ======== ======== ======== ========
</TABLE>
The following notes are an integral part of these financial statements.
F-3
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------ MONTH ENDED -----------------
JANUARY 31, JUNE 30, JULY 31,
1993 1994 1995 1996 1995 1996
------- ------- ------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product licensing...... $ 1,586 $ 4,394 $4,774 $ 329 $2,420 $2,438
Engineering services
and maintenance....... 3,655 4,942 5,639 396 2,312 4,650
------- ------- ------ ----- ------ ------
Total revenues........ 5,241 9,336 10,413 725 4,732 7,088
------- ------- ------ ----- ------ ------
Cost of revenues:
Product licensing...... 341 218 143 5 74 65
Engineering services
and maintenance....... 5,095 5,457 5,111 564 2,358 3,296
------- ------- ------ ----- ------ ------
Total cost of
revenues............. 5,436 5,675 5,254 569 2,432 3,361
------- ------- ------ ----- ------ ------
Gross margin.......... (195) 3,661 5,159 156 2,300 3,727
------- ------- ------ ----- ------ ------
Operating expenses:
Research and
development........... 1,766 1,767 2,088 127 1,077 1,038
Sales and marketing.... 1,656 1,878 2,142 156 1,080 1,164
General and
administrative........ 1,048 1,000 1,293 119 613 1,086
------- ------- ------ ----- ------ ------
Total operating
expenses............. 4,470 4,645 5,523 402 2,770 3,288
------- ------- ------ ----- ------ ------
Income (loss) from
operations............. (4,665) (984) (364) (246) (470) 439
Interest expense, net... 96 118 176 17 65 167
------- ------- ------ ----- ------ ------
Income (loss) before
provision for income
taxes.................. (4,761) (1,102) (540) (263) (535) 272
Provision for income
taxes.................. 63 124 99 7 62 50
------- ------- ------ ----- ------ ------
Net income (loss)..... $(4,824) $(1,226) $ (639) $(270) $ (597) $ 222
======= ======= ====== ===== ====== ======
Pro forma information
(unaudited):
Pro forma net income
(loss) per share...... $(0.08) $ 0.04
====== ======
Pro forma weighted
average number of
common and common
equivalent shares
outstanding........... 7,085 8,637
====== ======
</TABLE>
The following notes are an integral part of the these financial statements.
F-4
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
ADDITIONAL TOTAL
NUMBER OF PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1992................... 2,555 $ 192 $ (5,678) $ (5,486)
Issuance of common
stock for cash....... 62 13 13
Repurchase of common
stock for cash....... (17) (3) (3)
Net loss.............. (4,824) (4,824)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (228) (228)
----- ----- -------- --------
Balances, December 31,
1993................... 2,600 202 (10,730) (10,528)
Issuance of common
stock for cash....... 35 36 36
Net loss.............. (1,226) (1,226)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (223) (223)
----- ----- -------- --------
Balances, December 31,
1994................... 2,635 238 (12,179) (11,941)
Issuance of common
stock for cash....... 202 270 270
Net loss.............. (639) (639)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (175) (175)
Decrease in redemption
value of Series A
Preferred Stock...... $889 889
----- ----- ---- -------- --------
Balances, December 31,
1995................... 2,837 508 889 (12,993) (11,596)
Net loss.............. (270) (270)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (1) (1)
----- ----- ---- -------- --------
Balances, January 31,
1996................... 2,837 508 889 (13,264) (11,867)
Exercise of stock
options for cash
(unaudited).......... 46 45 45
Deferred compensation
related to grant of
stock options
(unaudited).......... 452 (452)
Amortization of
deferred compensation
(unaudited).......... 27 27
Net income
(unaudited).......... 222 222
Increase in redemption
value of Series A and
Series B Preferred
Stock (unaudited).... (6) (6)
----- ----- ---- ----- -------- --------
Balances, July 31, 1996
(unaudited)............ 2,883 1,005 889 ($425) ($13,048) $(11,579)
===== ===== ==== ===== ======== ========
</TABLE>
The following notes are an integral part of these financial statements.
F-5
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- -----------------
MONTH ENDED
JANUARY 31, JUNE 30, JULY 31,
1993 1994 1995 1996 1995 1996
-------- -------- -------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ (4,824) $ (1,226) $ (639) $ (270) $(597) $ 222
Adjustments to
reconcile net income
(loss) to net cash
provided (used) by
operating activities:
Depreciation and
amortization......... 147 156 203 15 71 205
Amortization of
deferred
compensation......... 27
Loss on sale of
property and
equipment............ 18
Changes in operating
assets and
liabilities:
Trade accounts
receivable.......... (760) (917) 735 (267) 703 5
Unbilled receivables. 152 26 (200) (34) (145) (139)
Prepaid expenses and
other current
assets.............. (6) 46 63 1 27 (81)
Other assets......... (63) 30 (241) 5 (92) (27)
Accounts payable..... (216) 119 (117) 36 (277) 224
Accrued wages........ 134 88 24 29 110 (66)
Accrued compensated
absences............ 150 121 37 (42) 13 80
Other current
liabilities......... 168 192 (231) 135 (187) (87)
Deferred rent........ 473 (200) (203) (8) (90) (39)
Deferred revenue..... 3,088 994 (767) (24) 404 (1,226)
-------- -------- -------- ------ ----- -------
Net cash provided
(used) by operating
activities......... (1,539) (571) (1,336) (424) (60) (902)
-------- -------- -------- ------ ----- -------
Cash flows from
investing activities:
Purchases of property
and equipment......... (79) (39) (47) (38) (27) (50)
Proceeds from sale of
property and
equipment............. 5
-------- -------- -------- ------ ----- -------
Net cash used by
investing
activities......... (74) (39) (47) (38) (27) (50)
-------- -------- -------- ------ ----- -------
Cash flows from
financing activities:
Principal payments of
long-term debt........ (61) (74)
Proceeds from issuance
of common stock....... 13 36 270 38 45
Repurchase of common
stock................. (3)
Proceeds from issuance
of convertible notes
payable............... 3,070
Net proceeds from
issuance of Series B
Preferred Stock....... 1,970
Net (payments)
borrowings on line of
credit................ (75) 270 (1,095) (156) 500
Payments on obligations
under capital leases.. (71) (8) (121)
-------- -------- -------- ------ ----- -------
Net cash provided by
financing
activities......... 1,844 232 2,174 (126) 424
-------- -------- -------- ------ ----- -------
Net increase
(decrease) in cash
and cash
equivalents........ 231 (378) 791 (462) (213) (528)
Cash and cash equiva-
lents, beginning of pe-
riod................... 540 771 393 1,184 393 722
-------- -------- -------- ------ ----- -------
Cash and cash equiva-
lents, end of period... $ 771 $ 393 $ 1,184 $ 722 $ 180 $ 194
======== ======== ======== ====== ===== =======
</TABLE>
(Continued)
The following notes are an integral part of these financial statements.
F-6
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
---------------- MONTH ENDED -----------------
JANUARY 31, JUNE 30, JULY 31,
1993 1994 1995 1996 1995 1996
------ ---- ---- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Income taxes.................. $ 63 $124 $111 $-- $ 46 $ 63
====== ==== ==== === ==== ====
Interest...................... $ 103 $119 $175 $-- $ 65 $174
====== ==== ==== === ==== ====
Supplemental schedule of noncash
investing and financing
activities:
Increase in redemption value of
Series A and Series B
Preferred Stock............... $ 228 $223 $175 $ 1 $113 $ 6
====== ==== ==== === ==== ====
Conversion of accrued interest
on convertible notes to shares
of Series B Preferred Stock... $ 27
======
Conversion of convertible notes
to shares of Series B
Preferred Stock............... $1,408
======
Decrease in redemption value of
Series A Preferred Stock...... $889
====
Software and equipment acquired
under capital lease
obligations................... $366 $267 $360
==== ==== ====
Deferred compensation related to
grant of stock options......... $452
====
</TABLE>
The following notes are an integral part of these financial statements.
F-7
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
Peerless Systems Corporation ("Peerless" or the "Company") was incorporated
in the State of California in April 1982. Peerless develops and licenses
embedded imaging software and supporting hardware technologies and provides
custom engineering services to Original Equipment Manufacturers ("OEMs"),
located primarily in the United States and Japan. These OEMs sell monochrome
printers, as well as multifunction products which combine printer, fax and
scanner capabilities.
History of Operating Losses; Accumulated Deficit:
The Company recognized net losses of $1,226 and $639 for the fiscal years
ended December 31, 1994 and 1995, respectively, and recognized net income of
$222 for the six months ended July 31, 1996. Losses have resulted in an
accumulated deficit of $13,048 as of July 31, 1996. Management plans to
enhance the Company's cash flows from operations by obtaining license fees
upon the signing of new contracts, and obtaining add-on and new product
contracts with existing and new customers, supplemented with additional
external funding, if necessary. In May 1996, management successfully
renegotiated its line of credit which resulted in covenants that management
believes are achievable.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment:
Property and equipment, including any assets under capital leases, are
stated at cost, less accumulated depreciation and amortization. Depreciation
on property and equipment is calculated using the straight-line method over
estimated useful lives of 5-10 years, and over the lesser of the term of the
lease or the estimated useful life of the leasehold improvements and assets
under capital leases. Maintenance and repairs are expensed as incurred, while
renewals and betterments are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation or amortization, and any resulting gain or loss is
included in operations.
Capitalization of Software Development Costs:
The Company follows the working model approach to determine technological
feasibility of its products. Costs that are incurred subsequent to
establishing technological feasibility are immaterial and, therefore, the
Company expenses all costs associated with the development of its products as
such costs are incurred.
Revenue Recognition:
Revenue from the licensing of source code of the Company's standard products
to customers is recognized upon shipment and customer acceptance. Recurring
licensing revenue is recognized on a royalty basis generally when the
Company's OEM customers ship their products incorporating Peerless' technology
to their end-user customers.
The Company also enters into engineering services contracts with OEMs to
provide research and development work to adapt the Company's standard products
to the OEM's specific hardware and software
F-8
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
requirements. Revenue on such contracts is recognized over the course of the
development work on a percentage-of-completion basis. The Company provides for
any anticipated losses on such contracts in the period in which such losses
are first determinable.
Deferred revenue consists of prepayments of recurring licensing royalties,
and payments billed to customers in advance of revenue recognized on
engineering services contracts. Unbilled receivables arise when the revenue
recognized on a contract exceeds invoices to customers under those contracts.
Research and Development Costs:
Research and development costs are expensed as incurred.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes." Under
this method, deferred income taxes are recognized for the tax consequences in
future years resulting from differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory rates applicable to the periods in which the
differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred income tax assets to the amount expected to
be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred income tax assets and liabilities.
2-for-3 Reverse Stock Split: (Unaudited)
On July 25,1996 the Board of Directors approved a 2-for-3 reverse split of
all outstanding common stock, Series A and Series B Preferred Stock, stock
options and warrants. All share and per share amounts have been adjusted to
give retroactive effect to this reverse split for all periods presented.
Net Loss Per Common Share:
Net loss per common share is based on reported net loss, with such reported
net loss adjusted for accretion of the Series A and B Preferred Stock and
interest on convertible notes payable. The resulting amount is presented in
the table below as loss applicable to common stock.
Net loss per share is computed based upon the weighted average number of
common shares outstanding adjusted for certain shares issuable under other
equity securities computed in accordance with Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") Topic 4-D. The SAB requires that
common stock issued by the Company, at prices less than the per share initial
public offering price, in the twelve months immediately preceding a proposed
public offering plus the number of common equivalent shares that become
issuable during the same period pursuant to the issuance of warrants or grant
of stock options (using the treasury stock method), convertible notes payable
or other potentially dilutive instruments with per share exercise prices below
the per share initial public offering price be included in the calculation of
common stock and common stock equivalent shares as if they were outstanding
for all periods presented.
F-9
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------ ----------------------------
JULY 31,
1993 1994 1995 JUNE 30, 1995 1996
--------------- --------------- -------------- -------------- ------------
(UNAUDITED) (UNAUDITED)
PER PER PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ------ ------- ------ ------ ------ ------ ------ ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income
(loss)................. $(4,824) $(1,226) $ (639) $ (597) $ 222
Adjustment for accretion
of Series A and B
Preferred Stock and
interest on convertible
notes.................. (228) (223) (130) (87) 101
------- ------- ------ ------ ------
Net income (loss)
applicable to common
stock and net income
(loss) per common share
and common equivalent
share.................. (5,052) $(1.17) (1,449) $(0.33) (769) $(0.17) (684) $(0.15) 323 $0.05
======= ====== ======= ====== ====== ====== ====== ====== ====== =====
Weighted average number
of:
Common shares.......... 2,556 2,599 2,664 2,661 2,835
Common equivalent
shares................ 1,774 1,774 1,774 1,774 3,155
------- ------- ------ ------ ------
Weighted average common
shares and common
equivalent shares
outstanding............ 4,330 4,373 4,438 4,435 5,990
======= ======= ====== ====== ======
</TABLE>
Primary and fully diluted earnings per share do not differ.
Pro Forma Net Income (Loss) Per Share and Unaudited Pro Forma Stockholders'
Deficit:
Pro forma net income (loss) per share has been computed as described above
and also gives effect, even if antidilutive, to common equivalent shares from
convertible Series A and B Preferred Stock that will automatically convert
upon the closing of the Company's initial public offering (using the if-
converted method). If the offering contemplated by this Prospectus is
consummated, all of the convertible Series A and B Preferred Stock and
convertible notes payable outstanding as of the closing date will
automatically be converted into an aggregate of 2,647 and 1,170 shares of
common stock, respectively.
Unaudited pro forma stockholders' deficit at July 31, 1996, as adjusted for
the assumed conversion of the Series A and Series B Preferred Stock and
convertible notes payable, is disclosed on the balance sheet.
Common Stock Options:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair
value based method of accounting for an employee stock option. Fair value of
the stock option is determined by considering factors such as the exercise
price, the expected life of the option, the current price of the underlying
stock and its volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option. Under the fair value based
method, compensation cost is measured as of the grant date based on the fair
value of the award and is recognized over the service period. A company may
elect to adopt SFAS No. 123 or elect to continue accounting for its stock
option or similar equity awards using the intrinsic method, where compensation
cost is measured at the date of grant based on the excess of the market value
of the underlying stock over the exercise price. If a company elects not to
adopt SFAS No. 123, then it must provide pro forma disclosure of net income
and net income per share, as if the fair value based method had been applied.
The Company does not intend to adopt SFAS No. 123 and will provide the
required pro forma disclosure.
F-10
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Interim Financial Information:
The financial information at July 31, 1996 and for the six-month periods
ended June 30, 1995 and July 31, 1996 is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position
at such date and the operating results and cash flows for those periods.
Results of the July 31, 1996 period are not necessarily indicative of the
results for the entire year.
Change in Fiscal Year-End:
The Company changed its fiscal year-end from December 31 to January 31,
effective in the year beginning February 1, 1996. The results of operations
for the one month transition period ended January 31, 1996 is presented
herein.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JULY 31,
1994 1995 1996
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and other equipment..................... $ 789 $ 798 $ 869
Furniture......................................... 111 118 121
Leasehold improvements............................ 23 23 36
Software under capital lease obligations.......... 115 156
Equipment under capital lease obligations......... 251 570
----- ------ -------
923 1,305 1,752
Less, accumulated depreciation and amortization. (624) (796) (1,015)
----- ------ -------
$ 299 $ 509 $ 737
===== ====== =======
</TABLE>
3. LINE OF CREDIT:
The Company has a revolving line of credit with a bank, collateralized by
all of the Company's assets, other than those subject to lease financing
agreements. The maximum amount available under the line of credit is the
lesser of $1,500 or a percentage of the Company's outstanding accounts
receivable and current royalty receivables, which amount was $726 at December
31, 1995 (unaudited: $1,251 at July 31, 1996). The interest rate on this line
of credit is the bank's prime interest rate plus 2% (an effective rate of
10.5% at December 31, 1995 [unaudited: 10.25% at July 31, 1996]). Under the
terms of this agreement, which expires in May 1997, the Company is required to
maintain compliance with certain financial ratios, the most restrictive of
which is a current ratio (as defined in the agreement) of 1:1, and to
recognize net income each fiscal quarter beginning July 31, 1996.
F-11
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. OBLIGATIONS UNDER CAPITAL LEASES:
Obligations under capital leases consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Obligations under capital leases with terms of
eighteen months, bearing an effective interest
rate of 26.97%, payable in monthly payments of
principal and interest ranging from $3 to $5,
expiring on various dates through 1997, and
collateralized by the software under lease........ $ 83 $ 72
Obligations under capital leases with terms of
three years, bearing effective interest rates
ranging from 14.70% to 17.87%, payable in monthly
payments of principal and interest ranging from $1
to $4, expiring on various dates through 1999, and
collateralized by the equipment under lease....... 212 462
----- -----
295 534
Less, current portion.............................. (154) (255)
----- -----
$ 141 $ 279
===== =====
</TABLE>
Total required minimum lease payments under capital leases in the calendar
years subsequent to December 31, 1995 and in the aggregate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C>
1996................................................................... $198
1997................................................................... 120
1998................................................................... 42
----
Total minimum lease payments......................................... 360
Less, amount representing interest................................. (65)
----
Net minimum lease payments under capital lease................... $295
====
</TABLE>
5. CONVERTIBLE NOTES PAYABLE:
In December 1992, the Company issued $1,408 of convertible notes payable in
exchange for cash. The notes carried an annual interest rate of 4%. The notes
and related accrued interest were converted into shares of the Company's
Series B Preferred Stock in June 1993 at $2.33 per share.
In October 1995, the Company issued 7.00% Senior Convertible Subordinated
Debentures ("Debentures"), to holders of the Company's Preferred Stock, with
an aggregate principal amount of $3,070 and a maturity date of June 1, 2001.
The Debentures bear interest at a rate of 7% per annum with interest due June
1 and December 1 of each year. The Debentures are convertible, at the option
of the holder, to shares of common stock at a specified conversion price of
$2.63 per common share, subject to dilution adjustments. The Debentures are
subordinate to all bank indebtedness. The Debentures will automatically
convert upon the effective date of a registration statement relating to a
public offering of at least $10,000 of the Company's common stock under the
Securities Act of 1933.
F-12
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. CONVERTIBLE NOTES PAYABLE--(CONTINUED)
If the Company receives requests for redemption on or prior to May 1, 1999
from the holders of a majority in aggregate principal amount of the Debentures
and obtains the appropriate consents from the preferred stockholders, all
Debentures will be redeemed at the rate of one-third of the then outstanding
principal plus accrued and unpaid interest on each of the following three
redemption dates: June 1, 1999, 2000 and 2001. The Company is not required to
set up a sinking fund for the redemption.
As of December 31, 1995 and January 31, 1996, total outstanding principal
was $3,070 and the Company had not received redemption requests from the
holders.
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company leases its offices and certain operating equipment under
operating leases that expire through 2001.
Future minimum rental payments under long-term operating leases are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C>
1996............................................................... $ 886
1997............................................................... 701
1998............................................................... 620
1999............................................................... 620
2000............................................................... 620
Thereafter......................................................... 155
------
Total........................................................... $3,602
======
</TABLE>
Total rental expense was $1,160, $916 and $1,059 for the years ended
December 31, 1993, 1994 and 1995, respectively. Unaudited: Rental expense was
$400 for the six months ended July 31, 1996.
Concentration of Credit Risk:
At December 31, 1994 and 1995, the Company had cash on deposit at a bank
that was in excess of federally-insured limits. The aggregate excess amount
was $300 and $1,164, respectively. Unaudited: The aggregate excess amount at
July 31, 1996 was $565.
The Company's credit risk in accounts receivable, which are generally not
collateralized, is concentrated with customers which are OEMs of laser
printers and printer peripheral technologies. The accounting loss, should a
customer be unable to meet its obligation to the Company, would be equal to
the recorded accounts receivable. At December 31, 1994 and 1995, two customers
represented 79% and 50% of total receivables, respectively. For the years
ended December 31, 1993, 1994 and 1995, two customers represented 40%, 45% and
41%, respectively, of product licensing revenues, and four customers
represented 64%, 81% and 94%, respectively, of engineering services revenues.
Unaudited: At July 31, 1996, five customers represented 70% of total
receivables. For the six months ended July 31, 1996, four customers
represented 78% of product licensing revenues and six customers represented
83% of engineering services revenues.
F-13
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES:
The income tax provision consists of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $-- $ -- $--
State....................................................... -- -- --
Foreign..................................................... 63 124 99
--- ---- ---
63 124 99
--- ---- ---
Deferred:
Federal..................................................... -- -- --
State....................................................... -- -- --
Foreign..................................................... -- -- --
--- ---- ---
-- -- --
--- ---- ---
$63 $124 $99
=== ==== ===
</TABLE>
The foreign tax provision is comprised of foreign withholding taxes on
license fees and royalty payments.
Temporary differences that give rise to the deferred tax provision consist
of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -----
<S> <C> <C> <C>
Property and equipment.............................. $ 9 $ 11 $ 19
Accrued liabilities................................. 61 40 42
Deferred revenue.................................... 1,337 431 (332)
Deferred expenses................................... 33 87 43
Tax credit carryforwards............................ 1,401 253
Net operating loss carryforwards.................... 447 (92) 317
Other............................................... (2) (36) (3)
------- ------- -----
1,885 1,842 339
Valuation allowance................................. (1,885) (1,842) (339)
------- ------- -----
Net deferred income taxes......................... $ -- $ -- $ --
======= ======= =====
</TABLE>
F-14
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
Temporary differences which give rise to deferred income tax assets and
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities...................................... $ 108 $ 150
Deferred revenue......................................... 2,365 2,033
Deferred expenses........................................ 120 163
Tax credit carryforwards................................. 1,401 1,654
Net operating loss carryforwards......................... 1,757 2,074
Other.................................................... 3
------- -------
Total deferred tax assets.............................. 5,754 6,074
Deferred tax liability:
Property and equipment................................... (49) (30)
------- -------
Subtotal............................................... 5,705 6,044
Valuation allowance........................................ (5,705) (6,044)
------- -------
Net deferred income taxes.............................. $ -- $ --
======= =======
</TABLE>
The Company periodically evaluates the sufficiency of its deferred tax asset
valuation allowance, which is adjusted as deemed appropriate based on
operating results.
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory regular federal income tax rate........... (34.0)% (34.0)% (34.0)%
Foreign provision................................... 1.3 11.2 18.3
Nondeductible expenses.............................. 1.2 1.1 3.2
Foreign tax and research and experimentation
credits............................................ (3.7) (74.4) (23.4)
Change in federal valuation allowance............... 39.6 108.4 55.7
Other............................................... (3.1) (1.1) (1.5)
----- ----- -----
1.3% 11.2% 18.3%
===== ===== =====
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards
for federal and state purposes of approximately $5,299 and $2,932,
respectively. The net operating loss carryforwards begin expiring in 2005 and
1997, respectively. The Company has research and experimentation credit
carryforwards for federal and state purposes of approximately $840 and $460,
respectively. The research and experimentation credits begin to expire in 2000
for federal purposes. The Company also has foreign tax credits of
approximately $355 for federal purposes, which begin to expire in 1996.
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK:
The Company has authorized 15,000 shares of Preferred Stock, of which 1,736
are designated as Series A Preferred Stock, 1,736 are designated as Series A1
Preferred Stock, 3,200 are designated as Series B Preferred Stock, 3,200 are
designated as Series B1 Preferred Stock, and 5,128 are undesignated.
F-15
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK--(CONTINUED)
During 1991, the Company issued 1,111 shares of Series A Preferred Stock at
a price of $2.25 per share in exchange for $2,500 of cash, less $51 of
offering expenses.
Shares of Series A Preferred Stock are convertible into the Company's common
stock at a rate of $2.22 per share of common stock, subject to anti-dilution
adjustments. Conversion into the Company's common stock may occur at any time
at the holder's option, but will automatically occur upon the effective date
of a registration statement relating to a public offering of at least $10,000
of the Company's common stock under the Securities Act of 1933.
Holders of Series A Preferred Stock are entitled to a noncumulative annual
dividend of $0.18 per share, payable only when and as declared by the Board of
Directors out of legally available funds.
Until October 1995, the Company was required to redeem all shares of Series
A Preferred Stock in three equal installments on June 1, 1997, 1998 and 1999
upon the request of a majority of the holders of the outstanding Series A
Preferred Stock received prior to May 1, 1997. The redemption amount was based
on $2.25 per share of Common Stock plus a redemption premium equal to $0.045
per share times the number of calendar quarters that elapsed between March 31,
1991 and the date of redemption. As a result of this provision for a
redemption premium, the Company recorded the incremental increases in Series A
Preferred Stock and charged the like amount to Accumulated Deficit.
As a result of an amendment of the Company's Articles of Incorporation in
1995, the Series A Preferred Stock redemption dates were changed to June 1,
1999, 2000 and 2001, redeemable upon the request of a majority of the holders
of the outstanding Series A Preferred Stock received prior to April 1, 1999
and consent of the holders of a majority of the then outstanding principal
amount of the Debentures (Note 5). All redemption premiums relating to Series
A Preferred Stock were retroactively eliminated. As a result of this
amendment, $889 of accumulated incremental increases to Series A Preferred
Stock relating to redemption premiums, including $200, $200 and $150
recognized in 1993, 1994 and 1995, respectively, was added to Additional Paid-
In Capital and charged to Series A Preferred Stock in 1995. The Company is
continuing to accrete for the difference between the carrying values and the
redemption values of its Series A and B Preferred Stock.
During 1993, the Company issued 1,501 shares of Series B Preferred Stock at
a per share price of $2.33 in exchange for $1,435 of convertible notes
payable, including $27 of accrued interest, and $2,055 of cash, less $85 of
offering expenses.
The Company's Series B Preferred Stock has substantially the same rights,
privileges and restrictions as those of Series A Preferred Stock. Shares of
Series B Preferred Stock are convertible into the Company's common stock at a
rate of $2.30 per share of common stock, subject to anti-dilution adjustments,
and also automatically convert into common stock upon the effective date of a
registration statement relating to a public offering of at least $10,000 of
the Company's common stock under the Securities Act of 1933.
In the event of a liquidation, holders of Series A Preferred Stock, and
Series B Preferred Stock would be entitled to receive a distribution equal to
$2.25 per share and $2.33 per share, respectively, plus all declared but
unpaid dividends. Holders of common stock would then participate in the
distribution to the extent of $1,250 on a pro rata basis. Thereafter, proceeds
would be allocated among the holders of common stock and Series A and Series B
Preferred Stock, with the Preferred Stock being treated on an as-converted
basis.
F-16
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK--(CONTINUED)
Holders of Series A Preferred Stock and Series B Preferred Stock vote as
separate classes from common stock with respect to elections of the Board of
Directors, and participate in other voting rights of the Company with
Preferred Stock being treated on an as-converted basis. Preferred Stock is
transferable in certain circumstances, subject to a right of first refusal by
the other holders of Preferred Stock.
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS:
Common Stock:
The Company has reserved shares of common stock at December 31, 1995 as
follows:
<TABLE>
<S> <C>
Series A and A1 Preferred Stock..................................... 1,736
Series B and B1 Preferred Stock..................................... 2,779
Conversion of warrants.............................................. 1,538
Stock option plans.................................................. 1,783
Conversion of notes payable......................................... 1,771
-----
Total............................................................. 9,607
=====
</TABLE>
In 1994, the Company adopted an Employee Stock Purchase Plan, under which
employees were offered the opportunity to purchase shares of common stock at a
price of $1.43 per share. Pursuant to this plan which terminated in December
1995, 159 shares of common stock were issued. In addition, not related to this
plan, during 1994 and 1995, the Company issued 33 and 27 shares, respectively,
of common stock at a price of $1.43 per share to certain employees.
Unaudited:
On July 25, 1996 the Board of Directors approved a 2-for-3 reverse split of
all outstanding common stock, Series A and Series B Preferred Stock, stock
options and warrants. All share and per share amounts have been adjusted to
give retroactive effect to this reverse split for all periods presented.
Warrants:
The Company has issued warrants to purchase common and preferred stock in
connection with various financing transactions, as follows:
<TABLE>
<CAPTION>
PER
SHARE
NUMBER OF EXERCISE EXPIRATION
STOCK CLASS SHARES PRICE DATE(1)
----------- --------- -------- ----------
<S> <C> <C> <C>
Common(2)................................ 67 $4.50 December 1996
Common(3)................................ 517 $1.13 July 1997
Common(4)................................ 27 $1.13 December 1997
Common(4)................................ 13 $2.55 December 1997
Common(5)................................ 365 $1.13 December 1998
Common(6)................................ 31 $1.13 February 2003
Common(7)................................ 5 $2.97 December 1998
Series A Preferred(8).................... 32 $2.25 July 2001
Series B Preferred(6).................... 75 $2.33 February 2003
</TABLE>
F-17
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS--(CONTINUED)
- ---------------------
(1) All warrants expire on the earlier of the above dates or the closing date
of an initial public offering of the Company's common stock.
(2) During 1991, the Company issued warrants to purchase these shares in
connection with the Series A Preferred Stock transaction.
(3) During 1993, the Company issued warrants to purchase 125 shares in
connection with a convertible note payable transaction. The Company had
previously issued warrants to purchase 125 shares in connection with the
same transaction and warrants to purchase 267 shares in connection with a
loan guarantee transaction.
(4) During 1993 and 1994, the Company issued warrants to purchase 27 and 13
shares, respectively, in connection with bank line of credit transactions.
(5) During 1993, the Company issued warrants to purchase these shares in
connection with the Series B Preferred Stock transaction.
(6) During 1993, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
(7) During 1995, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
(8) During 1991, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
At December 31, 1994, 1995 and (unaudited) at July 31, 1996, no warrants had
been exercised, and there was no imputed value associated with any of the
outstanding warrants due to deemed immateriality as such warrants were issued
at exercise prices not less than the deemed fair market value of the
applicable class of stock at the date of grant.
Stock Option Plans:
During 1992, the Board of Directors authorized a nonstatutory stock option
program for the purpose of granting options to purchase a total of 222 shares
of the Company's common stock to employees. The Board of Directors reduced the
number of shares authorized to 133 during 1994. Options vest annually, pro
rata over a five-year period, retroactive to the date of hire for each
recipient.
The following represents option activity under the nonstatutory option plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------- SIX MONTHS ENDED
1993 1994 1995 JULY 31, 1996
------------------- ------------------- ------------------- -------------------
NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE
OF EXERCISE OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE
------- ----------- ------- ----------- ------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 222 $0.21-$0.53 94 $0.21-$0.53 88 $0.21-$0.53 65 $0.21-$0.53
Options exercised....... (61) $0.21-$0.53 (13) $0.21 (10) $0.53
Options forfeited....... (67) $0.21-$0.53 (6) $0.21-$0.53 (10) $0.21-$0.53
--- --- --- ---
Options outstanding at
end of period.......... 94 $0.21-$0.53 88 $0.21-$0.53 65 $0.21-$0.53 55 $0.21-$0.53
=== === === ===
</TABLE>
F-18
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1995, unexercised stock options to purchase 49 and
46 shares, respectively, were vested and no shares were available for
granting. There was no stock option activity under this plan during the month
of January 1996.
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS--(CONTINUED)
During 1992, the Board of Directors authorized the 1992 Stock Option Plan
for the purpose of granting options to purchase the Company's common stock to
employees, directors and consultants. The Board of Directors determines the
form, term, option price and conditions under which each option becomes
exercisable. Options to purchase a total of 1,055 shares of common stock have
been authorized by the Board under this plan.
The following represents option activity under the 1992 Stock Option Plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------- SIX MONTHS ENDED
1993 1994 1995 JULY 31, 1996
----------------- ------------------- ------------------- -------------------
PER SHARE PER SHARE
NUMBER EXERCISE NUMBER PER SHARE NUMBER PER SHARE NUMBER EXERCISE
OF PRICE OF EXERCISE OF EXERCISE OF PRICE
OPTIONS RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS RANGE
------- --------- ------- ----------- ------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 147 $0.53 188 $0.53 309 $0.53-$1.43 774 $0.53-$1.65
Options granted......... 115 $0.53 137 $0.53-$1.43 503 $1.43-$1.86 186 $1.65
Options exercised....... (1) $0.53 (2) $0.53 (3) $0.53-$1.43 (36) $0.53
Options forfeited....... (73) $0.53 (14) $0.53-$1.43 (35) $0.53-$1.65 (37) $0.53-$1.65
--- --- --- ---
Options outstanding at
end of period.......... 188 $0.53 309 $0.53-$1.43 774 $0.53-$1.65 887 $0.53-$1.65
=== === === ===
</TABLE>
There was no stock option activity under this plan during the month of
January 1996. At December 31, 1994 and 1995, unexercised stock options to
purchase 79 and 162 shares, respectively, were vested and 411 and 277 shares
were available for granting, respectively.
During the years ended December 31, 1993, 1994 and 1995 and (unaudited) the
three months ended April 30, 1996, no compensation had been recorded on the
granting of any options, as such option prices equaled or exceeded the then
per share fair market value of the Company's common stock.
1996 Equity Incentive Plan (Unaudited). In May 1996, the Board adopted the
Company's 1996 Stock Option Plan (the "1996 Plan"). The Company's 1996 Equity
Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors in
July 1996 as an amendment and restatement of the Company's 1996 Plan. The
Board has authorized and reserved an aggregate of 1,267 shares of Common Stock
for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options, restricted stock purchase awards and
stock bonuses to employees, directors and consultants. The terms of stock
options granted under the Incentive Plan generally may not exceed 10 years.
The exercise price of options granted under the Incentive Plan is determined
by the Board of Directors, provided that the exercise price for an incentive
stock option cannot be less than 100% of the fair market value of the Common
Stock on the date of the option grant and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Incentive Plan vest at the rate specified in each optionee's option agreement.
F-19
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS--(CONTINUED)
The following represents option activity under the Incentive Plan:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31, 1996
---------------------
PER SHARE
NUMBER OF EXERCISE
OPTIONS PRICE RANGE
--------- -----------
(UNAUDITED)
<S> <C> <C>
Options outstanding at February 1, 1996.............
Options granted..................................... 562 $3.30-$9.00
Options exercised................................... -- --
Options forfeited................................... (2) $3.30
---
Options outstanding at July 31, 1996................ 560 $3.30-$9.00
===
</TABLE>
Unaudited:
The Company recognized deferred compensation expense of $452 for the
difference between the exercise price and the deemed fair value of the
Company's common stock at the date of grant for options issued under the
Incentive Plan. Of the total deferred expense, the Company recognized $27 as a
compensation expense during the three months ended July 31, 1996. The
remaining deferred compensation expense will be amortized over the vesting
periods of the options, which range from 2 to 60 months.
As of July 31, 1996, no restricted stock purchase awards or stock bonuses
were issued under the Incentive Plan.
Employee Stock Purchase Plan (Unaudited). In July 1996, the Company's Board
of Directors approved the Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 300 shares of the Company's Common Stock. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than
27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors and meet
eligibility standards established by the Board of Directors. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by
the Board of Directors, to the purchase of shares of Common Stock. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company
and its affiliates. The Purchase Plan will terminate at the Board of
Directors' discretion.
10. PROFIT-SHARING PLAN:
The Company has a profit-sharing plan which is available for all employees
age 21 or over. Employer contributions are at the discretion of the Company.
No employer contributions were made during the years ended December 31, 1993,
1994 and 1995. Unaudited: No employer contribution was made during the six
months ended July 31, 1996.
F-20
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTIES:
During 1993, 1994 and 1995, the Company recognized revenues of $229, $623
and $707, respectively, from transactions with a holder of Series B Preferred
Stock. Unaudited: Such revenues for the six-month period ended July 31, 1996
were $1,163. At December 31, 1994 and 1995, the Company owed this related
party $25 and $0, respectively, which was included in accounts payable. At
December 31, 1994 and 1995, the Company had $1,465 and $1,689, respectively,
of deferred revenue relating to license fees prepaid by this related party.
Unaudited: The amount of deferred revenue relating to license fees prepaid by
this related party at July 31, 1996 was $1,000.
12. INTERNATIONAL OPERATIONS:
The Company's revenues, which are transacted in U.S. dollars, are derived
from the following geographic regions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------------- -----------------
JUNE 30, JULY 31,
1993 1994 1995 1995 1996
------ ------ ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States........................... $3,680 $6,940 $ 6,139 $2,529 $4,214
Japan................................... 1,193 2,253 4,221 2,159 2,796
Other................................... 368 143 53 44 78
------ ------ ------- ------ ------
$5,241 $9,336 $10,413 $4,732 $7,088
====== ====== ======= ====== ======
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED):
Prior to the closing of the public offering pursuant to the Company's
registration statement filed with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public, the
Company plans to reincorporate in the state of Delaware, change the par value
of its common stock to $0.001 per share and increase its authorized number of
shares of common stock to 30,000 and decrease its authorized number of shares
of Preferred Stock to 5,000. The pro forma balance sheet at July 31, 1996
includes the effect of this change.
F-21
<PAGE>
[Description: The image will depict the networked monochrome, multifunction
and color markets targeted by the Company.]
TARGET MARKETS
Peerless markets complete solutions for networked monochrome, multifunction
and, in the future, color printer products. The Company has designed its
embedded imaging solution with a modular architecture that addresses a broad
spectrum of digital document product technologies and that can be tailored to
individual OEM requirements. Peerless offers its OEMs the flexibility to add
to their products a robust set of functionalities such as networking support,
languages, multifunction features and, in the future, color. Peerless
customers, such as Adobe, Canon, Digital, IBM and Xerox, can offer a broad
family of digital document products or related software, further leveraging
their core investment in the Company's imaging solutions.
<TABLE>
<CAPTION>
NETWORKED MULTIFUNCTION
MONOCHROME MARKET MARKET COLOR MARKET
----------------- ------------- ------------
<S> <C> <C>
. Low cost networkable . Low cost networkable . Networkable color laser
office laser printers inkjet and laser-based printers
MFPs to high speed
copier-based MFPs
. 1 to 40 pages per . 1 to 40 pages per . 1 to 10 color pages
minute minute per minute
. 600 to 1200 dots . 600 to 1200 dots . 600 to 1200 dots
per inch per inch per inch
. Gray scale support . Multitasking support for . Contone color quality
print, copy, fax and
scan features
. Multiprotocol network . Multiprotocol network . Multiprotocol network
support support support
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 13
Dividend Policy......................................................... 13
Capitalization.......................................................... 14
Dilution................................................................ 15
Selected Financial Data................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
Business................................................................ 25
Management.............................................................. 38
Certain Transactions.................................................... 46
Principal and Selling Stockholders...................................... 48
Description of Capital Stock............................................ 51
Shares Eligible for Future Sale......................................... 53
Underwriting............................................................ 55
Legal Matters........................................................... 56
Experts................................................................. 56
Additional Information.................................................. 57
Index to Financial Statements........................................... F-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,750,000 SHARES
[LOGO OF PEERLESS]
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee, the NASD filing fee and the Nasdaq National
Market application fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 19,333
NASD filing fee................................................. 6,106
Nasdaq National Market application fee.......................... 43,000
Blue sky qualification fee and expenses......................... 15,000
Printing and engraving expenses................................. 110,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 175,000
Transfer agent and registrar fees............................... 10,000
Miscellaneous................................................... 221,561
--------
Total........................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and executive
officers and may indemnify its other officers, employees and other agents to
the fullest extent not prohibited by Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its stockholders. These provisions do not
eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise. In addition, the Indemnity Agreement filed as
Exhibit 10.19 to this Registration Statement provides for indemnification by
Selling Stockholders of the Registrant and its officers and directors for
certain liabilities arising under the Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1993, except as otherwise noted, the Registrant has sold and
issued the following unregistered securities:
(1) In June, July and October 1993, the Registrant issued an aggregate of
1,501,177 shares of Series B Preferred Stock convertible into 1,520,792
shares of Common Stock, and in December 1992 and June, July and October
1993 the Registrant issued warrants to purchase an aggregate of 615,627
shares Common Stock, to a group of accredited investors for cash in the
aggregate amount of $2,055,004 and the cancellation of convertible
promissory notes in the aggregate principal amount of $1,407,950.
(2) In September 1993, the Registrant issued a warrant to purchase 75,268
shares of Series B Preferred Stock, at an exercise price of $2.33 per
share, in connection with the execution and delivery of a Master Lease
Agreement dated as of July 9, 1991, Equipment Schedule #VL-3 and #VL-4, and
related Summary Equipment Schedules.
(3) In November 1993, the Registrant issued a warrant to purchase 26,666
shares of Common Stock, at an exercise price of $1.13 per share, in
connection with bank line of credit transactions.
(4) In June 1994, the Registrant issued a warrant to purchase 13,333
shares of Common Stock, at an exercise price of $2.55 per share, in
connection with bank line of credit transactions.
(5) In December 1994 and January 1995, the Registrant issued an aggregate
of 59,452 shares of Common Stock, pursuant to the Deferred Compensation
Stock Purchase Plan, for $84,729.55.
(6) In February 1995, the Registrant issued a warrant to purchase 4,333
shares of Common Stock, at an exercise price of $2.97 per share, in
connection with equipment lease transactions.
(7) In October 1995, the Registrant issued 7.00% Convertible Debentures
in the aggregate principal amount of $3,070,000 (the "Debentures"). The
Debentures are convertible into 1,169,518 shares of Common Stock at a
conversion price of $2.63 per share.
(8) In December 1995, the Registrant issued an aggregate of 159,535
shares of Common Stock, pursuant to the Employee Stock Purchase Plan, for
an aggregate of $227,352.10.
(9) From inception to July 31, 1996, the Registrant granted incentive
stock options and nonstatutory stock options to employees, directors and
consultants covering an aggregate of 1,877,706 shares of the Registrant's
Common Stock, at a weighted average exercise price of $1.91 per share.
Options to purchase 1,490,957 shares are currently outstanding. Options to
purchase 250,899 shares of Common Stock have been canceled or have lapsed
without being exercised. The Registrant has sold 135,850 shares of its
Common Stock to employees, directors and consultants pursuant to exercise
of stock options. Options to purchase 833,189 shares remained available for
grant.
The sale and issuance of securities in the transactions described in
paragraphs (1) through (4), (6) and (7) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) adopted
thereunder. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to distribution
thereof. Appropriate legends are affixed to the stock certificate issued in
such transactions. All recipients either received adequate information about
the Registrant or had access, through employment or other relationships, to
such information.
The sale and issuance of securities in the transactions described in
paragraphs (5), (8) and (9) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder, in that
they were issued either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of the Registrant.
3.2+ Form of Certificate of Incorporation of the Registrant to be
effective upon the closing of the offering.
3.3+ Bylaws of the Registrant.
Bylaws of the Registrant to be effective upon the closing of the
3.4+ offering.
3.5 Form of Agreement and Plan of Merger.
4.1+ Reference is made to Exhibits 3.1 through 3.4.
5.1* Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1+ Form of Indemnity Agreement.
10.2+ 1992 Stock Option Plan, as amended.
10.3+ 1996 Equity Incentive Plan.
10.4+ Form of Incentive Stock Option.
10.5+ Form of Nonstatutory Stock Option.
10.6+ 1996 Employee Stock Purchase Plan.
10.7+ Third Party Development and License Agreement (the "Adobe Third
Party License") dated September 18, 1992 between the Registrant and
Adobe Systems Incorporated ("Adobe").
Reference Post Appendix #2 to the Adobe Third Party License dated
10.8++ February 11, 1993.
Amendment No. 1 to Adobe Third Party License, dated November 29,
10.9+ 1993.
10.10++ PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Registrant and Adobe.
10.11++ Amendment No. 1 to the PCL License dated October 31, 1993.
10.12++ Letter Modification to the PCL License dated August 5, 1994.
10.13+ Addendum No. 1 to the PCL License dated March 31, 1995.
10.14++ Letter Modification to the PCL License dated August 30, 1995.
10.15(i)+ Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated February
6, 1992.
10.15(ii)+ First Amendment to Office Lease dated December 1, 1995 between the
Company and Continental Development Corporation.
10.16+ Amended and Restated Investor Rights Agreement, dated October 6,
1995.
10.17 Employment Agreement with Lauren Shaw.
10.18 Employment Agreement with Edward Gavaldon.
10.19+ Form of Indemnity Agreement among the Registrant and the Selling
Stockholders.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Cooley Godward Castro Huddleson & Tatum. Reference is
made to Exhibit 5.1.
24.1+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- ---------------------
+ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested as to portions of this document, and such
omitted information has been separately filed with the Securities and Exchange
Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements
or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described in Item 14 or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to
be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of El Segundo,
County of Los Angeles, State of California, on the 10th day of September,
1996.
PEERLESS SYSTEMS CORPORATION
By: /s/ Edward A. Gavaldon
----------------------------------
Edward A. Gavaldon President and
Chief Executive Officer (Principal
Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Edward A. Gavaldon President, Chief
- ------------------------------------- Executive Officer September 10,
Edward A. Gavaldon and Director 1996
(Principal
Executive Officer)
/s/ Hoshi Printer Vice President,
- ------------------------------------- Finance and September 10,
Hoshi Printer Administration, 1996
Chief Financial
Officer and
Secretary
(Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- September 10,
Robert G. Barrett 1996
* Director
- ------------------------------------- September 10,
Robert L. North 1996
* Director
- ------------------------------------- September 10,
Lauren L. Shaw 1996
Director
/s/ Paul D. Levy September 10,
- ------------------------------------- 1996
Paul D. Levy
*By: /s/ Edward A. Gavaldon
------------------------------------
Edward A. Gavaldon
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of the Registrant.
3.2+ Form of Certificate of Incorporation of the Registrant to be
effective upon the closing of the offering.
3.3+ Bylaws of the Registrant.
Bylaws of the Registrant to be effective upon the closing of the
3.4+ offering.
3.5 Form of Agreement and Plan of Merger.
4.1+ Reference is made to Exhibits 3.1 through 3.4.
5.1* Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1+ Form of Indemnity Agreement.
10.2+ 1992 Stock Option Plan, as amended.
10.3+ 1996 Equity Incentive Plan.
10.4+ Form of Incentive Stock Option.
10.5+ Form of Nonstatutory Stock Option.
10.6+ 1996 Employee Stock Purchase Plan.
10.7+ Third Party Development and License Agreement (the "Adobe Third
Party License") dated September 18, 1992 between the Registrant and
Adobe Systems Incorporated ("Adobe").
Reference Post Appendix #2 to the Adobe Third Party License dated
10.8++ February 11, 1993.
Amendment No. 1 to Adobe Third Party License, dated November 29,
10.9+ 1993.
10.10++ PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Registrant and Adobe.
10.11++ Amendment No. 1 to the PCL License dated October 31, 1993.
10.12++ Letter Modification to the PCL License dated August 5, 1994.
10.13+ Addendum No. 1 to the PCL License dated March 31, 1995.
10.14++ Letter Modification to the PCL License dated August 30, 1995.
10.15(i)+ Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated February
6, 1992.
10.15(ii)+ First Amendment to Office Lease dated December 1, 1995 between the
Company and Continental Development Corporation.
10.16+ Amended and Restated Investor Rights Agreement, dated October 6,
1995.
10.17 Employment Agreement with Lauren Shaw.
10.18 Employment Agreement with Edward Gavaldon.
10.19+ Form of Indemnity Agreement among the Company and Selling
Stockholders.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Cooley Godward Castro Huddleson & Tatum. Reference is
made to Exhibit 5.1.
24.1+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested as to portions of this document, and such
omitted information has been separately filed with the Securities and Exchange
Commission.
<PAGE>
EXHIBIT 1.1
PEERLESS SYSTEMS CORPORATION
3,750,000 SHARES/1/
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_________ __, 1996
HAMBRECHT & QUIST LLC
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the Several
Underwriters Named on Schedule I hereto
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Peerless Systems Corporation, a Delaware corporation (herein called the
Company), proposes to issue and sell 2,500,000 shares of its authorized but
unissued Common Stock, $0.001 par value (herein called the Common Stock), and
certain stockholders and warrant holders of the Company named in Schedule II
hereto propose to sell 1,073,125 shares of Common Stock (the "Outstanding
Stock") and warrants (the "Warrants") to purchase on a net exercise basis
176,875 shares of Common Stock (the "Warrant Stock") (said Outstanding Stock and
Warrant Stock being herein called the Underwritten Stock). Certain stockholders
of the Company named in Schedule II hereto (said stockholders, together with the
stockholders and warrant holders named in Schedule II selling the Outstanding
Stock and Warrants, herein collectively called the Selling Securityholders)
propose to grant to the Underwriters (as hereinafter defined) an option to
purchase up to 562,500 additional shares of Common Stock (herein called the
Option Stock and with the Underwritten Stock herein collectively called the
Stock). The Common Stock is more fully described in the Registration Statement
and the Prospectus hereinafter mentioned.
The Company and each of the Selling Securityholders for itself severally
hereby confirm the agreements made with respect to the purchase of the Stock and
the Warrants by the several underwriters, for whom you are acting, named in
Schedule I hereto (herein collectively called the Underwriters, which term shall
also include any underwriter purchasing Stock and Warrants pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by
___________________________
/1/ Plus an option to purchase from the Company and certain of the Selling
Securityholders of up to 562,500 additional shares to cover over-
allotments.
<PAGE>
each of the other Underwriters to enter into this Agreement on its behalf and to
act for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-09357), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act), of the Stock. Copies of such registration statement and of
each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES
(a) The Company hereby represents and warrants as follows:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary
(except where the failure to be so qualified would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company). The execution
and delivery of the Agreement and Plan of Merger, to be dated as of
_______, 1996 (herein called the Merger Agreement) between Peerless Systems
Corporation, a California
-2-
<PAGE>
corporation (herein called the California Corporation), and the Company,
which will effect the reincorporation of the California Corporation under
the laws of the State of Delaware on the Closing Date (as defined in
Section 5(a)), was duly authorized by all necessary corporate action on the
part of each of the California Corporation and the Company. Each of the
California Corporation and the Company has all corporate power and
authority to execute and deliver the Merger Agreement, to file the Merger
Agreement with the Secretary of State of California and the Secretary of
State of Delaware and to consummate the reincorporation contemplated by the
Merger Agreement, and the Merger Agreement at the time of execution and
filing constitute a valid and binding obligation of each of the California
Corporation and the Company, enforceable in accordance with its terms. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity.
(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
any materially adverse change in the business, properties, financial
condition or results of operations of the Company, whether or not arising
from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, the Company has not
entered into any material transaction not referred to in the Registration
Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder. On the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock, are accurate, complete and
fair in all material respects. The Company's outstanding capital stock and
the Warrants have been validly authorized, are fully paid and
nonassessable, were issued in compliance with the registration and
qualification provisions of applicable federal and state securities laws
and were issued free of any preemptive right, right of first refusal or
similar right. The Stock and the Warrants are duly and validly authorized,
are (or, in the case of shares of the Stock to be sold by the Company, will
be, when issued and sold to the Underwriters as provided herein and in the
case of the Warrant Stock, will be, when issued upon the net exercise of
-3-
<PAGE>
the Warrants by the Underwriters as provided herein) duly and validly
issued, fully paid and nonassessable and conform to the descriptions
thereof in the Prospectus. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for
the transfer and sale of the Stock and the Warrants to be sold by the
Selling Securityholders, the issuance of the Warrant Stock upon the net
exercise of the Warrants by the Underwriters as contemplated herein or the
issuance and sale of the Stock by the Company as contemplated herein. No
preemptive right, or right of first refusal in favor of stockholders,
exists with respect to the Stock, or the Warrants, pursuant to the
Certificate of Incorporation or Bylaws of the Company, and there is no
contractual preemptive right, right of first refusal, right of co-sale or
similar right which exists and has not been waived with respect to the
Stock or Warrants being sold by the Selling Securityholders or the issue
and sale of the Stock by the Company.
(v) The Registration Statement has become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement or suspending or preventing the use of the
Prospectus is in effect and, to the Company's knowledge after inquiry, no
proceeding for that purpose has been instituted or is contemplated by the
Commission.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and
delivery by the Representatives, constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms, except as rights
to indemnity or contribution may be limited by federal or state securities
laws and except as enforcement (A) may be limited by the effect of
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
conveyance and other similar laws relating to or affecting the rights of
creditors generally, (B) is subject to general principles of equity and
similar principles, including, without limitation, concepts of materiality,
reasonableness, unconscionability, good faith and fair dealing and the
possible unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (C) is subject to the effect of public policy.
(vii) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement, and
the issue and sale by the Company of the shares of Stock to be sold by the
Company as provided herein will not conflict with, or result in a breach
of, the Certificate of Incorporation or Bylaws of the Company or any
material agreement or instrument to which the Company is a party or any
applicable law or regulation, or any judgment, order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality.
(viii) All holders of securities of the Company having rights to
the registration of shares of Common Stock, or other securities, because of
the filing of the Registration Statement by the Company have waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement.
(ix) The Company has (A) notified each holder of a currently
outstanding option issued under the Company's 1992 Stock Option Plan
(herein called the 1992 Option Plan) and 1996 Equity Incentive Plan (herein
called the 1996 Equity Plan)
-4-
<PAGE>
and each person who has acquired shares of Common Stock pursuant to the
exercise of any option granted under the 1992 Option Plan or 1996 Equity
Plan that, pursuant to the terms of the 1992 Option Plan and 1996 Equity
Plan, none of such options or shares may be sold or otherwise disposed of
for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters; and (B) imposed a stop-transfer
instruction with the Company's transfer agent in order to enforce the
foregoing "lock-up" provisions. Each of the foregoing "lock-up" provisions
shall be in full force and effect on the Closing Date.
(x) No consent, approval, authorization or order of any court
or governmental agency is required for the consummation of the transactions
contemplated herein, except such as have been (or will before the Closing
Date have been) obtained under the Securities Act and such as may be
required under state securities or blue sky laws in connection with the
purchase and distribution of the Stock by the Underwriters.
(xi) The Company has timely filed all necessary federal, state
and foreign income and franchise tax returns and has paid all taxes shown
thereon as due, and there is no tax deficiency that has been or, to the
Company's knowledge, might be asserted against the Company that could have
a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company; and
all tax liabilities are adequately provided for on the books of the
Company.
(xii) To the Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any
of its principal value added resellers, subcontractors, original equipment
manufacturers, authorized dealers or international distributors that might
be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company. No collective bargaining agreement exists with
any of the Company's employees and, to the Company's knowledge, no such
agreement is imminent.
(xiii) The financial statements, including the notes thereto,
and supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
dates indicated and the results of its operations for the periods
specified; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the
supporting schedules included in the Registration Statement present fairly
the information required to be stated therein. Such financial statements
are correct and complete and are in accordance with the books and records
of the Company in all material respects. No other financial statements are
required by Form S-1 or otherwise to be included in the Registration
Statement or Prospectus.
(xiv) The Company has good and marketable title to all the
properties and assets reflected as owned in the financial statements (or
elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge
or encumbrance of any kind except (A) those, if any, reflected in the
financial statements (or elsewhere in the Prospectus), or (B) those which
are not material in amount and do not materially adversely affect the use
made and
-5-
<PAGE>
proposed to be made of such property by the Company. The Company holds its
leased properties under valid and binding leases, with such exceptions as
are not materially significant in relation to the business of the Company.
Except as disclosed in the Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(xv) Neither the Company nor, to the Company's knowledge, any
other party is in violation or breach of, or in default with respect to,
complying with any material provision of any contract, agreement,
instrument, lease, license, arrangement or understanding which is material
to the Company, and each such contract, agreement, instrument, lease,
license, arrangement and understanding is in full force and is the legal,
valid and binding obligation of the Company and, to the Company's
knowledge, the other parties thereto and is enforceable against the
Company, except as enforcement (i) may be limited by the effect of
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
conveyance and other similar laws relating to or affecting the rights of
creditors generally, (ii) is subject to general principles of equity and
similar principles, including, without limitation, concepts of materiality,
reasonableness, unconscionability, good faith and fair dealing and the
possible unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (iii) is subject to the effect of public policy and, to
the Company's knowledge, against the other parties thereto in accordance
with its terms. The Company enjoys peaceful and undisturbed possession
under all leases and licenses under which it is operating. The Company is
not in violation or breach of, or in default with respect to, any term of
its Certificate of Incorporation or Bylaws.
(xvi) To the Company's knowledge, the Company is not infringing
or otherwise violating any patent, copyright, trade secret, trademark,
service mark, trade name, technology, know-how or other proprietary
information or material of others. The Company has not received any notice
of infringement or conflict with (and the Company knows of no conflict or
infringement with) asserted rights of others with respect to any patents,
copyrights, trademarks, service marks, trade names, technology or know-how,
which could have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company.
(xvii) The Company owns or possesses sufficient licenses or
other rights to use all patents, copyrights, trade secrets, trademarks,
service marks, trade names, technology, know-how or other proprietary
information or materials necessary to conduct the business now being
conducted or proposed to be conducted by the Company as described in the
Prospectus.
(xviii) The Company (A) is in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants (herein called
Environmental Laws), (B) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business and (C) is in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with
-6-
<PAGE>
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company.
(xix) There is no legal or governmental proceeding pending or
threatened to which the Company is a party or to which any of the
properties of the Company is subject that is required to be described in
the Registration Statement or the Prospectus and is not so described, nor
is there any statute, regulation, contract or other document that is
required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that is not
described or filed.
(xx) The Company has all necessary consents, authorizations,
approvals, orders, certificates and permits of and from, and has made all
declarations and filings with, all governmental authorities, to own, lease,
license and use its properties and assets and to conduct its business in
the manner described in the Prospectus, except to the extent that the
failure to obtain or file such would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(xxi) The Common Stock has been approved for listing on the
Nasdaq National Market, subject to official notice of issuance.
(xxii) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the
offering and sale of the Stock other than the Preliminary Prospectus, the
Prospectus, the Registration Statement and the other materials permitted by
the Securities Act.
(xxiii) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not
limited to, insurance covering real and personal property owned or leased
by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is in
full force and effect. The Company has not been refused any insurance
coverage sought or applied for; and the Company has no reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not materially and adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(xxiv) The Company has not at any time during the last five (5)
years in any jurisdiction (A) made any unlawful contribution to any
candidate for office, or failed to disclose fully any contribution in
violation of law, or (B) made any payment to any governmental officer or
official, or other person charged with similar public or quasi-public
duties other than payments required or permitted by the laws of the United
States.
(xxv) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of
the officers or directors of the Company or any of the members of the
families of any of them required to be disclosed in the
-7-
<PAGE>
Registration Statement and Prospectus, except as disclosed in the
Registration Statement and the Prospectus.
(xxvi) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba.
(xxvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions
are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (C) access
to its assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to differences.
(xxviii) The accountants, Coopers & Lybrand LLP, who have
certified or shall certify the financial statements included in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants with respect to the Company
within the meaning of the Securities Act.
(xxix) The Company is not now, and upon the Closing Date, and
after application of the net proceeds from the offering as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(b) Each of the Selling Securityholders, severally and not jointly,
hereby represents and warrants as follows:
(i) Such Selling Securityholder has good and marketable title to
all the shares of Stock and Warrants to be sold by such Selling
Securityholder hereunder, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever, with full right and
authority to deliver the same hereunder, subject, in the case of each
Selling Securityholder other than Lauren L. Shaw, Barbara B. Renshaw,
Lauren L. Shaw and Barbara B. Renshaw and Renshaw/Shaw Charitable Remainder
Trust (the "Shaw/Renshaw Group"), to the rights of Norwest Shareholder
Services, as Custodian (herein called the Custodian), and that upon the
delivery of and payment for such shares of the Stock and Warrants
hereunder, the several Underwriters will receive good and marketable title
thereto, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever.
(ii) With the exception of the Shaw/Renshaw Group, certificates
in negotiable form for the shares of the Stock and Warrants to be sold by
such Selling Securityholder have been placed in custody under a Custody
Agreement for delivery under this Agreement with the Custodian; such
Selling Securityholder specifically agrees that the shares of the Stock and
Warrants represented by the certificates so held in custody for such
Selling Securityholder are, as therein provided, subject to the interests
of the several Underwriters and the Company, that the arrangements made by
such Selling Securityholder for such custody, including the Power of
Attorney provided for in such Custody Agreement, are to that extent
irrevocable, and that the obligations of such Selling
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Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of Stock and Warrants hereunder,
certificates for such shares of Stock and Warrants shall be delivered by
the Custodian in accordance with the terms and conditions of this Agreement
as if such death, incapacity, dissolution, liquidation or other event had
not occurred, regardless of whether the Custodian shall have received
notice of such death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that:
(x) on the Effective Date, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and (y) on the Effective Date the Prospectus contained and,
on the Closing Date and any later date on which Option Stock is to be
purchased, contains any untrue statement of a material fact or omitted or
omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(iv) All information furnished in writing by or on behalf of
such Selling Securityholder for use in the Registration Statement and
Prospectus is, and on the Closing Date will be, true, correct, and complete
in all material respects, and does not, and on the Closing Date will not,
contain any untrue statement of a material fact or omit to state any
material fact necessary to make such information not misleading.
(v) Such Selling Securityholder has no reason to believe that
any representation or warranty of the Company set forth in Section 2(a)
above is untrue or inaccurate in any material respect.
(vi) The sale of the Stock and Warrants by such Selling
Securityholder pursuant hereto is not prompted by any material adverse
information concerning the Company which is not set forth in the
Registration Statement and Prospectus.
(vii) The execution and delivery by such Selling Securityholder
of, and the performance by such Selling Securityholder of its obligations
under, this Agreement, the Custody Agreement signed by or on behalf of such
Selling Securityholder and the Custodian (with the exception of the
Shaw/Renshaw Group), relating to the deposit of the Stock and the Warrants
to be sold by such Selling Securityholder (herein called the Custody
Agreement) and the power of attorney appointing certain individuals as such
Selling Securityholder's attorneys-in-fact to the extent set forth therein
(with the exception of the Shaw/Renshaw Group), relating to the
transactions contemplated hereby and by the Registration Statement (herein
called the Power of Attorney) will not contravene any provision of
applicable law binding upon such Selling Securityholder, or the certificate
or articles of incorporation or by-laws of such Selling Securityholder (if
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such Selling Securityholder is a corporation), or any agreement or other
instrument binding upon such Selling Securityholder or any judgment, order
or decree of any governmental body, agency or court having jurisdiction
over such Selling Securityholder, and no consent, approval, authorization
or order of or qualification with any court or governmental body or agency
is required for the performance by such Selling Securityholder of its
obligations under this Agreement, the Custody Agreement or the Power of
Attorney of such Selling Securityholder, except such as may be required
under the Securities Act or by the securities or blue sky laws of various
states in connection with the offer and sale of the Stock by the
Underwriters.
(viii) Such Selling Securityholder has, and on the Closing Date
will have, the legal right and power, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement (with
the exception of the Shaw/Renshaw Group) and the Power of Attorney (with
the exception of the Shaw/Renshaw Group) and to sell, transfer and deliver
in the manner provided in this Agreement the shares of Stock and Warrants
to be sold by such Selling Securityholder.
(ix) Each of this Agreement, the Custody Agreement (with the
exception of the Shaw/Renshaw Group) and the Power of Attorney (with the
exception of the Shaw/Renshaw Group) has been duly authorized, executed and
delivered by or on behalf of such Selling Securityholder and, assuming due
authorization, execution and delivery by the other parties thereto,
constitutes a valid and binding obligation of such Selling Securityholder
enforceable in accordance with its terms, except as rights to indemnity or
contribution may be limited by federal or state securities laws and except
as enforcement (i) may be limited by the effect of bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other
similar laws relating to or affecting the rights of creditors generally,
(ii) is subject to general principles of equity and similar principles,
including, without limitation, concepts of materiality, reasonableness,
unconscionability, good faith and fair dealing and the possible
unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (iii) is subject to the effect of public policy.
(c) Each member of Shaw/Renshaw Group, severally and not jointly,
hereby represent, warrant and covenant that certificates in negotiable form for
the shares of Stock and Warrants to be sold by each member of the Shaw/Renshaw
Group hereunder shall be delivered to Norwest Shareholder Services, as the
Company's transfer agent, together with stock powers with signatures guaranteed
by an eligible guarantor under a medallion signature guarantee program,
authorizing transfer of such Stock and Warrants into such names as the
Underwriters shall instruct against payment for such Stock and Warrants on the
terms set forth herein. Each member of the Shaw/Renshaw Group agrees that the
shares of the Stock and Warrants represented by the certificates to be provided
to the Underwriters hereunder are subject to the interests of the several
Underwriters and the Company, that the obligations of such Selling
Securityholder hereunder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by death or incapacity of such
Selling Securityholder (or, in the case of a Selling Securityholder that is not
an individual, the dissolution or liquidation of such Selling Securityholder) or
the occurrence of any other event, if any such death, incapacity, dissolution,
liquidation or other such event should occur before the delivery of such Stock
and Warrants
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hereunder, certificates for such Stock and Warrants shall be delivered by a
representative of the Selling Securityholder in accordance with the terms of
this Agreement as if such death, incapacity, dissolution, liquidation or other
event had not occurred.
3. PURCHASE OF THE STOCK AND WARRANTS BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell 2,500,000 shares of the Underwritten Stock to the
several Underwriters, each Selling Securityholder agrees to sell to the several
Underwriters the number of shares of the Outstanding Stock and the number of
Warrants that are net exercisable into the number of shares of Warrant Stock set
forth in Schedule II opposite the name of such Selling Securityholder, and each
of the Underwriters agrees to purchase from the Company and the Selling
Securityholders the respective aggregate number of shares of Outstanding Stock
and the number of Warrants that are net exercisable into the number of shares of
Warrant Stock collectively set forth opposite its name in Schedule I. The price
at which each share of Outstanding Stock shall be sold by the Company and the
Selling Securityholders and purchased by the several Underwriters shall be $___
per share. The price at which each Warrant shall be sold by the Selling
Securityholders and purchased by the Underwriters shall be $___ per share of
Common Stock which may be acquired on a net exercise basis of such Warrant on
the date hereof, using a fair market value per share of Common Stock for the
calculation of such net exercise of $____ per share. Each of the Underwriters
hereby agrees to exercise each Warrant at the Closing Date (as hereinafter
defined) in accordance with the terms of the Warrant on a net exercise basis and
the Company shall thereupon immediately issue to such Underwriters such number
of shares as are issuable pursuant to the net exercise of the Warrant, subject
in each case to such allocation adjustments as the Underwriters in their
discretion shall make to eliminate any sales or purchases of fractional shares.
The obligation of each Underwriter to the Company and each of the Selling
Securityholders shall be to purchase from the Company and the Selling
Securityholders that number of shares of Outstanding Stock and Warrants which
represents the same proportion of the total number of shares of the Outstanding
Stock and Warrants, respectively, to be sold by each of the Company and the
Selling Securityholders pursuant to this Agreement as the number of shares of
Underwritten Stock set forth opposite the name of such Underwriter in Schedule I
hereto represents of the total number of shares of Underwritten Stock to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Outstanding Stock and Warrants specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock and Warrants agreed to be purchased by
such Underwriter or Underwriters, the Company or the Selling Securityholders
shall immediately give notice thereof to you, and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by you of
such notice to purchase, or procure one or more other Underwriters to purchase,
in such proportions as may be agreed upon between you and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, all or any part
of the shares of the Stock and Warrants which such defaulting
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<PAGE>
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail to make such arrangements with respect to all such shares and
portion, the number of shares of the Stock and Warrants which each non-
defaulting Underwriter is otherwise obligated to purchase under this Agreement
shall be automatically increased on a pro rata basis to absorb the remaining
shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase; provided, however, that the non-defaulting Underwriters shall not be
obligated to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock and Warrants exceeds 10% of the total number of shares of the Stock and
Warrants which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock and Warrants which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company and the Selling Securityholders
shall have the right, within 24 hours next succeeding the 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
reasonably satisfactory to you for purchase of such shares and portion on the
terms herein set forth. In any such case, either you or the Company and the
Selling Securityholders shall have the right to postpone the Closing Date
determined as provided in Section 5 hereof for not more than seven business days
after the date originally fixed as the Closing Date pursuant to said Section 5
in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company and the Selling Securityholders
shall make arrangements within the 24-hour periods stated above for the purchase
of all the shares of the Stock and Warrants which the defaulting Underwriter or
Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
or the Selling Securityholders to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Selling Securityholders grant an option to the several Underwriters to purchase,
severally and not jointly, up to the number of shares of Option Stock set forth
opposite the name of each Selling Securityholder in Schedule II at the same
price per share as the Underwriters shall pay for the Outstanding Stock. Said
options may be exercised only to cover over-allotments in the sale of the
Underwritten Stock by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the thirtieth day after the
date of this Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of shares of the Option Stock as to which the
several Underwriters are exercising the option. Delivery of certificates for the
shares of Option Stock, and payment therefor, shall be made as provided in
Section 5 hereof. The number of shares of the Option Stock to be purchased by
each Underwriter shall be the same percentage of the total number of shares of
the Option Stock to be purchased by the several Underwriters as such Underwriter
is purchasing of the Underwritten Stock, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In the event that the
Underwriters purchase less than the total number of shares of Option Stock
available to be purchased, the number of shares of Option Stock to be sold by
the Selling Securityholders shall be a pro rata percentage of the total number
of shares of Option Stock each would sell if the
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Underwriters purchased the total number of shares of Option Stock available to
be purchased, adjusted by the Underwriters in such a manner as they deem
advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page and under the caption "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in the Registration Statement, any Preliminary Prospectus, and the Prospectus,
and you on behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK AND WARRANTS
(a) Delivery of certificates for the shares of the Underwritten Stock
and Warrants and the shares of Option Stock (if the option granted by Section
3(c) hereof shall have been exercised not later than 7:00 A.M., San Francisco
time, on the date two business days preceding the Closing Date), and payment
therefor, shall be made at the office of Cooley, Godward, Castro, Huddleson &
Tatum, Five Palo Alto Square, Palo Alto, California 94306, at 7:00 a.m., San
Francisco time, on the [FOURTH] business day after the date of this Agreement,
or at such time on such other day, not later than seven full business days after
such [FOURTH] business day, as shall be agreed upon in writing by the Company,
the Selling Securityholders and you. The date and hour of such delivery and
payment (which may be postponed as provided in Section 3(b) hereof) are herein
called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Cooley, Godward, Castro,
Huddleson & Tatum, Five Palo Alto Square, Palo Alto, California 94306, at 7:00
a.m., San Francisco time, on the third business day after the exercise of such
option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order; with the exception of the Shaw/Renshaw Group, payment
for the Stock and Warrants purchased from the Selling Securityholders shall be
made to the Custodian, for the account of the Selling Securityholders; and with
respect to the Shaw/Renshaw Group, payment for the Stock and Warrants purchased
from them shall be made to the individual members of the Shaw/Renshaw Group; in
each case by one or more certified or official bank check or checks in next day
funds (and the Company and the Selling Securityholders agree not to deposit any
such check in the bank on which drawn until the day following the date of its
delivery to the Company, the Custodian or the Shaw/Renshaw Group, as the case
may be). Such payment shall be made upon delivery of certificates for the Stock
and Warrants to you for the respective accounts of the several Underwriters
against receipt therefor signed by you. Certificates for the
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Stock and Warrants to be delivered to you shall be registered in such name or
names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS. The
Company and, with respect to Sections 6(i), (j), (k) and (m) hereof, the Selling
Securityholders, severally and not jointly, covenant and agree as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the
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Underwriters as many additional copies of the Prospectus and as many copies of
any supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as you may reasonably request for the purposes
contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of three years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally
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available to its security holders an earnings statement in accordance with
Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company and the Selling Securityholders jointly and severally
agree to pay all costs and expenses incident to the performance of its
obligations under this Agreement, including all costs and expenses incident to
(i) the preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. of the Registration Statement, any
Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The Selling
Securityholders will pay any transfer taxes incident to the transfer to the
Underwriters of the shares of Stock and Warrants being sold by the Selling
Securityholders.
(j) The Company and the Selling Securityholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for blue
sky fees and related disbursements (including reasonable counsel fees and
disbursements and cost of printing memoranda for the Underwriters) paid by or
for the account of the Underwriters or their counsel in qualifying the Stock
under state securities or blue sky laws and in the review of the offering by the
NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the Effective Date, directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in, make
any short sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock. The foregoing sentence shall not apply to (A)
the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares
of Common Stock issued pursuant to currently outstanding warrants, shares of
Common Stock issued by the Company upon the exercise of options that are
currently outstanding under the option plans of the Company (the "Option
Plans"), as described in footnote (3) to the table under the caption
"Capitalization" in the Prospectus, and (C) options to purchase Common Stock
granted under the Option Plans and shares of Common Stock issuable under the
Company's 1996 Employee Stock Purchase Plan, provided that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters, any
stock issuable upon the exercise of such additional options under the Option
Plans and such additional stock issuable under the 1996 Purchase Plan shall not
be saleable during such 180-day period.
(m) The Selling Securityholders agree that, without the prior written
consent of Hambrecht & Quist LLC acting alone or of each of the Representatives
acting jointly, the Selling
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Securityholders will not, for a period of 180 days following the Effective Date,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock, whether any
such transaction is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to the
Stock and Warrants to be sold to the Underwriters pursuant to this Agreement.
(n) At any time during the 180-day period after the Registration
Statement becomes effective, the Company will use its best efforts to enforce
the "lock-up" agreements and provisions against any person who is subject to (A)
any of the "lock-up" agreements between you and all of the Company's executive
officers and directors and at least ___% of the Company's stockholders, warrant
holders, debenture holders and optionees whose options will vest, in whole or in
part, prior to [180 days following the Effective Date], 1997, delivered to you
before the date hereof, or (B) the "lock-up" provisions imposed in connection
with the 1992 Option Plan and 1996 Equity Plan, including but not limited to
instructing its transfer agent to refuse to make a transfer of such shares prior
to the expiration of such 180-day period.
(o) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(p) For the six (6) fiscal quarters of the Company ending after the
date of this Agreement, prior to filing its quarterly statements on Form 10-Q
with respect to such fiscal quarter, the Company will have its independent
auditors perform a limited quarterly review of its quarterly numbers.
7. INDEMNIFICATION AND CONTRIBUTION
(a) (i) Subject to the provisions of paragraph (f) of this Section 7,
the Company and the Selling Securityholders severally and not jointly agree to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders severally and not
jointly agree to reimburse each such Underwriter and controlling person for any
reasonable legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration
-17-
<PAGE>
statement), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a)(i) shall not
apply to any such losses, claims, damages, liabilities or expenses if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a)(i) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Stock which is the subject
thereof (or to the benefit of any person controlling such Underwriter) if at or
prior to the written confirmation of the sale of such Stock a copy of the
Prospectus (or the Prospectus as amended or supplemented) was not sent or
delivered to such person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph (c) of Section 6 hereof.
(ii) The indemnity agreements of the Company and the Selling
Securityholders contained in paragraph (a)(i) of this Section 7 and the
representations and warranties of the Company and the Selling Securityholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock and Warrants.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter, each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the
-18-
<PAGE>
statements therein not misleading or (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of such indemnifying Underwriter for use in the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto. The indemnity agreement of each Underwriter contained in
this paragraph (b) shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the Stock and Warrants.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in
-19-
<PAGE>
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear the
reasonable legal and other expenses of one counsel for the indemnified parties
incurred in connection with the conduct of the defense as referred to in clause
(i) of the proviso to the preceding sentence and (B) the indemnifying party or
parties shall bear such other expenses as it or they have authorized to be
incurred by the indemnified party or parties. If, within a reasonable time after
receipt of the Notice, no Notice of Defense has been given, the indemnifying
party or parties shall be responsible for any reasonable legal or other expenses
incurred by the indemnified party or parties in connection with the defense of
the action, suit, investigation, inquiry or proceeding, provided that it shall
only be responsible for the legal fees and expenses of one counsel.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a)(i) of this Section 7 or under paragraph (b) of this Section 7,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in paragraph
(a)(i) of this Section 7 or in paragraph (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Stock and sale of the Warrants received by
the Company and the Selling Securityholders and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Stock. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
-20-
<PAGE>
Each party entitled to contribution agrees that upon the service of
a summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders, without the
prior written consent of each Underwriter, will settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under the indemnity,
contribution and reimbursement agreements contained in the provisions of this
Section 7 and of Section 11 hereof and under the representations and warranties
contained in Sections 2(b)(iii) and (v) hereof shall be limited to an amount
equal to the respective proceeds received by each such Selling Securityholder
from the sale to the Underwriters of the Stock in the initial public offering.
In addition, no Selling Securityholder shall be liable under the indemnity and
reimbursement agreements of Sections 7 and 11 hereof unless and until the
Underwriters have made written demand on the Company for payment under such
Sections which shall not have been paid by the Company within 60 days after
receipt of such demand. The Company and the Selling Securityholders may agree,
as among themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for which they
each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company and the Selling
Securityholders if after the date of this Agreement trading in the Common Stock
shall have been suspended, or if there shall have occurred (i) the engagement in
hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, (ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, calamity, crisis or change in economic or political conditions
in the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or
-21-
<PAGE>
(vi) the taking of any action by any federal, state or local government or
agency in respect of its monetary or fiscal affairs which in the Underwriters'
reasonable opinion has a material adverse effect on the securities markets in
the United States. If this Agreement shall be terminated pursuant to this
Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock and Warrants shall be
subject to the performance by the Company of all its obligations to be performed
hereunder at or prior to the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock and the
Warrants hereunder and the validity and form of the certificates representing
the Stock and Warrants, all corporate proceedings and other legal matters
incident to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein), shall have
been approved at or prior to the Closing Date by Fenwick & West LLP, counsel for
the Underwriters.
(c) You shall have received from Cooley Godward Castro Huddleson &
Tatum, counsel for the Company, Blakely, Sokoloff, Taylor & Zafman, patent
counsel for the Company, and counsel for each of the Selling Securityholders who
are not individual persons, opinions, addressed to the Underwriters and dated
the Closing Date, covering the matters set forth in Annex A, Annex B and Annex C
hereto, respectively, and if Option Stock is purchased at any date after the
Closing Date, additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements expressed
as of the Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct in all material respects and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not misleading,
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, the Company
-22-
<PAGE>
has not entered into any material transaction not referred to in the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein, (iv) the Company does not have any material
contingent obligations which are not disclosed in the Registration Statement and
the Prospectus, (v) there are not any pending or known threatened legal
proceedings to which the Company is a party or of which property of the Company
is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus, (vi) there are not any franchises,
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required, and (vii)
the representations and warranties of the Company herein are true and correct in
all material respects as of the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Coopers & Lybrand LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(i) Prior to the Closing Date, you shall have received from all of the
Company's executive officers and directors and at least __% of the Company's
stockholders, warrant holders, debenture holders and optionees whose options
will vest, in whole or in part,
-23-
<PAGE>
prior to [180 days following the Effective Date], 1997, "lock-up" agreements, in
form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the
prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
such person or entity will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters, directly
or indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock. The foregoing sentence
shall not apply to the Stock and Warrants to be sold by the Selling
Securityholders to the Underwriters pursuant to this Agreement.
(j) Prior to the Closing Date, the Company shall have furnished to the
Underwriters such further information, certificates and documents as the
Underwriters may reasonably request.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Fenwick & West LLP, counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all reasonable out-of-
pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock and the Warrants shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders agree to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the
-24-
<PAGE>
Selling Securityholders under this Agreement, including all costs and expenses
referred to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations
under Section 7 of this Agreement (and subject, in the case of a Selling
Securityholder, to the provisions of paragraph (f) of Section 7, including the
penultimate sentence thereof), the Company and the Selling Securityholders
hereby severally and not jointly agree to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 7 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them with
interest thereon at the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by the
Bank of America NT & SA, San Francisco, California and (ii) such persons shall
provide to the Company, upon request, reasonable assurances of their ability to
effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104, Attn.: Bruce Crocker (with a copy to the
General Counsel); and if to the Company or the Selling Securityholders, shall be
mailed, telegraphed or delivered to the Company or the Selling Securityholders
at the Company's office, 2381 Rosecrans Avenue, El Segundo, California 90245,
Attn: Edward A. Gavaldon (with a copy to Gregory C. Smith, Esq. at Cooley
Godward Castro Huddleson & Tatum). All notices given by telegraph shall be
promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock and Warrants under this
Agreement; provided, however, that if this Agreement is terminated prior to the
Closing Date, the provisions of paragraphs (l) and (m) of Section 6 hereof shall
be of no further force or effect.
-25-
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-26-
<PAGE>
Please sign and return to the Company and the Selling Securityholders the
enclosed duplicates of this letter, whereupon this letter will become a binding
agreement among the Company, the Selling Securityholders and the several
Underwriters in accordance with its terms.
Very truly yours,
PEERLESS SYSTEMS CORPORATION
By: ___________________________________
[Name]
[Title]
SELLING SECURITYHOLDERS:
_______________________________________
[Name], Attorney-in-Fact
_______________________________________
Lauren L. Shaw
_______________________________________
Barbara B. Renshaw
_______________________________________
Renshaw/Shaw Charitable Remainder Trust
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON L.L.C.
By Hambrecht & Quist LLC
By: _____________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
-27-
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES NET
SHARES OF EXERCISABLE
OUTSTANDING PURSUANT TO
STOCK TO BE WARRANTS
UNDERWRITERS PURCHASED PURCHASED
- ----------------------------- ----------- -----------
<S> <C> <C>
Hambrecht & Quist LLC........
Prudential Securities
Incorporated...............
Wessels, Arnold & Henderson
L.L.C......................
__________ __________
Total........................ 1,073,125 176,875
========== ==========
</TABLE>
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
UNDERWRITTEN STOCK
------------------------------------------------------------------
NUMBER OF
NUMBER OF SHARES NET NUMBER OF
SHARES OF EXERCISABLE SHARES OF
NAME OF SELLING SECURITYHOLDER OUTSTANDING PURSUANT TO OPTION
- ------------------------------ STOCK TO BE SOLD WARRANTS SOLD STOCK TO BE SOLD
---------------- ------------- ----------------
<S> <C> <C> <C>
Lauren L. Shaw 65,000 -- --
Barbara B. Renshaw 91,667 -- --
Lauren L. Shaw and Barbara B. Renshaw 27,572 90,703 --
Lauren L. Shaw 1996 Trust -- -- 15,743
Barbara B. Renshaw 1996 Trust -- -- 15,743
Renshaw/Shaw Charitable Remainder Trust 599,766 -- 27,810
Morgan Keegan Merchant Banking Fund, L.P. 38,095 -- 38,095
Morgan Keegan Merchant Banking Fund II, L.P. 114,286 -- 114,286
Stephen R. Butterfield 37,883 -- 38,117
David R. Fournier -- -- 6,086
Thomas B. Ruffolo 5,203 -- --
Reginald Cardin 1,836 -- --
Steven K. Nelson 23,010 -- 7,667
Robert F. Hossley 19,801 -- --
William Bailey 16,548 -- 2,333
Comdisco, Inc. -- 58,257 58,256
Silicon Valley Bank -- 17,333 17,332
William S. Wood 10,666 -- 10,666
Bayview Investors 20,187 7,322 --
Larry Feldman 969 -- --
Cary Kimmel 636 -- --
First Portland Corporation -- 3,260 --
Edward Gavaldon -- -- 21,560
_________ _______ _______
Total 1,073,125 176,875 373,694
========= ======= =======
</TABLE>
<PAGE>
ANNEX A
-------
MATTERS TO BE COVERED IN THE OPINION OF COOLEY GODWARD CASTRO HUDDLESON & TATUM
COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good standing
in all jurisdictions in which the character of the property owned or leased or
the nature of the business transacted by it makes qualification necessary
(except where the failure to be so qualified would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company), and has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus;
(ii) the execution and delivery of the Agreement and Plan of Merger dated
as of _________, 1996 (herein called the Merger Agreement) between Peerless
Systems Corporation, a California corporation (herein called the California
Corporation), and the Company, which effected the reincorporation of the
California Corporation under the laws of the State of Delaware on __________,
1996, was duly authorized by all necessary corporate action on the part of each
of the California Corporation and the Company. Each of the California
Corporation and the Company had all corporate power and authority to execute and
deliver the Merger Agreement, to file the Merger Agreement with the Secretary of
State of California and the Secretary of State of Delaware and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger Agreement
at the time of execution and filing constituted a valid and binding obligation
of each of the California Corporation and the Company, enforceable in accordance
with its terms;
(iii) the authorized capital stock of the Company consists of 5,000,000
shares of Preferred Stock, of which there are no shares outstanding, and
30,000,000 shares of Common Stock, $.001 par value, of which there are
outstanding _______ shares (including the Underwritten Stock plus the number of
shares of Option Stock issued on the date hereof); proper corporate proceedings
have been taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Underwritten Stock and
the shares of Option Stock issued, if any) and the Warrants have been duly and
validly issued and are fully paid and nonassessable; any Option Stock purchased
after the Closing Date, when issued and delivered to and paid for by the
Underwriters as provided in the Underwriting Agreement, will have been duly and
validly issued and will be fully paid and nonassessable; and no preemptive
rights of, or rights of refusal in favor of, stockholders exist with respect to
the Stock or Warrants, or the issue and sale thereof, pursuant to the
Certificate of Incorporation or Bylaws of the Company and, to the knowledge of
such counsel, there are no contractual preemptive rights that have not been
waived, rights of first refusal or rights of co-sale which exist with respect to
the issue and sale of the Stock or Warrants;
(iv) the Registration Statement has become effective under the Securities
Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
<PAGE>
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1, to the knowledge of such counsel, accurately and adequately
set forth therein in all material respects or no response is required with
respect to such Items, and the description of the Company's stock option plans
and the options granted and which may be granted thereunder set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to said plans and options to the extent required by the Securities
Act and the rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Company has full corporate power and corporate authority to
enter into the Underwriting Agreement, and the Underwriting Agreement has been
duly authorized, executed and delivered by the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its terms;
(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Company or any agreement or instrument known to such counsel to which the
Company is a party or any applicable law or regulation, or so far as is known to
such counsel, any order, writ, injunction or decree, of any jurisdiction, court
or governmental instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters;
(xii) the Company is not now, and upon the Closing Date, and after
application of the net proceeds from the offering as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
2
<PAGE>
(xiii) the Stock has been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance;
(xiv) the Company is, to such counsel's knowledge, not in violation of
its Certificate of Incorporation or Bylaws, or, to such counsel's knowledge, not
in default (nor has an event occurred which with notice or lapse of time or both
would constitute a default or acceleration) in the performance of any
obligation, agreement or condition contained in any material agreement or
instrument to which the Company is a party or by which any of its properties is
bound or affected where such violation or default might have a material adverse
effect on the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(xv) the Custody Agreement between each Selling Securityholder who is an
individual (an "Individual Selling Securityholder") and Norwest Shareholder
Services, as Custodian, and the Power of Attorney referred to in such Custody
Agreement, have been duly executed and delivered by or on behalf of each of the
Individual Selling Securityholders [other than Lauren L. Shaw and Barbara B.
Renshaw], and the Custody Agreement and the Power of Attorney constitute valid
and binding agreements of each such Individual Selling Securityholder in
accordance with their terms;
(xvi) the Underwriting Agreement has been duly executed and delivered by
or on behalf of each of the Individual Selling Securityholders, and constitutes
a valid and binding agreement of each of the Individual Selling Securityholders,
enforceable in accordance with its terms;
(xvii) to such counsel's knowledge, no consent, approval, authorization or
order of any court or governmental agency or body is required for the
consummation of the transactions contemplated by the Underwriting Agreement in
connection with the Stock or the Warrants to be sold by such Selling
Securityholder thereunder, except such as have been obtained under the
Securities Act and such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters;
(xviii) each Individual Selling Securityholder has full legal right and
authority to enter into the Underwriting Agreement and to sell, transfer and
deliver in the manner provided in the Underwriting Agreement the shares of Stock
or the Warrants sold by such Individual Selling Shareholder thereunder; and
(xix) upon delivery of and payment for the Stock or the Warrants sold by
each Individual Selling Securityholder as contemplated in the Underwriting
Agreement, the Underwriters will be the owners of such Stock or the Warrants
free and clear of any adverse claim, lien, encumbrance, equity or security
interest, assuming the Underwriters have purchased such Stock or the Warrants in
good faith and without notice of adverse claims.
In the course of the preparation of the Registration Statement and the
Prospectus, such counsel has participated in discussions and conferences with
officers of the Company and with representatives of its independent public
accountants as well as with the Underwriters and their counsel during which
successive drafts of the Registration Statement and the Prospectus were
reviewed, and such counsel has also reviewed and discussed with various of such
persons
3
<PAGE>
materials submitted for use in the Registration Statement, the Prospectus and
certain other data and information furnished in support of the statements made
therein. While such counsel has not independently verified the accuracy,
completeness or fairness of the Registration Statement or the Prospectus, such
counsel advises the underwriters that nothing has come to such counsel's
attention which would lead such counsel to believe that the Registration
Statement as of its effective date contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus,
as of its date and as of the date hereof, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (except, in each case, for the financial statements, schedules and
other financial and statistical information derived therefrom, as to which such
counsel expresses no view).
4
<PAGE>
ANNEX B
-------
MATTERS TO BE COVERED IN THE OPINION OF BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN
PATENT COUNSEL FOR THE COMPANY
Such counsel is familiar with the technology used by the Company in its
business and the manner of its use thereof, to the extent such technology is
generally related to patent applications prepared and filed by such counsel, and
has read the Registration Statement and the Prospectus, including particularly
the portions of the Registration Statement and the Prospectus referring to
patents, trademarks, service marks or other proprietary information or materials
and:
(i) such counsel has no reason to believe that the Registration Statement
or the Prospectus (A) contains any untrue statement of a material fact with
respect to patents, trademarks, service marks or other proprietary information
or materials owned or used by the Company, or the manner of its use thereof, or
any allegation on the part of any person that the Company is infringing any
patent rights, trademarks, service marks or other proprietary information or
materials of any such person or (B) omits to state any material fact relating to
patents, trademarks, service marks or other proprietary information or materials
owned or used by the Company, or the manner of its use thereof, or any
allegation of which such counsel has knowledge, that is necessary to make the
statements therein not misleading;
(ii) to the best of such counsel's knowledge, there are no legal or
governmental proceedings pending relating to patent rights, trademarks, service
marks or other proprietary information or materials of the Company, and to the
best of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or others;
(iii) such counsel does not know of any contracts or other documents,
relating to governmental regulation affecting the Company or the Company's
patents, trademarks, service marks or other proprietary information or
materials, of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus that are not filed or described as required;
(iv) to the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, trademarks, service marks or
other proprietary information or materials, of others, and to the best of such
counsel's knowledge, there are no infringements by others of any of the
Company's patents, trademarks, service marks or other proprietary information or
materials which in the judgment of such counsel could affect materially the use
thereof by the Company; and
(v) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents, trademarks,
service marks or other proprietary information or materials necessary to conduct
the business now being or proposed to be conducted by the Company as described
in the Prospectus.
<PAGE>
ANNEX C
-------
MATTERS TO BE COVERED IN THE OPINION OF
COUNSEL FOR THE NON-INDIVIDUAL SELLING SECURITYHOLDERS
(i) the Custody Agreement between each Selling Securityholder and
Norwest Shareholder Services as Custodian, and the Power of Attorney referred to
in such Custody Agreement have been duly executed and delivered by each of the
Selling Securityholders, and the Custody Agreement and the Power of Attorney
constitute valid and binding agreements of such Selling Securityholder in
accordance with their terms;
(ii) the Underwriting Agreement has been duly executed and delivered by
or on behalf of each of the Selling Securityholders, and constitutes a valid and
binding agreement of each of the Selling Securityholders, enforceable in
accordance with its terms, and the sale of the Stock and the Warrants to be sold
by such Selling Securityholder hereunder and the compliance by such Selling
Securityholder with all of the provisions of the Underwriting Agreement, the
Power of Attorney and the Custody Agreement and the consummation of the
transactions therein contemplated will not conflict with or result in a breach
or violation of any terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which such Selling Securityholder is a
party or by which such Selling Securityholder is bound or to which any of the
property or assets of such Selling Securityholder is subject, nor will such
action result in any violation of the provisions of the articles or certificate
of incorporation or bylaws of such Selling Securityholder if such Selling
Securityholder is a corporation, the Partnership Agreement of such Selling
Securityholder if such Selling Securityholder is a partnership or any order,
rule or regulation known to such counsel of any court or governmental agency or
body having jurisdiction over such Selling Securityholder or the property of
such Selling Securityholder;
(iii) To such counsel's knowledge, no consent, approval, authorization or
order of any court or governmental agency or body is required for the
consummation of the transactions contemplated by the Underwriting Agreement in
connection with the Stock and Warrants to be sold by such Selling Securityholder
thereunder, except such as have been obtained under the Securities Act and such
as may be required under state securities or blue sky laws in connection with
the purchase and distribution of the Stock by the Underwriters;
(iv) each Selling Securityholder has full legal right and authority to
enter into the Underwriting Agreement and to sell, transfer and deliver in the
manner provided in the Underwriting Agreement the shares of Stock and Warrants
sold by such Selling Securityholder hereunder; and
(v) upon delivery of and payment for the Stock and Warrants sold by each
Individual Selling Securityholder as contemplated in the Underwriting Agreement,
the Underwriters will be the owners of such Stock and Warrants free and clear of
any adverse claim, lien, encumbrance, equity or security interest, assuming the
Underwriters have purchased such Stock and Warrants in good faith and without
notice of adverse claims.
<PAGE>
EXHIBIT 3.5
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (hereinafter referred to as the "Merger
Agreement") is made as of September [ ], 1996, by and between Peerless Systems
Corporation, a California corporation ("Peerless California"), and Peerless
Systems Corporation (Delaware), a Delaware corporation ("Peerless Delaware").
Peerless California and Peerless Delaware are sometimes referred to as the
"Constituent Corporations."
RECITALS:
WHEREAS, Peerless California has filed a registration statement with the
Securities and Exchange Commission on Form S-1 (the "Registration Statement")
that provides for the initial public offering (the "Initial Public Offering") of
shares of Common Stock;
WHEREAS, the Registration Statement provides that Peerless California will
be reincorporated in Delaware by virtue of the merger of Peerless California
into Peerless Delaware upon the closing of the Initial Public Offering;
WHEREAS, the Articles of Incorporation of Peerless California provide that
all of the shares of Series A Preferred Stock and Series B Preferred Stock
(collectively, the "Preferred Stock") of Peerless California will be converted
into shares of common stock ("Common Stock") of Peerless California upon the
closing of an Initial Public Offering of Peerless California;
WHEREAS, the Board of Directors of Peerless California, in accordance with
the Registration Statement, desires to provide for the conversion of the shares
of Preferred Stock into an appropriate number of shares of Common Stock of
Peerless Delaware as a result of the reincorporation of Peerless California into
Peerless Delaware upon the closing of the Initial Public Offering; and
WHEREAS, the Boards of Directors of the Constituent Corporations deem it
advisable and to the advantage of said corporations that Peerless California
merge into Peerless Delaware upon the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the promises and mutual agreements
contained in this Merger Agreement, the parties do hereby adopt the plan of
reorganization encompassed by this Merger Agreement and do hereby agree that
Peerless California shall merge into Peerless Delaware on the following terms,
conditions and other provisions:
1.
<PAGE>
ARTICLE I
The Merger
----------
1.1 Merger. Peerless California shall be merged with and into Peerless
Delaware (the "Merger"), and Peerless Delaware shall be the surviving
corporation (the "Surviving Corporation"), effective on the closing of the
Initial Public Offering on September [ ], 1996 (the "Effective Date").
1.2 Name Change. On the Effective Date, the name of Peerless Delaware
shall be Peerless Systems Corporation.
1.3 Succession. On the Effective Date, Peerless Delaware shall continue
its corporate existence under the laws of the State of Delaware, and the
separate existence and corporate organization of Peerless California, except
insofar as it may be continued by operation of law, shall be terminated and
cease.
1.4 Transfer of Assets and Liabilities. On the Effective Date, the
rights, privileges, powers and franchises, both of a public as well as of a
private nature, of each of the Constituent Corporations shall be vested in and
possessed by the Surviving Corporation, subject to all of the disabilities,
duties and restrictions of or upon each of the Constituent Corporations; and all
and singular rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, of each of
the Constituent Corporations, and all debts due to each of the Constituent
Corporations on whatever account, and all things in action or belonging to each
of the Constituent Corporations shall be transferred to and vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest, including the Subsidiaries of the
Constituent Corporations, shall be thereafter the property of the Surviving
Corporation as they were of the Constituent Corporations, and the title to any
real estate vested by deed or otherwise in either of the Constituent
Corporations shall not revert or be in any way impaired by reason of the Merger;
provided, however, that the liabilities of the Constituent Corporations and of
their shareholders, directors and officers shall not be affected and all rights
of creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and any claim existing or action or
proceeding pending by or against either of the Constituent Corporations may be
prosecuted to judgment as if the Merger had not taken place except as they may
be modified with the consent of such creditors and all debts, liabilities and
duties of or upon each of the Constituent Corporations shall attach to the
Surviving Corporation, and may be enforced against it to the same extent as if
such debts, liabilities and duties had been incurred or contracted by it.
1.5 Additional Actions. If, at any time after the Effective Date, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Peerless California acquired or to be acquired by the
Surviving
2.
<PAGE>
Corporation as a result of, or in connection with, the Merger or to otherwise
carry out this Merger Agreement, the officers and directors of the Surviving
Corporation shall, and will be authorized to execute and deliver, in the name
and on behalf of Peerless California, or otherwise, all such deeds, bills of
sale, assignments and assurances and to take and do, in the name and on behalf
of Peerless California, or otherwise, all such other actions and things as may
be necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the Surviving
Corporation or to otherwise carry out this Merger Agreement.
ARTICLE II
Capital Stock of Constituent Corporations
-----------------------------------------
2.1 Common Stock of Peerless California and Peerless Delaware. On the
Effective Date, by virtue of the Merger and without any further action on the
part of the Constituent Corporations or their shareholders, (i) each share of
Common Stock of Peerless California issued and outstanding immediately prior
thereto shall be changed and converted into one (1) fully paid and nonassessable
share of the Common Stock of Peerless Delaware and (ii) each share of Common
Stock of Peerless Delaware issued and outstanding immediately prior thereto
shall be canceled and returned to the status of authorized but unissued shares.
2.2 Series A Preferred Stock of Peerless California. On the Effective
Date, by virtue of the Merger and without any further action on the part of the
Constituent Corporations or their shareholders, each share of Series A Preferred
Stock of Peerless California issued and outstanding immediately prior thereto
shall be changed and converted into 1.013514 fully paid and nonassessable shares
of Common Stock of Peerless Delaware, subject to Section 2.4 below.
2.3 Series B Preferred Stock of Peerless California. On the Effective Date
, by virtue of the Merger and without any further action on the part of the
Constituent Corporations or their shareholders, each share of Series B Preferred
Stock of Peerless California issued and outstanding immediately prior thereto
shall be changed and converted into 1.013072 fully paid and nonassessable shares
of Common Stock of Peerless Delaware, subject to Section 2.4 below.
2.4 No Fractional Shares. No fractional shares of Peerless Delaware Common
Stock shall be issued in connection with the Merger, and no certificates for any
such fractional shares shall be issued. In lieu of such fractional shares, any
holder of Peerless California Preferred Stock who would otherwise be entitled to
receive a fraction of a share of Peerless Delaware Common Stock (after
aggregating all fractional shares of Peerless Delaware Common Stock issuable to
such holder) shall, upon surrender of such holder's Peerless California Stock
Certificate(s), be entitled to receive the dollar amount equal to such fraction
of a share of Peerless Delaware Common Stock multiplied by the public offering
price of the Peerless Delaware Common Stock in the Initial Public Offering.
2.5 Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of the
Common Stock or Preferred Stock
3.
<PAGE>
of Peerless California shall be deemed for all purposes to evidence ownership of
and to represent the shares of Peerless Delaware Common Stock into which the
shares of Peerless California represented by such certificates have been
converted as herein provided, plus the right to receive cash in lieu of
fractional shares, and shall be so registered on the books and records of the
Surviving Corporation or its transfer agents. The registered owner of any such
outstanding stock certificate shall, until such certificate shall have been
surrendered for transfer or conversion or otherwise accounted for to the
Surviving Corporation or its transfer agent, have and be entitled to exercise
any voting and other rights with respect to and to receive any dividend and
other distributions upon the shares of Peerless Delaware evidenced by such
outstanding certificate as above provided.
2.6 Options. On the Effective Date, the Surviving Corporation will assume
and continue all of Peerless California's stock option plans in existence on the
Effective Date, including but not limited to the 1992 Stock Option Plan, the
1996 Stock Option Plan (including the automatic grants of stock options to non-
employee directors as set forth in the July 25, 1996 meeting minutes of the
board of directors of Peerless California), and the Employee Stock Purchase
Plan, and the outstanding and unexercised portions of all options to purchase
Common Stock of Peerless California, including without limitation all options
outstanding under such stock option plans and any other outstanding options,
shall become options to purchase the same number of shares of Common Stock of
Peerless Delaware, with no other changes in the terms and conditions of such
options, and shall cease to be options to purchase shares of Peerless California
Common Stock. Effective on the Effective Date, Peerless Delaware hereby assumes
the outstanding and unexercised portions of such options and the obligations of
Peerless California with respect thereto.
2.7 Warrants. On the Effective Date, all rights to Peerless California
Common Stock and Preferred Stock under each warrant to purchase Peerless
California Common Stock or Preferred Stock (each, a "Warrant") then outstanding
shall be converted into and become rights with respect to Peerless Delaware
Common Stock, and Peerless Delaware shall assume each such Warrant. From and
after the Effective Date: (i) each Warrant assumed by Peerless Delaware may be
exercised solely for shares of Peerless Delaware Common Stock; (ii) the number
of shares of Peerless Common Stock issuable pursuant to each Warrant shall be
equal to the number of shares of Peerless Delaware Common Stock into which the
Peerless California Common Stock or Preferred Stock, as the case may be, would
have been converted pursuant to Section 2.1, 2.2 or 2.3, as the case may be, had
the Company Warrant been exercised immediately prior to the Effective Date, in
each case rounding all share numbers down to the nearest whole share (with cash
at fair market value, less the applicable exercise price, being payable for any
fraction of a share); (iii) the per share exercise price under each such Warrant
shall be adjusted in such manner as shall keep the product of the number of
shares each such Warrant is exercisable for multiplied by such exercise price
unchanged; and (d) any restriction on the exercise of any Warrant and all other
terms of such Warrant shall continue in full force and effect.
2.8 Debentures. On the Effective Date, all rights to Peerless California
Common Stock under each convertible debenture to purchase Peerless California
Common Stock (each, a "Debenture") then outstanding shall be converted into and
become rights with respect to
4.
<PAGE>
Peerless Delaware Common Stock, and Peerless Delaware shall assume each such
Debenture. From and after the Effective Date: (i) each Debenture assumed by
Peerless Delaware may be converted solely for shares of Peerless Delaware Common
Stock; (ii) the number of shares of Peerless Common Stock issuable pursuant to
each Debenture shall be equal to the number of shares of Peerless Delaware
Common Stock into which the Peerless California Common Stock, as the case may
be, would have been converted pursuant to Section 2.1, 2.2 or 2.3, as the case
may be, had the Company Debenture been exercised immediately prior to the
Effective Date, in each case rounding all share numbers down to the nearest
whole share (with cash at fair market value, less the applicable exercise price,
being payable for any fraction of a share); (iii) the per share conversion price
under each such Debenture shall be adjusted in such manner as shall keep the
product of the number of shares each such Debenture is convertible for
multiplied by such conversion price unchanged; and (d) any restriction on the
conversion of any Debenture and all other terms of such Debenture shall continue
in full force and effect.
2.9 Employee Benefit Plans. On the Effective Date, the Surviving
Corporation shall assume all obligations of Peerless California under any and
all employee benefit plans in effect as of such date with respect to which
employee rights or accrued benefits are outstanding as of such date.
2.10 Exchange Procedures. As soon as practicable after the Effective Date,
Peerless Delaware shall request that each holder of record of a Peerless
California stock certificate which immediately prior to the Effective Date
represented outstanding shares of Peerless California Common Stock or Preferred
Stock (the "Certificates"), whose shares of Peerless California Common Stock
and/or Preferred Stock converted into Peerless Delaware Common Stock pursuant to
the terms hereof and the Merger Agreement, surrender its Certificates in
exchange for certificates representing Peerless Delaware Common Stock. Upon
surrender of the Certificates, the holder thereof shall be entitled to receive
in exchange therefor a certificate representing the number of shares of Peerless
Delaware Common Stock to which the holder of Peerless California Common Stock
and/or Preferred Stock is entitled pursuant to the terms hereof and are
represented by the Certificates so surrendered. The Certificates so surrendered
shall forthwith be canceled. Until surrendered as contemplated by this Section,
each Certificate shall be deemed at any time after the Effective Date to
represent the right to receive upon such surrender the number of shares of
Peerless Delaware Common Stock as provided by this Section and the provisions of
the Delaware Corporation Law.
2.11 No Further Ownership Rights in Peerless California Common Stock. All
shares of Peerless Delaware Common Stock delivered upon the surrender for
exchange of shares of Peerless California Common Stock in accordance with the
terms hereof shall be deemed to have been delivered in full satisfaction of all
rights pertaining to such shares of Peerless California Common Stock.
2.12 Dissenting Shares. Notwithstanding anything to the contrary contained
in this Merger Agreement, any shares of Peerless California Common Stock or
Preferred Stock that are outstanding immediately prior to the Effective Date
that were not voted in favor of the Merger and are held by shareholders who have
complied with the applicable provisions of Chapter 13 of the California
Corporations Code ("Dissenting Shares") shall not be converted into or represent
the right to receive Peerless Delaware Common Stock in accordance with Sections
2.1, 2.2 and 2.3, as the case may be, and each holder of Dissenting Shares shall
be entitled only to
5.
<PAGE>
such rights as may be granted to such holder in Chapter 13 of the California
Corporations Code. From and after the Effective Date, a holder of Dissenting
Shares shall not have and shall not be entitled to exercise any of the voting
rights or other rights of a shareholder of the Surviving Corporation. If any
holder of Dissenting Shares shall fail to perfect or shall waive, rescind,
withdraw or otherwise lose such holder's right of appraisal under Chapter 13 of
the California Corporations Code, then such shares shall automatically be
converted into and shall represent only the right to receive (upon the surrender
of the certificate or certificates representing such shares) Peerless Delaware
Common Stock and cash in lieu of fractions shares in accordance with Sections
2.1, 2.2, 2.3 and 2.4, as the case may be.
ARTICLE III
Corporate Governance Matters
----------------------------
3.1 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation and Bylaws of Peerless Delaware in effect on the Effective Date
shall continue to be the Certificate of Incorporation and Bylaws of the
Surviving Corporation except that on the date of effectiveness of the Merger,
Article I of the Certificate of Incorporation shall be amended to read in its
entirety "The name of the corporation is Peerless Systems Corporation."
3.2 Directors. The directors of Peerless California immediately preceding
the Effective Date shall become the directors of the Surviving Corporation on
and after the Effective Date to serve until the expiration of their terms and
until their successors are elected and qualified. The committees of the Board of
Directors and members thereof of Peerless California immediately preceding the
Effective Date shall become the committees of the Board of Directors and members
thereof of the Surviving Corporation on and after the Effective Date.
3.3 Officers. The officers of Peerless California immediately preceding
the Effective Date shall become the officers of the Surviving Corporation on and
after the Effective Date to serve at the pleasure of its Board of Directors.
ARTICLE IV
Miscellaneous
-------------
4.1 Amendment. At any time before or after approval by the shareholders of
Peerless California, this Merger Agreement may be amended in any manner (except
that, after the approval of the Merger Agreement by the shareholders of Peerless
California, the principal terms may not be amended without the further approval
of the shareholders of Peerless California) as may be determined in the judgment
of the respective Board of Directors of Peerless Delaware and Peerless
California to be necessary, desirable, or expedient in order to clarify the
intention of the parties hereto or to effect or facilitate the purpose and
intent of this Merger Agreement.
4.2 Conditions to Merger. The obligation of the Constituent Corporations
to effect the transactions contemplated hereby is subject to satisfaction of the
following conditions (any
6.
<PAGE>
or all of which may be waived by either of the Constituent Corporations in its
sole discretion to the extent permitted by law):
(a) the Merger shall have been approved by the shareholders of
Peerless California in accordance with applicable provisions of the General
Corporation Law of the State of California; and
(b) Peerless California, as sole stockholder of Peerless Delaware,
shall have approved the Merger in accordance with the General Corporation Law of
the State of Delaware;
(c) any and all consents, permits, authorizations, approvals, and
orders deemed in the sole discretion of Peerless California to be material to
consummation of the Merger shall have been obtained; and
(d) the closing of the Initial Public Offering.
4.3 Abandonment or Deferral. At any time before the Effective Date, this
Merger Agreement may be terminated and the Merger may be abandoned by the Board
of Directors of either Peerless California or Peerless Delaware or both,
notwithstanding the approval of this Merger Agreement by the shareholders of
Peerless California or Peerless Delaware, or the consummation of the Merger may
be deferred for a reasonable period of time if, in the opinion of the Boards of
Directors of Peerless California and Peerless Delaware, such action would be in
the best interest of such corporations. In the event of termination of this
Merger Agreement, this Merger Agreement shall become void and of no effect and
there shall be no liability on the part of either Constituent Corporation or its
Board of Directors or shareholders with respect thereto, except that Peerless
California shall pay all expenses incurred in connection with the Merger or in
respect of this Merger Agreement or relating thereto.
4.4 Counterparts. In order to facilitate the filing and recording of this
Merger Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original.
4.5 Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto, and supersedes any prior written or oral agreements between
them concerning the subject matter contained herein.
4.6 Governing Law. This Agreement shall be governed in all respects,
including validity, interpretation and effect by the laws of the State of
Delaware.
7.
<PAGE>
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by the Board of Directors of Peerless California and Peerless Delaware, is
hereby executed on behalf of each said corporation and attested by their
respective officers thereunto duly authorized.
PEERLESS SYSTEMS CORPORATION,
a California Corporation
By:
--------------------------------------
Edward A. Gavaldon
President and Chief Executive Officer
ATTEST:
- ----------------------------------
Hoshi Printer
Vice President, Administration and
Finance, Chief Financial Officer
and Secretary
PEERLESS SYSTEMS CORPORATION (DELAWARE),
a Delaware Corporation
By:
--------------------------------------
Edward A. Gavaldon
President and Chief Executive Officer
ATTEST:
- ---------------------------------
Hoshi Printer
Vice President, Administration and
Finance, Chief Financial Officer and
Secretary
8.
<PAGE>
EXHIBIT 10.7
ADOBE CONFIDENTIAL
THIRD PARTY DEVELOPMENT AND
LICENSE AGREEMENT
Dated as of September 18, 1992
------------
BETWEEN
PEERLESS SYSTEMS CORP.
AND
ADOBE SYSTEMS INCORPORATED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
RECITALS 1
1. DEFINITIONS 1
1.1 Adobe-Designed Hardware 1
1.2 Adobe OEM License Agreement 1
1.3 Adobe Screening Test Suite 1
1.4 Adobe Software 1
1.5 Adobe Support Information 1
1.6 Adobe Trademarks 2
1.7 Confidentiality Agreement 2
1.8 Development Site 2
1.9 Documentation 2
1.10 Documentation Addendum 2
1.11 End User 2
1.12 First Commercial Shipment 2
1.13 Font Programs 2
1.14 Licensed System 2
1.15 OEM Customer 3
1.16 OEM Customer Hardware Product 3
1.17 Other Adobe Software 3
1.18 Peerless Development Agreement 3
1.19 Peerless Modifications 3
1.20 PPD File 3
1.21 Reference Port 3
1.22 Revised Adobe Software 4
1.23 Typeface 4
1.24 Update 4
2. LICENSE GRANTS 4
2.1 License to Use Reference Port Support Source and
Adobe Support Information 4
2.2 Limitations on License to Peerless 4
2.3 No Other Rights 5
2.4 License Grant to Adobe to Use Peerless Support
Modifications and PPD Files 5
2.5 Similar Products 5
3. DEVELOPMENT, DELIVERY. AND TESTING 5
3.1 Adobe Deliverables and Reference Systems 5
3.2 Peerless Development 6
3.3 Adobe Training 6
3.4 Peerless Deliverables 6
3.5 Technical Coordinators 7
3.6 Testing 7
4. PROPRIETARY RIGHTS; CONFIDENTIALITY 7
4.1 Ownership 7
4.2 Confidentiality; Security 7
4.3 Peerless Confidential Information 7
5. LICENSE TO USE TRADEMARKS 7
6. PAYMENTS 7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
6.1 Source License Fees 7
6.2 Royalty Payments 8
6.3 Reference Port Update Fees 8
6.4 Per Copy License Fees for Use of Third Party Software 8
6.5 Taxes 8
7. PERFORMANCE WARRANTY 8
7.1 Reference Port Warranties 8
7.2 Update Warranties 9
7.3 Other Adobe Software Warranties 9
7.4 Limitations on Warranties 9
7.5 Peerless Warranty 9
8. PROPRIETARY RIGHTS INDEMNITY 10
8.1 By Adobe 10
8.2 By Peerless 10
9. TERM AND CANCELLATION 10
9.1 Term 10
9.2 Cancellation by Adobe for Cause 10
9.3 Cancellation by Peerless for Cause 11
9.4 Bankruptcy 11
9.5 Obligations on Cancellation, Termination, or Expiration 11
10. LIMITATION OF LIABILITY 11
10.1 Adobe 11
10.2 Peerless 11
11. GENERAL 12
11.1 Governing Law 12
11.2 Attorneys' Fees 12
11.3 Forum 12
11.4 Notices 12
11.5 Injunctive Relief 12
11.6 No Agency 12
11.7 Force Majeure 12
11.8 Waiver 13
11.9 Severability 13
11.10 Headings 13
11.11 No Patent License 13
11.12 Assignment 13
11.13 Export 13
11.14 Full Power 13
11.15 Confidential Agreement 14
11.16 Counterparts 14
11.17 Entire Agreement 14
</TABLE>
<PAGE>
EXHIBITS
--------
<TABLE>
<CAPTION>
Description Exhibit Paragraph References
- ----------- ------- ------------------------------
<S> <C> <C>
Description of Adobe Software A 1.4, 1.4.1, 1.9
Adobe Trademarks B 1.6
Confidentiality Agreements C 1.7, Exhibit K, Exhibit L
Development Site D 1.8, Exhibit L
Restricted OEM Customers E 1.15.1, 22.5
Training and Support F 1.24, 3.2, 3.3, 6.3, 7.1, 7.2,
7.3, 7.5
Sample Format for Reference Port Appendix G 3.1.1
Test Procedures H 3.4.1, 3.4.2, 3.4.3, 3.6,
Exhibit F, Exhibit K
Adobe Deliverables I 3.1.1, 6.4
Minimum Terms of Peerless Development J 3.2
Agreement
Secure Procedures for Handling Adobe K 4.2, Exhibit L
Confidential Information
Additional Secure Procedures for Handling L 4.2, Exhibit K
Adobe Restricted Information
Royalty Payments M 6.2, Exhibit E
Additional Provisions Regarding Use of N 5
Trademarks
</TABLE>
<PAGE>
THIRD PARTY DEVELOPMENT AND
LICENSE AGREEMENT
THIS AGREEMENT is between ADOBE SYSTEMS INCORPORATED, a California
corporation having its principal place of business at 1585 Charleston Road, PO
Box 7900, Mountain View, California 94039-7900 ("Adobe"), and PEERLESS SYSTEMS
CORP., a California corporation having its principal place of business at 2629
Manhattan Beach Blvd., Redondo Beach, California 90278 ("Peerless"). This
Agreement is effective as of September 18, 1992 (the "Effective Date").
RECITALS:
A. Adobe owns certain computer programs which are useful in controlling raster
devices including, but not limited to, CRT displays, dot-matrix printers, and
laser printers, known collectively as the PostScript software.
B. Peerless provides printing and imaging technologies and products that enhance
the development, output and performance of printer products. Peerless currently
licenses the Peerless Page Imaging Operating System, a platform upon which
Peerless provides industry-standard language (including the PostScript language)
and networking product.
C. Adobe and Peerless desire that Peerless provide certain porting and support
services to Adobe's OEM Customers and that Adobe license portions of the
PostScript software (in source code form as defined below) to Peerless so that
Peerless may provide such porting and support services.
AGREEMENT:
1. DEFINITIONS. Capitalized terms shall have the meaning set forth below.
-----------
1.1 "Adobe-Designed Hardware" means the specific device including, but not
-------------------------
limited to, a controller, which executes or operates with the Revised Object, if
such device is based on a design which Adobe provides to an OEM Customer
pursuant to a Licensed System appendix.
1.2 "Adobe OEM License Agreement" means an agreement pursuant to which
-----------------------------
Adobe licenses to an OEM Customer the right to use and distribute the object
code version of the PostScript software.
1.3 "Adobe Screening Test Suite" means the test programs, procedures and
----------------------------
accompanying documentation developed by Adobe, and subject to change by Adobe in
its sole discretion, to be used by Peerless to test implementations of Licensed
Systems and Revised Object for conformity to the Documentation.
1.4 "Adobe Software" means (a) the unmodified computer programs, both in
----------------
source and object code form, and compilations thereof, as described in item (1)
of Exhibit A (Description of
---------
<PAGE>
Adobe Software) provided by Adobe to Peerless and (b) any changes to the Adobe
Software which Adobe may supply to Peerless.
1.4.1 "Adobe Source" means the source code of the Adobe Software and
------------
any corresponding source documentation described in item (2) of Exhibit A
---------
(Description of Adobe Software).
1.4.2 "Adobe Object" means all of the object code of the
------------
Adobe Software.
1.5 "Adobe Support Information" means any (a) Adobe Software, Font
---------------------------
Programs, design packages for Adobe-Designed Hardware. Documentation, Adobe
Screening Test Suite and other documentation and computer recorded data related
to any of the above, and (b) Other Adobe Software, which Adobe may supply to
Peerless; provided, that the Adobe Support Information shall not include any
Peerless Modifications made pursuant to the licenses granted herein.
1.6 "Adobe Trademarks" means (a) the trademarks, stylistic marks and
------------------
distinctive logotypes set forth in Exhibit B (Adobe Trademarks) and (b) other
---------
marks and logotypes as Adobe may from time to time designate during the course
of this Agreement.
1.7 "Confidentiality Agreement" means individually and collectively the
---------------------------
agreements in writing. substantially in the form attached as Exhibit C-1
-----------
(Employee Nondisclosure Agreement), Exhibit C-2 (Contractor Agreement) and
-----------
Exhibit C-3 (Notice Regarding Confidentiality).
- -----------
1.8 "Development Site" means a site specified in Exhibit D (Development
------------------ ---------
Site) at which Peerless may use the Adobe Support Information and Adobe
Software.
1.9 "Documentation" means the documentation described in item (3) of
-------------
Exhibit A (Description of Adobe Software).
- ------- -
1.10 "Documentation Addendum" means a supplement to the Documentation for
------------------------
each Licensed System to be written by Peerless from the republisher information
provided by Adobe, with technical content approved by Adobe, that describes the
features specific to a Licensed System and the means of accessing those features
via the Postscript language.
1.11 "End User" means a third party using a Licensed System for its
----------
ordinary and customary business or personal purposes, but not for redistribution
or resale.
1.12 "First Commercial Shipment" as to each Licensed System appendix means
---------------------------
(a) an OEM Customer's first internal use of a Licensed System described in a
Licensed System appendix other than for development or testing, or (b) shipment
of such Licensed System to a third party, whichever occurs first.
1.13 "Font Programs" means the digitally encoded, machine readable outline
---------------
programs and screen fonts, if any, for the Typefaces identified as Initial
Installation Font Programs, Additional Font Programs (if any) and Other Font
Programs (if any) encoded in a special format. "Font Programs" does not include
any font programs which Adobe is not entitled to license to Adobe's OEM
Customers.
<PAGE>
1.13.1 "Initial Installation Font Programs" means the Font
----------------------------------
Programs for Typefaces specified as Initial Installation Font Programs in a
Reference Port appendix or Licensed System appendix, and bundled as a part of a
Licensed System.
1.13.2 "Additional Font Programs" means the Font Programs
------------------------
for any Typefaces specified as Additional Font Programs in a Reference Port
appendix or Licensed System appendix, and bundled as a part of a Licensed
System.
1.13.3 "Other Font Programs" means the Font Programs (which
-------------------
may include, but are not limited to, Font Programs for Japanese Typefaces) for
Roman or non-Roman Typefaces which are specified in a Reference Port appendix or
Licensed System appendix, and bundled as a part of a Licensed System, or other
Font Program that Adobe may make available from time to time.
1.14 "Licensed System" means the collective term for a final product
------------------
composed of Revised Object, Other Adobe Software (if any), Adobe-Designed
Hardware (if any), the OEM Customer Hardware Product(s) and any Font Programs
bundled as a single commercial product and described in a Licensed System
appendix.
1.14.1 "Licensed System appendix" means any Licensed System
-------------------------
appendix to an Adobe OEM License Agreement.
1.15 "OEM Customer" means a party to whom Adobe has licensed the right to
--------------
use and distribute the object code version of the Postscript software in
accordance with the terms and conditions of an Adobe OEM License Agreement.
1.15.1 "Restricted OEM Customer" means an OEM Customer listed on
Exhibit E (Restricted OEM Customers). Adobe may in its sole discretion, add,
- ---------
delete or otherwise change this list upon thirty (30) days prior written notice
to Peerless, provided that (i) Adobe may not add the name of a company that
Peerless "introduces" (as defined below) to Adobe prior to the execution of an
Adobe OEM License Agreement between Adobe and such company and (ii) the
designation of an OEM Customer as "Restricted" after the date of this Agreement
shall only apply to Licensed Systems of such OEM Customer developed after the
date of the addition of such OEM Customer to the list. For purposes of this
Paragraph 1.15.1, the term, "introduces," means to refer in writing
- ----------------
individuals authorized to negotiate an Adobe OEM License Agreement.
1.16 "OEM Customer Hardware Product" means a device consisting of a marking
-------------------------------
engine or other output device and OEM Customer-supplied controller or Postscript
language interpretation device (if any) manufactured by or for OEM Customer and
distributed by OEM Customer, which executes or operates with the Revised Object
and which is described in a particular Licensed System appendix.
1.17 "Other Adobe Software" means (a) the software both in source and/or
----------------------
object code form, and associated documentation, identified in a Reference Port
appendix, other than the Adobe Software, which Adobe provides to Peerless for
use only in conjunction with the Adobe Software as part of a Licensed System,
and (b) any changes to the Other Adobe Software which may be supplied by Adobe
to Peerless.
<PAGE>
1.18 "Peerless Development Agreement" means a Development Agreement entered
--------------------------------
into between Peerless and an OEM Customer regarding the development of Revised
Object by Peerless for the benefit of the OEM Customer.
1.19 "Peerless Modifications" means all modifications or additions made by
------------------------
Peerless to the Adobe Source in creating Revised Adobe Software pursuant to this
Agreement.
1.20 "PPD File" means a human readable, machine parseable, Postscript
----------
printer description file containing device-specific information as to how to
invoke the features of a particular Licensed System, as described in the
Postscript Printer Description File Specification (which specification is
available from Adobe and subject to change by Adobe, in its sole discretion,
from time to time).
1.21 "Reference Port" means a release of the Adobe Software, consisting of
----------------
source code and object code modules as defined in a Reference Port appendix.
ported to a controller platform and printer engine specified by Adobe, from
which Peerless develops Revised Object. A "Reference Port" refers to the
Reference Port Support Source and the object code version thereof, the
Unmodified Core and any Update to a Reference Port described in Exhibit F
---------
(Training and Support), which is provided to Peerless pursuant to this
Agreement.
1.21.1 "Reference Port Support Source" means those portions
-----------------------------
of the source code version of the Reference Port, supplied to Peerless on
agreed-upon media, as more specifically described in a Reference Port appendix
with the character "S" designating Adobe Source or some other form of
designation, which may be modified to adapt the Reference Port for use as part
of Licensed Systems.
1.21.2 "Unmodified Core" means those portions of the
---------------
Reference Port, as more specifically described in a Reference Port appendix with
the character "C" designating Unmodified Core or some other form of designation,
supplied to Peerless on agreed-upon media in binary object or linkable object
code form only, as determined by Adobe.
1.21.3 "Reference Port appendix" means any Reference Port
-----------------------
appendix added to this Agreement in a form similar to Exhibit G (Sample Format
---------
for Reference Port Appendix) hereto, pursuant to which Peerless is permitted to
use Reference Port Support Source to create Revised Object for use with a
Licensed System described in a Licensed System appendix.
1.21.4 "Reference System" means a compiled Reference Port,
------------------
together with the controller and printer engine that the Reference Port
supports, which is Identified in a Reference Port appendix.
1.22 "Revised Adobe Software" means collectively, the Revised Support
------------------------
Software and Unmodified Core which is intended to be implemented for use as part
of a Licensed System. All versions of the Revised Adobe Software shall be deemed
to be derivative works based upon the Adobe Software and shall be subject to all
provisions of this Agreement applicable to the Adobe Software.
1.22.1 "Revised Support Software" means the versions of any
------- ------- --------
portions of Reference Port Support Source that are modified, adapted or
translated by Peerless. "Revised Support Source" means the human readable source
code version of the Revised Support
<PAGE>
Software. "Revised Support Object" means the machine readable object code
version of the Revised Support Software.
1.22.2 "Revised Object" means the machine readable object
------- ------
code version of the Revised Adobe Software.
1.23 "Typeface" means a human readable set of character stylings, including
----------
letters of the alphabet, upper and/or lower case, the numerals 0-9 and
additional special characters and punctuation marks as may be offered by Adobe
in conjunction with such letters and numerals of one typeface design and
identified in a Reference Port appendix or Licensed System appendix. Each weight
or version of a single typeface design (such as Roman or Italic or in an
expanded or condensed form) marketed by Adobe as a separate typeface will be
considered a separate Typeface.
1.24 "Update" means update versions of a Reference Port, in source code
--------
form for Reference Port Support Source and in object code for Unmodified Core,
which include all changes, alterations, corrections and enhancements to such
Reference Port which Adobe makes generally available to Adobe Source licensees
receiving Adobe Support (as defined in Exhibit F (Training and Support)) for
---------
that particular Reference Port.
2. LICENSE GRANTS.
--------------
2.1 License to Use Reference Port Support Source and Adobe Support
--------------------------------------------------------------
Information. Subject to Peerless' compliance with the terms of this Agreement,
- ------------
Adobe hereby grants to Peerless a non-exclusive, non-transferable license to use
each version of the Reference Port Support Source and Adobe Support Information
solely at the Development Site for the sole purpose of designing, developing,
adapting, testing and maintaining Revised Support Software which is (a)
implemented as part of present or future Licensed Systems set forth in Licensed
System appendices and (b) is in conformance with the specifications set forth in
the Documentation.
2.2 Limitations on License to Peerless.
-----------------------------------
2.2.1 No Right to Sublicense. Peerless shall have no right
----------------------
to sublicense any rights under this Agreement to a third party, including any
rights to use Adobe Source. In addition, Peerless shall have no right to grant a
license to use or to grant any distribution rights to Revised Adobe Software or
Revised Object.
2.2.2 Changes to the Adobe Software. (a) In view of the
-----------------------------
desire of Peerless and Adobe to establish and maintain an industry standard
PostScript interpreter, Peerless shall not make, without the express written
permission of Adobe, any changes or add-ons to, enhancements in, or deletions
from, the Adobe Software (including Reference Port Support Source), if such
changes or enhancements would in any way (i) change the PostScript language
imaging model, syntax" semantics, or functionality of the Postscript language,
or (ii) change or disable use of Adobe's Type 1 font rendering code. Peerless
agrees not to distribute to third parties any version of the Revised Object
containing any symbol table information with respect to external variables or
procedure entry points.
2.2.3 Peerless Modifications. Peerless shall own the
----------------------
copyrights and patents in all of the Peerless Modifications, provided that any
Revised Object containing Peerless
<PAGE>
Modifications shall be subject to the terms and conditions of this Agreement.
Peerless grants to Adobe a license to authorize its OEM Customers to use and
distribute Peerless Modifications embodied in Revised Object.
2.2.4 No Other Font Rendering Code. Peerless agrees that
-----------------------------
the PostScript component of the Revised Object will contain font rendering
rasterizers that only Adobe may provide, and at a minimum the Revised Object
will contain the Initial Installation Font Programs, as specified in a Licensed
System appendix.
2.2.5 Marketing Coordination. In the event Peerless intends
----------------------
to engage in business discussions with a Restricted OEM Customer with respect to
Adobe Postscript software products, Peerless will advise Adobe that it plans to
engage in such discussions, and Peerless and Adobe will work together to
coordinate their sales efforts to such OEM Customer including joint sales calls.
2.3 No Other Rights. Peerless specifically acknowledges that, other than as
----------------
expressly set forth in Paragraph 2.1 (License to Use Reference Port Support
Source and Adobe Support Information) above, no rights to the Reference Port
Support Source versions are granted to it. Peerless agrees that It will not
attempt to reverse engineer the Font Programs or any portions of the Unmodified
Core or any portion of the Adobe Support Information provided to Peerless solely
in object code form during the term of this Agreement or thereafter.
2.4 License Grant to Adobe to Use Peerless Support Modifications and PPD
--------------------------------------------------------------------
Files.
------
2.4.1 License to Revised Support Source. Peerless shall
---------------------------------
make best efforts to provide to Adobe those portions of the Revised Support
Source which have been modified by Peerless to correct errors found in the
Reference Port Support Source supplied to Peerless by Adobe hereunder. Peerless
may, in its sole discretion, provide to Adobe any other Revised Support Source.
If, at any time, Peerless provides a Documentation Addendum, Revised Support
Source or any Peerless-revised source code derived from access to Adobe Support
Information to Adobe, except as provided in Paragraph 4.3 ("Peerless
-------------
Confidential Information"), Peerless shall be deemed to have granted to Adobe a
perpetual, worldwide, royalty-free, fully paid-up license to use, modify,
reproduce and distribute such Documentation Addendum, source code, and any
object code versions thereof, and the right to sublicense all such licensed
rights through multiple tiers of distribution.
2.4.2 PPD File License. Peerless hereby grants to Adobe a
----------------
perpetual, worldwide, royalty-free, fully paid-up license to use, modify,
reproduce and distribute any PPD Files and updates thereto which Peerless
creates, and the right to sublicense all such licensed rights through multiple
tiers of distribution.
2.5 Similar Products. Peerless acknowledges that Adobe develops and
----------------
acquires software related to the Postscript language; that existing or planned
software independently developed or acquired by Adobe may contain ideas and
concepts similar or identical to those in the Peerless Modifications; and that,
over time, Adobe's employees may gain certain familiarity with the general
concepts and ideas in the Peerless Modifications. Therefore, Peerless agrees
that except for restrictions imposed on Adobe in Paragraph 4.3 ("Peerless
-------------
Confidential Information") below for Peerless confidential information accepted
by Adobe, Adobe shall not be precluded from developing or acquiring software or
other products containing such ideas and concepts for any purpose, without
obligation to Peerless. Notwithstanding the foregoing,
<PAGE>
Adobe shall not have the right to decompile, disassemble, or reverse engineer
the Peerless Modifications.
3. DEVELOPMENT, DELIVERY, AND TESTING.
-----------------------------------
3.1 Adobe Deliverables and Reference Systems.
-----------------------------------------
3.1.1 Adobe Deliverables. Upon execution of this Agreement
------------------
and upon a mutually agreeable schedule, Adobe will provide Peerless with the
Adobe Deliverables set forth in Exhibit I (Adobe Deliverables). Upon agreement
---------
of both parties, and as described in Reference Port appendices to be added to
this Agreement in a form similar to Exhibit G (Sample Format for Reference Port
---------
Appendix), Adobe will supply Peerless with additional deliveries of Reference
Port(s) and accompanying Adobe Deliverables.
3.1.2 Reference System(s). Each Reference Port delivered to
-------------------
Peerless hereunder, when compiled, will execute only as part of the appropriate
Reference System, as identified in the applicable Reference Port appendix. Adobe
will supply the Reference Port and accompanying Adobe Deliverables. Peerless
will also use the Reference System to validate the functionality of the Licensed
System under development by Peerless by comparing the operation of the Licensed
System with that of the Reference System.
3.2 Peerless Development. It is intended that Peerless and an OEM Customer
---------------------
will enter into a Peerless Development Agreement providing the terms and
conditions of the development by Peerless of Revised Object for the benefit of
the OEM Customer and shall contain the minimum terms set forth in Exhibit J
---------
(Minimum Terms of Peerless Development Agreement). Adobe shall prepare the
relevant Licensed System appendix with information and advice from Peerless and
OEM Customer. In accordance with the peerless Development Agreement, Peerless
shall then be responsible for modifying the Reference Port Support Source to
create the Revised Support Source, to the extent permitted by Paragraph 2.1
-------------
("License To Use Reference Port Support Source and Adobe Support Information")
above; compiling and linking the foregoing to produce the Revised Object fully
adapted to Licensed Systems, suitable for distribution to End Users and adhering
to Adobe's standards for quality and functionality; and promptly merging with
the Revised Support Source any Updates which it receives as a result of its
decision to purchase support services as described in Exhibit F (Training and
---------
Support). Peerless may elect not to merge any such Update into the Revised
Support Source for a Licensed System that is undergoing development at the time
of delivery of such Update, provided Adobe is consulted and consents to the
decision to continue the development effort without including the Update. Adobe
hereby consents to the delivery by Peerless of interim versions of the Revised
Object and the Golden Master copy of the Revised Object to the OEM Customer in
accordance with the Licensed System appendix. Adobe shall have no responsibility
in connection with any such modifications, including the development and
bundling of the PPD Files with each Licensed System, except as expressly
provided in a Reference Port appendix.
3.3 Adobe Training. Adobe agrees to provide the training and technical
--------------
assistance described in Exhibit F (Training and Support) or in any Reference
---------
Port appendix.
3.4 Peerless Deliverables.
---------------------
<PAGE>
3.4.1 Revised Adobe Software. Peerless will promptly
----------------------
provide Adobe with two (2) copies of the machine readable version of the Revised
Object and any updated versions thereof in a timely manner as the updated
versions become available, and at Peerless' sole option, with two (2) copies of
the Revised Support Source (collectively, the "Peerless Deliverables") for
evaluation and testing in accordance with Exhibit H (Test Procedures).
---------
3.4.2 Loaned Equipment. Peerless shall loan Adobe all
----------------
necessary equipment as specified in the applicable Licensed System appendix in
order to permit Adobe to conduct adequate and thorough testing of such Peerless
Deliverables in accordance with Exhibit H (Test Procedures).
---------
3.4.3 PPD File. Peerless shall also create and deliver
--------
to Adobe two (2) master copies of the PPD File for each Licensed System at the
time Peerless provides the Revised Object to Adobe for testing pursuant to
Exhibit H (Test Procedures) and any updated version thereof in a timely manner
- ---------
following the availability of any updated version.
3.4.4 Documentation Addendum. Peerless will provide
----------------------
Adobe with a draft version of a Documentation Addendum for each Licensed System
and any updated versions in a timely manner following the availability of any
updated version. The contents of the Documentation Addendum and any updated
versions shall be reviewed and approved by Adobe for compliance with Adobe's
PostScript language standards before the Documentation Addendum is distributed
with a Licensed System. Peerless shall provide to OEM Customers a master copy of
the corresponding Documentation Addendum.
3.5 Technical Coordinators. Peerless and Adobe agree to designate a
-----------------------
technically qualified person (each, a Technical Coordinator) for each Reference
Port in each Reference Port appendix to serve as the primary contact for
information requests by the other party who, when so requested by the other
party hereto, shall use his or her best efforts to respond promptly after
receipt of such request.
3.6 Testing. Prior to the anticipated First Commercial Shipment of Revised
-------
Object by an OEM Customer, testing will be conducted in accordance with Exhibit
-------
H (Test Procedures). Upon successful completion of acceptance testing pursuant
- -
to Exhibit H Test Procedures), an OEM Customer shall have the right to
---------
distribute the Revised Object in accordance with the terms of the Adobe OEM
License Agreement.
4. PROPRIETARY RIGHTS; CONFIDENTIALITY.
-----------------------------------
4.1 Ownership. Adobe and its suppliers are the sole and exclusive owners of
----------
all rights, title and interest, including all trademarks, copyrights, patents,
trade names, trade secrets and other intellectual property rights to the Adobe
Support Information. Except for the rights expressly enumerated herein, Peerless
is not granted any rights to patents, copyrights, trade secrets, trade names,
trademarks (whether or not registered), or any other rights, franchises or
licenses with respect to the Adobe Support Information.
4.2 Confidentiality; Security. Peerless agrees to protect the Adobe Support
-------------------------
Information in accordance with Exhibit K (Secure Procedures for Handling Adobe
---------
Support Information) and Exhibit L (Additional Secure Procedures for Handling
---------
Adobe Restricted Information).
<PAGE>
4.3 Peerless Confidential Information. For the purpose of obtaining
---------------------------------
consulting or technical assistance from Adobe during the course of development
of a Licensed System, Peerless may desire to provide to Adobe, without granting
the license to Adobe described in Paragraph 2.4.1 ("License to Revised Support
---------------
Source") above, portions of source code that Peerless reasonably believes
contains Peerless confidential information and does not constitute revisions of
source code provided by Adobe to Peerless ("Peerless Independent Materials").
Adobe shall receive such Peerless Independent Materials (i) without receiving
the license described above as to the Peerless Independent Materials and (ii)
under confidentiality restrictions as long as Peerless notifies Adobe in writing
in advance of such planned delivery to Adobe, and Adobe Director of Adobe's
Systems Products Division Engineering grants approval of Adobe's receipt of such
information in writing and, in accordance with procedures specified by Adobe,
executes Peerless's materials release form, acknowledging receipt of the such
source code. Peerless must describe the content and purpose of such Peerless
Independent Materials in advance to Adobe. Adobe reserves the right to refuse
such delivery of such Peerless Independent Materials to prevent contamination of
Adobe employees.
5. LICENSE TO USE TRADEMARKS. Peerless shall prominently incorporate the Adobe
Trademarks and Adobe's PostScript logo in the form set forth in Adobe's then
current trademark manual in product literature, advertising and other marketing
materials used by Peerless in connection with this Agreement. The grant of a
license to Peerless to use Adobe Trademarks shall comply with all of the
conditions as described in Exhibit N (Additional Provisions Regarding Use of
---------
Trademarks). Peerless is not granted a license to use the Adobe Trademarks in
association with any Clone Product, as defined in Exhibit K (Secure Procedures
---------
for Handling Adobe Support Information).
6. PAYMENTS.
--------
6.1 Source License Fees. Peerless shall pay Adobe a source license tee of
-------------------
[*] for the initial delivery of a Reference Port and accompanying Adobe
Deliverables. Peerless shall pay a source license fee of [*] for each additional
Reference Port and accompanying Adobe Deliverables specified in a Reference Port
appendix attached hereto. Peerless shall pay the initial and additional source
license fees as follows: (a) [*] .
6.2 Royalty Payments. Adobe shall pay Peerless the royalties set forth in
----------------
Exhibit M (Royalty Payments) in connection with the distribution by an OEM
- ---------
Customer of Revised Object pursuant to an Adobe OEM License Agreement.
6.3 Reference Port Update Fees. The "Annual Fee" for support services as
---------------------------
described in Exhibit F (Training and Support) for the initial year shall be [*]
---------
per Reference Port or such other amount as specified in an applicable Reference
Port appendix and shall be payable within thirty (30) days of the Effective Date
of this Agreement or the Reference Port appendix, as applicable. The "Annual
Fee" for subsequent years during the term hereof shall be Adobe's then current
annual lee per Reference Port and shall be payable within thirty (30) days after
the anniversary date of this Agreement or the applicable Reference Port
appendix.
6.4 Per Copy License Fees for Use of Third Party Software. Peerless shall
------------------------------------------------------
Pay fees for use of any Third Party Software designated in Exhibit I (Adobe
---------
Deliverables) or in a Reference Port appendix ("Third Party Software") in
accordance with this Paragraph and any special terms set forth in such Reference
Port appendix. Peerless will not be required to pay Adobe an additional per copy
source license fee for the right to use the [*] provided that (i) the number of
[* Confidential Treatment Requested]
<PAGE>
users at a single Development Site concurrently accessing the [*] on one or more
CPU's shall not exceed [*] in number, (ii) use of the [*] is limited to one
Development Site, (iii) Peerless monitors the maximum number of copies of the
[*] being used concurrently on multiple CPU's at a single Development Site and
reports that number to Adobe upon request, and (iv) Peerless maintains
appropriate records to permit Adobe to verily the accuracy of the number of
multiple copies in concurrent use reported to Adobe by Peerless as required
under subitem (iii) above. For purposes of this Paragraph, the term "CPU" shall
mean a stand alone central processing unit or a protected cluster of computing
devices coupled together in a server environment with the [*] located only on
the server and with download capability to workstations, terminals or other such
computing devices on the system. In the event that Peerless' use of the Third
Party Software exceeds the limitation on the number of royalty-free copies as
specified above in this Paragraph or in a Reference Port appendix, Peerless
shall report such usage to Adobe hereunder and Peerless shall pay Adobe a source
license fee equal to the actual amount of the license fees payable by Adobe to
[*] in source code form (or to such other third party supplier of software
identified in a Reference Port appendix) directly resulting from Peerless' use
of the Third Party Software.
6.5 Taxes. In addition to any other payments due under this Agreement,
------
Peerless agrees to pay, and to indemnify and hold Adobe harmless from, any
sales, use, excise, import or export, value added or similar tax or duty not
based on Adobe's net income, including any penalties and interest, as well as
any costs associated with the collection or withholding thereof, and all
governmental permit fees, license fees and customs and similar fees levied upon
the delivery by Adobe of the Adobe Deliverables to Peerless hereunder, which
Adobe may incur in respect of this Agreement. If a resale certificate or other
certificate or document of exemption is required in order to exempt all or any
of the Adobe Software or other deliverables from any such tax liability,
Peerless will promptly furnish it to Adobe.
7. PERFORMANCE WARRANTY.
--------------------
7.1 Reference Port Warranties. Adobe warrants that for a period of ninety
--------------------------
(90) days from the date of delivery of a Reference Port to Peerless (hereinafter
the "Warranty Period"), the Reference Port Support Source and Unmodified Core
contained in a Reference Port will compile, assemble, and link in the
development environment (as specified from time to time by Adobe) to yield the
corresponding object code version of the Reference Port. Additionally, subject
to any exceptions specified by Adobe at the time of delivery, the object code
version of the Reference Port will execute substantially in accordance with the
Documentation (excluding any portions of the Documentation not applicable to the
specified Reference System) when used as part of the Reference System specified
in the Reference Port appendix. If Peerless reports to Adobe a failure of such
Reference Port to conform to the foregoing warranties during the applicable
Warranty Period, and provides such detail as Adobe may require to permit Adobe
to reproduce such failure, Adobe, at its expense, shall use reasonable
commercial efforts to modify or replace the Reference Port to correct such
failure within the time parameters specified in Paragraph 2(f) of Exhibit F
---------
(Training and Support).
7.2 Update Warranties. Adobe warrants that, for a period of ninety (90)
-----------------
days from the date of delivery of an Update to Peerless hereunder, subject to
Peerless' purchase of support services as described in Exhibit F (Training and
---------
Support) (the "Warranty Period"), the Reference Port Support Source and
Unmodified Core contained in an Update to a Reference Port will compile,
assemble, and link in the development environment (as specified from time to
time by Adobe) to yield the corresponding object code version of the Update.
Additionally,
[* Confidential Treatment Requested]
<PAGE>
subject to any exceptions specified by Adobe at the time of delivery, the object
code version of the Update will execute substantially in accordance with the
Documentation (excluding any portions of the Documentation not applicable to the
specified Reference System) as part of the applicable Reference System specified
in the Reference Port appendix. If Peerless reports to Adobe a failure of such
Update to conform to the foregoing warranties during the applicable Warranty
Period, and provides such detail as Adobe may require to permit Adobe to
reproduce such failure, Adobe, at its expense, shall use reasonable commercial
efforts to modify or replace the Update to correct such failure within the time
parameters specified in Paragraph 2(f) of Exhibit F (Training and Support).
---------
7.3 Other Adobe Software Warranties. Adobe warrants that if Other Adobe
-------------------------------
Software is provided to Peerless in source code form, for a period of ninety
(90) days from the date of delivery of the Other Adobe Software to Peerless
(hereinafter the /"/Warranty Period"), the source code version of the Other
Adobe Software will compile, assemble, and link in the development environment
(as specified from time to time by Adobe) to yield the corresponding object code
version of the Other Adobe Software. Additionally, subject to any exceptions
specified by Adobe at the time of delivery, the object code version of the Other
Adobe Software will execute substantially in accordance with the specifications
set forth in documentation identified in a Reference Port appendix when used in
conjunction with the applicable Reference Port as part of the applicable
Reference System. If Peerless reports to Adobe a failure of such Other Adobe
Software to conform to the foregoing warranties during the applicable Warranty
Period, and provides such detail as Adobe may require to permit Adobe to
reproduce such failure, Adobe, at its expense, shall use reasonable commercial
efforts to modify or replace the Other Adobe Software to correct such failure
within the time parameters specified in Paragraph 2(f) of Exhibit F (Training
---------
and Support). This warranty shall not apply to the Other Adobe Software if it
has been modified by Peerless or any third party.
7.4 Limitations on Warranties. Peerless acknowledges that the Adobe
--------------------------
Software and the Other Adobe Software delivered by Adobe to Peerless hereunder
will require adaptation by Peerless for compatibility with Peerless platforms
and configurations, which platforms and configurations will generally be
different from the development environment and Reference System specified by
Adobe. Peerless acknowledges that the Adobe Software and the Other Adobe
Software is of such complexity that it may have inherent defects, and agrees
that Adobe makes no other warranty, either express or implied, as to any matter
whatsoever. THE FOREGOING STATES ADOBE'S SOLE AND EXCLUSIVE WARRANTY TO PEERLESS
CONCERNING THE ADOBE SOFTWARE AND OTHER ADOBE SOFTWARE AND ADOBE'S SOLE AND
EXCLUSIVE OBLIGATION TO PEERLESS FOR BREACH OF WARRANTY. EXCEPT AS EXPRESSLY SET
FORTH ABOVE, THE ADOBE SUPPORT INFORMATION IS PROVIDED STRICTLY "AS IS." EXCEPT
FOR THE EXPRESS WARRANTIES STATED IN THIS AGREEMENT, ADOBE MAKES NO ADDITIONAL
WARRANTIES, EXPRESS, IMPLIED, ARISING FROM COURSE OF DEALING OR USAGE OF TRADE,
OR STATUTORY, AS TO THE ADOBE SOFTWARE, THE OTHER ADOBE SOFTWARE OR ANY OTHER
ADOBE SUPPORT INFORMATION, OR ANY MATTER WHATSOEVER. IN PARTICULAR, ANY AND ALL
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT ARE EXPRESSLY EXCLUDED. THIS IS A LIMITED WARRANTY AND IS THE
ONLY WARRANTY MADE BY ADOBE. PEERLESS SHALL NOT HAVE THE RIGHT TO MAKE OR PASS
ON, AND SHALL TAKE ALL MEASURES NECESSARY TO ENSURE THAT NEITHER IT NOR ANY OF
ITS AGENTS OR EMPLOYEES SHALL MAKE OR PASS, ON ANY EXPRESS OR IMPLIED WARRANTY
OR REPRESENTATION ON BEHALF OF ADOBE TO ANY OEM CUSTOMER, END USER, OR THIRD
PARTY.
<PAGE>
7.5 Peerless Warranty. During the period of ninety (90) days (the "Peerless
-----------------
Warranty Period") from the date of the acceptance of Revised Object by Adobe
pursuant to Exhibit H (Test Procedures), Peerless warrants that such Revised
---------
Object will perform substantially in accordance with the Documentation and any
of the specifications provided by Peerless to Adobe when used in conjunction
with the applicable Licensed System. Peerless shall, at Peerless' expense, use
reasonable commercial efforts to modify or replace the Revised Object to correct
such failure within the time parameters specified in Paragraph 2(f) of Exhibit F
---------
(Training and Support). All expenses associated with the return to Peerless of
such Revised Object and the delivery to Adobe of a repaired or replacement
implementation of the Revised Object shall be borne by Peerless. This warranty
shall not apply to Revised Object if it has been modified by Adobe or any third
party. THE FOREGOING WARRANTY STATES PEERLESS' SOLE AND EXCLUSIVE WARRANTY TO
ADOBE CONCERNING THE REVISED OBJECT AND PEERLESS' SOLE AND EXCLUSIVE OBLIGATION
TO ADOBE FOR BREACH OF WARRANTY. EXCEPT AS EXPRESSLY SET ABOVE, THE REVISED
OBJECT IS PROVIDED STRICTLY "AS IS". THE FOREGOING WARRANTY IS IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER WHATSOEVER
AND, IN PARTICULAR, ANY AND ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED.
8. PROPRIETARY RIGHTS INDEMNITY.
----------------------------
8.1 By Adobe. Adobe agrees to defend and otherwise hold Peerless harmless
---------
from any costs, damages, and reasonable attorneys' fees resulting from any
claims by third parties that the uses permitted hereunder of the Adobe Software
and the Adobe Trademarks infringe any U.S. patents, U.S. copyrights or
trademarks in U.S., Japan, Benelux, The Federal Republic of Germany, France,
Italy, the United Kingdom, Denmark, Ireland, Greece, Spain, Portugal, Sweden,
Norway, Finland, Switzerland, Australia, Austria, Belgium, Canada, Israel, the
Netherlands and New Zealand, provided that Peerless gives Adobe prompt written
notice of any such claim, tenders to Adobe the defense or settlement of such a
claim at Adobe's expense, and cooperates with Adobe, at Adobe's expense, in
defending or settling such claim. In no event shall Adobe's liability under this
Paragraph 8.1 with respect to trademark infringement in the enumerated countries
- -------------
(other than the U.S.) exceed [*]. If Adobe receives notice of an alleged
infringement or if Peerless' use of the Adobe Software shall be prevented by
permanent injunction, Adobe may, at its sole option and expense, procure for
Peerless the right to continued use of the Adobe Software or the Adobe
Trademarks as provided hereunder, modify the Adobe Software so that it is no
longer infringing and is substantially equivalent to the Adobe Software, replace
the Adobe Software with computer software of equal or superior functional
capability, or, in the case of trademark infringement, instruct Peerless to use
an alternative trademark proprietary to Adobe. THE RIGHTS GRANTED TO PEERLESS
UNDER THIS PARAGRAPH SHALL BE PEERLESS' SOLE AND EXCLUSIVE REMEDY AND ADOBE'S
SOLE OBLIGATION FOR ANY ALLEGED INFRINGEMENT OF ANY PATENT, COPYRIGHT,
TRADEMARK, OR OTHER PROPRIETARY RIGHT. ADOBE WILL HAVE NO LIABILITY TO PEERLESS
IF ANY ALLEGED INFRINGEMENT OR CLAIM OF INFRINGEMENT IS BASED UPON THE
MODIFICATION OF THE ADOBE SOFTWARE BY PEERLESS OR ANY THIRD PARTY OR USE OF THE
ADOBE SOFTWARE IN CONNECTION OR IN COMBINATION WITH EQUIPMENT, DEVICES, OR
SOFTWARE NOT DELIVERED BY ADOBE (IF SUCH INFRINGEMENT OR CLAIM COULD HAVE BEEN
AVOIDED BY THE USE OF THE UNMODIFIED ADOBE SOFTWARE WITH OTHER EQUIPMENT,
DEVICES OR SOFTWARE), OR THE USE OF ANY ADOBE SOFTWARE OTHER THAN AS PERMITTED
UNDER THIS
[* Confidential Treatment Requested]
<PAGE>
AGREEMENT OR IN A MANNER FOR WHICH IT WAS NOT INTENDED OR USE OF OTHER THAN THE
MOST CURRENT RELEASE OF THE ADOBE SOFTWARE (IF SUCH CLAIM WOULD HAVE BEEN
PREVENTED BY THE USE OF SUCH RELEASE).
8.2 By Peerless. Peerless agrees to defend and otherwise hold Adobe, its
------------
OEM Customers and their customers harmless from any costs, damages, and
reasonable attorneys' fees resulting from all claims by third parties arising
from the development of the Revised Object by Peerless, including, without
limitation, that the Revised Object infringes any U.S. patents or U.S.
copyrights; provided that Adobe gives Peerless prompt written notice of any such
claim, tenders to Peerless the defense or settlement of any such claim at
Peerless' expense, and cooperates with Peerless, at Peerless' expense, in
defending or settling such claim. PEERLESS WILL HAVE NO LIABILITY TO ADOBE WITH
RESPECT TO ANY CLAIM AS TO WHICH ADOBE IS LIABLE TO PEERLESS PURSUANT TO
PARAGRAPH 8.1 ("BY ADOBE") ABOVE.
9. TERM AND CANCELLATION.
---------------------
9.1 Term. The initial term of this Agreement is for five (5) years from the
-----
Effective Date, unless this Agreement is terminated for cause. This Agreement
may be renewed biannually on its anniversary date at the option of either party
(subject to the written consent of the other party), provided that (a) each
party has made all the payments required by this Agreement, and (b) there has
been no uncured breach of this Agreement.
9.2 Cancellation by Adobe for Cause. This Agreement shall terminate in the
-------------------------------
event of any material breach by Peerless which continues after thirty (30) days'
written notice of said breach (which notice shall, in reasonable detail, specify
the nature of the breach) by Adobe to Peerless.
9.3 Cancellation by Peerless for Cause. If any material breach under this
-----------------------------------
Agreement by Adobe continues after thirty (30) days' written notice of said
breach (which notice shall, in reasonable detail, specify the nature of the
breach) by Peerless to Adobe, Peerless may seek any damages arising under this
Agreement, and (a) continue this Agreement in full force and effect, or (b)
terminate this Agreement on written notice to Adobe.
9.4 Bankruptcy. In addition to any material breach of this Agreement, the
----------
application for, or adjudication in, bankruptcy by Peerless, the insolvency of
Peerless, or the dissolution of Peerless, shall terminate this Agreement.
9.5 Obligations on Cancellation, Termination, or Expiration. Upon
--------------------------------------------------------
cancellation, termination, or expiration of this Agreement:
9.5.1 Licenses Terminated. Subject to Paragraph 9.5.5 ("Continuing
------------------- ---------------
Support") below, the licenses granted pursuant to Paragraph 2.1 ("License to Use
-------------
Reference Port Support Source and Adobe Support Information") shall terminate
immediately.
9.5.2 Safeguarding of Proprietary Rights. Peerless shall continue to
----------------------------------
be responsible for safeguarding the proprietary rights of Adobe and Adobe's
suppliers in accordance with the terms of this Agreement after such
cancellation, termination, or expiration.
<PAGE>
9.5.3 Return or Destruction of Adobe Information. Subject to Paragraph
------------------------------------------- ---------
9.5.5 ("Continuing Support") below, Peerless will immediately discontinue use
- -----
of, and return or destroy all copies of, Adobe Support Information and other
Adobe proprietary information in its possession (including copies placed in any
storage device under Peerless' control). Upon Adobe's request, Peerless shall
warrant in writing to Adobe its return or destruction of all of Adobe's
proprietary information within thirty (30) days of cancellation, termination or
expiration.
9.5.4 Payment. The payment date of all moneys due to either party
--------
shall automatically be accelerated so that they shall become due and payable on
the effective date of termination, even if longer terms had been provided
previously. Further, Adobe's obligations to pay royalties to Peerless as set
forth herein shall survive any termination of this Agreement.
9.5.5 Continuing Support. Peerless shall have the right to retain two
------------------
(2) copies of the Revised Adobe Software and use such Revised Adobe Software to
the extent required for support and maintenance purposes only.
10. LIMITATION OF LIABILITY.
-----------------------
10.1 Adobe. NEITHER ADOBE NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES,
------
AFFILIATES, OR AGENTS SHALL BE LIABLE TO PEERLESS OR TO ANY THIRD PARTY FOR ANY
LOSS OF USE, LOSS OF GOODWILL, INTERRUPTION OF BUSINESS, OR FOR INDIRECT,
INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST REVENUES OR
PROFITS) OR SIMILAR DAMAGES, WHETHER BASED ON TORT (INCLUDING WITHOUT
LIMITATION, NEGLIGENCE OR STRICT LIABILITY), CONTRACT, OR OTHER LEGAL OR
EQUITABLE GROUNDS, EVEN IF ADOBE HAS BEEN ADVISED OR HAD REASON TO KNOW OF THE
POSSIBILITY OF SUCH DAMAGES AND EVEN IN THE EVENT OF FAILURE OF EXCLUSIVE
REMEDIES WITH THE EXCEPTION THAT THE LIMITATION OF LIABILITY SET FORTH IN THIS
SECTION 10.1 SHALL NOT APPLY TO ANY BREACH BY ADOBE OF PARAGRAPH 2.5 ("SIMILAR
-------------
PRODUCTS") AND PARAGRAPH 4.3 ("PEERLESS CONFIDENTIAL INFORMATION"). THE
-------------
FOREGOING LIMITATION OF LIABILITY IS INDEPENDENT OF ANY EXCLUSIVE REMEDIES FOR
BREACH OF WARRANTIES SET FORTH IN THIS AGREEMENT.
10.2 Peerless. NEITHER PEERLESS NOR ANY OF ITS OFFICERS, DIRECTORS,
---------
EMPLOYEES, AFFILIATES, OR AGENTS SHALL BE LIABLE TO ADOBE OR TO ANY THIRD PARTY
FOR ANY LOSS OF USE, LOSS OF GOODWILL, INTERRUPTION OF BUSINESS, OR FOR ANY
INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS
OR REVENUES) OR SIMILAR DAMAGES, WHETHER BASED ON TORT (INCLUDING WITHOUT
LIMITATION, NEGLIGENCE OR STRICT LIABILITY), CONTRACT, OR OTHER LEGAL OR
EQUITABLE GROUNDS, EVEN IF PEERLESS HAS BEEN ADVISED OR HAD REASON TO KNOW OF
THE POSSIBILITY OF SUCH DAMAGES AND EVEN IN THE EVENT OF FAILURE OF EXCLUSIVE
REMEDIES, WITH THE EXCEPTION THAT THE LIMITATION OF LIABILITY SET FORTH IN THIS
SECTION 10.2 SHALL NOT APPLY TO ANY BREACH BY PEERLESS OF THE TERMS OF
PARAGRAPHS 2.1 THROUGH 2.5 ("LICENSE GRANTS"), 4.1 ("OWNERSHIP"), 4.2
- -------------- --- --- ---
("CONFIDENTIALITY; SECURITY"), 5 ("LICENSE TO USE TRADEMARKS"), OR EXHIBITS J
- -
(MINIMUM TERMS OF PEERLESS DEVELOPMENT AGREEMENT), K (SECURE PROCEDURES FOR
-
HANDLING ADOBE SUPPORT INFORMATION), L (ADDITIONAL SECURE PROCEDURES FOR
-
HANDLING ADOBE RESTRICTED INFORMATION) AND N (ADDITIONAL PROVISIONS REGARDING
-
USE OF TRADEMARKS) TO PROTECT ADOBE'S PROPRIETARY RIGHTS IN
<PAGE>
THE POSTSCRIPT SOFTWARE, IN WHICH CASE, SUCH LIMITATION OF LIABILITY SHALL NOT
APPLY.
11. GENERAL
-------
11.1 Governing Law. This Agreement shall be governed in all respects by the
--------------
laws of the United States of America and the State of California as such laws
are applied to agreements entered into and to be performed entirely within
California between California residents. The parties agree that the United
Nations Convention on Contracts for the International Sale of Goods is
specifically excluded from application to this Agreement.
11.2 Attorneys' Fees. In the event any proceeding or lawsuit is brought by
----------------
Adobe, its suppliers or Peerless in connection with this Agreement, the
prevailing party in such proceeding shall be entitled to receive its costs,
expert witness fees and reasonable attorneys' fees, including costs and fees on
appeal, as determined by the Court.
11.3 Forum. All disputes arising under this Agreement may be brought to the
------
Superior Court of the State of California in Santa Clara County or the Federal
District Court sitting in San Jose, California, as permitted by law. The
Superior Court of Santa Clara County and the Federal District Court silting in
San Jose, California shall each have nonexclusive jurisdiction over disputes
under this Agreement. Peerless consents to the personal jurisdiction of the
above courts.
11.4 Notices. All notices or reports permitted or required under this
-------
Agreement shall be in writing and shall be delivered by personal delivery,
telegram, telecopier, facsimile transmission, or registered mail, return receipt
requested, and shall be deemed given upon personal delivery, five (5) days after
deposit in the mail, or upon acknowledgment of receipt of electronic
transmission. Notices shall be sent to: (i) the contract representative
designated in the specific Reference Port appendix if the notice or report
relates to one or more specific Reference Ports, (ii) the signatory of this
Agreement at the address set forth at the end of this Agreement or such other
address as either party may specify in writing, and (iii) the party's General
Counsel at the address set forth at the end of this Agreement or such other
address as either party may specify in writing. Notices shall be effective upon
receipt unless otherwise specified in such notice or in this Agreement.
11.5 Injunctive Relief. Notwithstanding any other provisions of this
------------------
Agreement, breach of the proprietary rights provisions of this Agreement by
either party will cause the other party irreparable damage for which recovery of
money damages would be inadequate, and the owner of such proprietary rights
shall be entitled to obtain timely injunctive relief to protect the owner's
rights under this Agreement in addition to any and all remedies available at
law.
11.6 No Agency. Nothing contained herein shall be construed as creating any
----------
agency, partnership, or other form of joint enterprise between the parties.
11.7 Force Majeure. Neither party shall be liable hereunder by reason of
-------------
any failure or delay in the performance of its obligations hereunder (except for
the payment of money) on account of strikes, shortages, riots, insurrection,
fires, flood, storm, explosions, acts of God, war, governmental action, labor
conditions, earthquakes, material shortages, or any other cause which is beyond
the reasonable control of such party.
<PAGE>
11.8 Waiver. The failure of either party to require performance by the
------
other party of any provision hereof shall not affect the full right to require
such performance at any time thereafter; nor shall the waiver by either party of
a breach of any provision hereof be taken or held to be a waiver of the
provision itself.
11.9 Severability. In the event that any provision of this Agreement shall
-------------
be unenforceable or invalid under any applicable law or be so held by applicable
court decision, such unenforceability or invalidity shall not render this
Agreement unenforceable or invalid as a whole, and, in such event, such
provision shall be changed and interpreted so as to best accomplish the
objectives of such unenforceable or invalid provision within the limits of
applicable law or applicable court decisions.
11.10 Headings. The paragraph headings appearing in this Agreement are
--------
inserted only as a matter of convenience and in no way define, limit, construe,
or describe the scope or extent of such paragraph, or in any way affect this
Agreement.
11.11 No Patent License.
------------------
11.11.1 Adobe Patents. As used herein, "Adobe Patent Right" means any
-------------
right arising under any United States or foreign patent now owned by, or later
issued or assigned to Adobe, applicable to the Adobe Software. Adobe covenants
that, to the extent that Peerless and its OEM Customers exercise the rights
expressly granted to Peerless, or which Peerless is authorized to grant to OEM
Customers herein, Adobe will not (i) assert any Adobe Patent Right against
Peerless, (ii) assert any Adobe Patent Right against OEM Customers of Peerless,
or (iii) require any additional fee or royalty from Peerless or OEM Customers
based upon any Adobe Patent Right. Except to the extent of such covenant not to
assert any Adobe Patent Right, nothing contained herein shall be construed as
conferring, by implication, estoppel, or otherwise, any license or right with
respect to any Adobe Patent Right.
11.11.2 Peerless Patents. As used herein, "Peerless Patent Right"
-------- -------
means any right arising under any United States or foreign patent issued or
assigned to Peerless and having a filing date after the inventor had access to
the Adobe Source in which (i) an inventor is (A) an employee of Peerless who has
had access to the Adobe Source or (B) an independent contractor who has had
access to the Adobe Source and has assigned patent rights in the claimed
invention to Peerless and (ii) the Adobe Source contributed to and is an
essential aspect of the claimed invention. Peerless agrees that it will not (i)
assert any Peerless Patent Right against Adobe, (ii) assert any Peerless Patent
Right against Adobe's sublicensees or customers who have, directly or
indirectly, purchased or licensed PostScript products from Adobe or its
sublicensees (which shall include other PostScript language compatible products
from Adobe such as Adobe Type Manager and Display PostScript products), or (iii)
require any fee or royalty from Adobe or such entities based upon any Peerless
Patent Right.
11.12 Assignment. Neither this Agreement nor any rights or obligations of
----------
Peerless hereunder may be assigned by Peerless in whole or in part without the
prior written approval of Adobe. For the purposes of this Paragraph, a change in
the persons or entities who control fifty percent (50%) or more of the equity
securities or voting interest of Peerless shall be considered an assignment of
Peerless' rights. Adobe's rights and obligations, in whole or in part, under
this Agreement may be assigned by Adobe; provided that Adobe shall remain
secondarily obligated and liable hereunder. Adobe may exercise full transfer and
assignment rights in any manner at
<PAGE>
Adobe's discretion and specifically may sell, pledge or otherwise transfer its
right to receive payments under this Agreement.
11.13 Export. Peerless agrees not to export or re-export any Adobe Support
-------
Information or any immediate product (including processes and services) produced
directly by use of Adobe Support Information without fully complying with all
United States laws and regulations. The provisions of this Paragraph shall
survive notwithstanding any cancellation, termination, or expiration of this
Agreement.
11.14 Full Power. Each party warrants that it has full power to enter into
----------
and perform this Agreement, and the person signing this Agreement on such
party's behalf has been duly authorized and empowered to enter into this
Agreement. Each party further acknowledges that it has read this Agreement,
understands it and agrees to be bound by it.
11.15 Confidential Agreement. Neither party shall make any public
-----------------------
announcement of, or otherwise disclose to a third party, the existence of
matters set forth in this Agreement, except as mutually agreed in writing or as
required by disclosure obligations arising under law.
11.16 Counterparts. This Agreement may be executed simultaneously in two or
-------------
more counterparts, each of which will be considered an original, but all of
which together will constitute one and the same instrument.
11.17 Entire Agreement. This Agreement, the Exhibits hereto, and any
-----------------
executed Reference Port appendices constitute the entire agreement between the
parties with respect to the subject matter hereof. This Agreement supersedes,
and the terms of this Agreement govern, any prior or collateral agreements
between the parties with respect to the subject matter hereof, any
communications, discussions, whether written or oral, including the Adobe OEM
License Agreement and any Licensed System appendices, which in all other
respects shall remain in full force and effect. No terms of any purchase order,
invoice, or similar document will be deemed to amend or supplement this
Agreement, even if it is accepted or signed by the receiving party. This
Agreement may only be changed by mutual agreement of authorized representatives
of all parties in writing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
Adobe: Peerless:
ADOBE SYSTEMS INCORPORATED PEERLESS SYSTEMS CORP.
By: By:
----------------------------------- ------------------------------------
Print Name: Stephen A. MacDonald Print Name: Thomas D. Blondi
--------------------------- ----------------------------
Title: Senior Vice President Title: VP Sales / Mktg.
-------------------------------- ---------------------------------
Date: September 18, 1992 Date: September 16, 1992
--------------------------------- ----------------------------------
Address: 1585 Charleston Road Address: 2629 Manhattan Beach Blvd.
PO Box 7900 Redondo Beach, CA 90278
Mountain View, CA 94039-7900
<PAGE>
EXHIBIT A
---------
DESCRIPTION OF ADOBE SOFTWARE
(POSTSCRIPT SUPPORT SOURCE)
(1) "Adobe Software" shall include:
See those Items listed in Reference Port Appendix No. 1 dated September 11,1992.
(2) "Adobe Source" shall include the following source code and source
documentation:
See Reference Port Appendix No. 1 dated September 11,1992.
"Adobe Source" shall also include "Example Source", which shall consist of those
portions of the PostScript Software designated in the Reference Port appendices
which are supplied in source code form by Adobe to Peerless for the purpose of
demonstrating an example of software development that implements certain
functions which Peerless may wish to emulate in its own implementation of a
Licensed System. Example Source shall not be included within or as part of the
definition of a Reference Port.
(3) "Documentation" shall mean the PostScript Language Reference Manual, Second
Edition, as printed in English by Addison-Wesley, current as of April 1991
and any Adobe Supplement thereto, but shall not include any PostScript
Language Addendum.
<PAGE>
EXHIBIT B
---------
ADOBE TRADEMARKS
(POSTSCRIPT SUPPORT SOURCE)
Trademark Trademark Attribution
- --------- ---------------------
Adobe(TM) is a trademark of Adobe Systems
Incorporated which may be registered in
certain jurisdictions.
The Adobe Logo is a trademark of Adobe Systems
Incorporated which may be registered
in certain jurisdictions.
PostScript(TM) is a trademark of Adobe Systems
Incorporated which may be registered in
certain jurisdictions.
The PostScript Logo is a trademark of Adobe Systems
Incorporated which may be registered
in certain jurisdictions.
<PAGE>
EXHIBIT C-1
-----------
EMPLOYEE NONDISCLOSURE AGREEMENT
PEERLESS' STANDARD EMPLOYEE NONDISCLOSURE AGREEMENT, TO BE APPROVED BY ADOBE,
WILL BE INSERTED HERE BEFORE EXECUTION.
<PAGE>
EXHIBIT B-1
-----------
CALIFORNIA LABOR CODE SECTION 2870
EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
"(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either: (1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or (2) Result from any work performed
by the employee for the employer. (b) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under Subdivision (a), the provision
is against the public policy of this state and is unenforceable."
<PAGE>
EXHIBIT C
---------
TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed
to return, any computer programs (including without limitation source and object
code versions) devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints, sketches, materials,
equipment, other documents or property, or reproductions of any aforementioned
items belonging to Peerless Systems Corporation, its subsidiaries, affiliates,
successors or assigns or any other relevant third party described in Paragraph
1c of the Peerless Systems Corporation Proprietary Information Agreement
(together, the "Company").
I further certify that I have complied with all the terms of Company's
Proprietary Information Agreement signed by me, including the reporting of any
inventions and original works of authorship (as defined therein), conceived or
made by me (solely or jointly with others) covered by that agreement.
I further agree that, in compliance with Company's Proprietary Information
Agreement, I will preserve as confidential all trade secrets, confidential
knowledge, data or other proprietary information relating to products,
processes, know-how, designs, formulas, developmental or experimental work,
computer programs, databases, other original works of authorship, customer
lists, business plans, financial information or other subject matter pertaining
to any business of Company or any of its clients, consultants or licensees.
I acknowledge my duty, pursuant to the Company's Proprietary Information
Agreement, to notify all of my future and prospective employers of the existence
of that Agreement and recognize Company's right to do the same. I further
acknowledge my duty, which shall continue under that Agreement until one (1)
year from today, to advise Company in writing before entering into any competing
or conflicting commercial activity.
Date:
-------------------------
- ------------------------------- -------------------------------------
Employee Signature Type/Print Employee Name
<PAGE>
EXHIBIT C-2
-----------
PEERLESS SYSTEMS CORPORATION
PROPRIETARY INFORMATION AGREEMENT
(Employee/Independent Contractor)
In consideration of my hiring by Peerless Systems Corporation ("Company") and
the compensation now and hereafter paid to me, I agree to the following:
1. Maintaining Confidential Information
----------- ------------------------
a) Company Information. I agree at all times, both during and after
-------------------
the termination of my employment for any reason whatsoever (whether with or
without cause), to hold in strictest confidence, and not to use or to
disclose or make accessible to any person or entity, without the prior
written authorization of an executive officer of Company, any past, present
or future trade secrets, confidential knowledge, data or other proprietary
information relating to products, processes, know-how, designs, formulas,
developmental or experimental work, computer programs, data bases, other
original works of authorship, customer lists, employee information, business
plans, financial information or other subject matter pertaining to any
business of Company or any of its affiliates, clients, consultants,
licensees or licensors (collectively, "Company Information"). I understand
that Company Information shall be solely owned by Company, its successors
and assigns, and that I may use Company Information solely for the benefit
of Company as directed by Company. I agree not to reproduce or remove from
Company's premises any notes, data, reference materials, sketches, drawings,
memoranda, documentation or records. I agree to take whatever steps are
necessary to preserve the confidentiality of any and all Company Information
I have received or do receive by virtue of my employment with Company.
b) Former Employer Information. I agree that I will not, during my
---------------------------
employment with Company, use or disclose any confidential or proprietary
information or trade secrets of my former or concurrent employers or
companies, if any, and that I will not bring onto the premises of Company
any unpublished document or any property belonging to my former or
concurrent employers or companies, if any, unless consented to in writing by
said employers or companies.
c) Third Party Information. I recognize that Company has received and
------------------------
in the future will receive from third parties their confidential or
proprietary information subject to a duty on Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. I understand and agree that such information is the sole property
of such third parties and that I owe Company and such third parties, both
during the tern of my employment and thereafter, a duty to hold all such
confidential or proprietary information in the strictest confidence and not
to disclose it to any person or entity ( except as necessary in carrying out
my work for Company consistent with Company's agreement with such third
party) or to use it for the benefit of anyone other than for Company or such
third party (consistent with Company's agreement with such third party)
without the express written authorization of an executive officer of Company
and the governing body of such third party.
d) Exceptions. My obligations under this Section shall not apply
-----------
to information which I can demonstrate by clear and convincing evidence is
or becomes generally known other than through my acts in violation of this
Agreement.
<PAGE>
2. Disclosing and Assigning Inventions and Original Works
-------------------------------------------------------
a) Prior Inventions and Original Works. I have attached hereto, as
-----------------------------------
Exhibit A, a list describing all inventions, original works of authorship,
developments, improvements, and trade secrets which were made by me prior to
my employment with Company, which belong to me alone or jointly with others,
which relate to Company's proposed business, products or research and
development, and which are not assigned to Company if "none" is stated on
Exhibit A, I therefore represent that there are no such inventions, works of
authorship, developments, improvements or trade secrets.
b) Inventions and Original Works Assigned to Company. I agree that I
-------------------------------------------------
will promptly make full written disclosure to Company, will hold in trust
for the sole right and benefit of Company, and I hereby assign to Company
all my right, title, and interest in and to any and all inventions (and
patent rights with respect thereto), original works of authorship (including
an copyrights with respect thereto), developments, improvements or trade
secrets which I may solely or jointly conceive or develop or reduce to
practice, or cause to be conceived or developed or reduced to practice,
during the period of time I am in the employ of Company.
c) Exception to Assignments. I understand that the provisions of this
------------------------
Agreement requiring assignment to Company do not apply to any invention made
by an employee or Company which qualifies fully under the provisions of
Section 2870 of the California Labor Code (as set forth in Exhibit B
hereto). I will advise Company promptly in writing of any inventions that I
believe meet the criteria of Section 2870 of the California Labor Code. I
will at that time provide to Company in writing all evidence necessary to
substantiate that belief. I understand that Company will keep in confidence
and will not disclose to third parties without my consent any Confidential
Information disclosed in writing to Company relating to inventions that
qualify fully under the provisions of Section 2870 of the California Labor
Code. I understand that the provisions of Section 2870 of the California
Labor Code may not apply to me if I am an independent contractor and not an
employee of Company.
d) Works for Hire. I acknowledge that all original works of
---------------
authorship which are made by me (solely or jointly with others) within the
scope of my employment and which are protectible by copyright are "works
made for hire," as that term is defined in the United States Copyright Act
(17 USCA, Section 101) and that I am an employee as defined under that Act.
I further agree from time to time to execute written transfers to Company of
ownership of specific original works of authorship (and all copyrights
therein) made by me (solely or jointly with others) which may, despite the
preceding sentence, be deemed by a court of law not to be works made for
hire, and which are being assigned by me to Company pursuant to this
Agreement in such form as is acceptable to Company in its reasonable
discretion.
e) Maintenance of Records. I agree to keep and maintain adequate
----------------------
and current written records of all inventions, original works of authorship,
trade secrets or development developed or made by me (solely or jointly with
others) during the term of my employment with Company. The records will be
in the form of notes, sketches, drawings, and any other format that may be
specified by Company. The records will be available to and remain the sole
property of Company at all times.
f) Inventions Assigned to the United States. I agree to assign to the
----------------------------------------
United States government all my right, title, and interest in and to any and
all inventions, original works of authorship, developments, improvements or
trade secrets whenever such full title is required to
<PAGE>
be in the United States by a contract between Company and the United States
or any of its agencies.
g) Obtaining Letters Patent and Copyright Registrations. I agree
-----------------------------------------------------
to assist Company to obtain United States or foreign letters patent and
copyright registrations (and to execute any transfers of ownership of
letters patent as reasonably requested by Company) covering inventions and
original works of authorship assigned hereunder to Company. Such obligation
shall continue beyond the termination of my employment, but Company shall
compensate me at a reasonable rate for time actually spent by me at
Company's request on such assistance after such termination. If Company is
unable for any reason whatsoever, including my mental or physical
incapacity, to secure my signature to apply for or to pursue any application
for any United States or foreign letters patent or copyright registrations
(or on any document transferring ownership thereof) covering inventions or
original works of authorship assigned to Company under this Agreement, I
hereby irrevocably designate and appoint Company and its duly authorized
officers and agents as my agent and attorney in fact, to act for and in my
behalf and stead to execute and file any such applications and documents and
to do all other lawfully permitted acts to further the prosecution and
issuance of letters patent or copyright registrations or transfers thereof
with the same legal force and effect as if executed by me. This appointment
is coupled with an interest in and to the inventions and works of authorship
and shall survive my death or disability. I hereby quit claim to Company any
and all claims of any nature whatsoever which I now or may hereafter have
for infringement of any patents or copyright resulting from or relating to
any such application for letters patent or copyright registrations assigned
hereunder to Company.
3. Conflicting Employment
----------------------
I agree that, during the term of my employment with Company, I will not
engage in any other employment, occupation, consulting or other commercial
activity directly related to the business in which Company is now involved
or becomes involved during the term of my employment, nor will I engage in
any other activities that conflict with my obligations to Company.
I further agree that, during the one (1) year immediately succeeding
the term of my employment with Company, I will promptly advise Company, in
writing, upon entering into any competing or conflicting commercial
activity.
4. Returning Company Documents
---------------------------
I agree that, at the time of leaving the employ of Company (or at any
prior time at the request of Company), I will deliver to Company (and will
not keep in my possession or deliver to anyone else) any and all computer
programs (including without limitation source and object code versions),
devices, records, data, notes, reports, proposals, lists, correspondence,
specifications, drawings, flow charts, blueprints, sketches, materials,
equipment, other documents or property, or reproductions of any
aforementioned items belonging to Company, its successors or assigns. In the
event of the termination of my employment, I agree to sign and deliver the
"Termination Certification" attached hereto is Exhibit C.
5. Customer Lists and Employees
----------------------------
I agree that I shall not for a period of six (6) months immediately
following the termination of my relationship with Company for any reason,
whether with or without cause, either directly or indirectly: (1) call on,
solicit, or take away any of the customers of Company on whom I called
<PAGE>
or with whom I became acquainted during the period of my employment with
Company, either for myself or for any other person or entity, or 2) solicit
or take away, or attempt to solicit or take away any employees of Company,
either for myself or for any other person or entity. I understand and agree
that, to the extent that Company's employee and customer lists and related
information constitute trade secrets, my duties hereunder shall continue for
the six month period described above or for as long as such information
remains a trade secret, whichever period is longer.
6. Representations
---------------
I agree to execute any proper oath or verify any proper document
required to carry out the terms of this Agreement. I represent that my
performance of all the terms of this Agreement and of my employment with
Company will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to my employment
by Company. I have not entered into, and I agree I will not enter into,
either during or after the termination of my employment with Company, any
oral or written agreement In conflict herewith. I further agree to notify
all of my present, future and prospective employers of the existence of this
Agreement and recognize Company's right to do the same.
7. Injunctive Relief
-----------------
I agree that it would be difficult to measure the damage to Company
from any breach by me of the covenants set forth in paragraphs 1, 2, 3, 4, 5
or 6 herein, that injury to Company from any such breach would be impossible
to calculate, and that money damages would therefore be an inadequate remedy
for any such breach. Accordingly, I agree that if I breach paragraphs 1, 2,
3, 4, 5 and 6 or any of them, Company shall be entitled, in addition to all
other remedies it may have, to immediate injunctions or other appropriate
orders to restrain any such breach and/or to direct me to pay to Company all
gross receipts generated by any such breach without showing or proving any
actual damage to Company.
8. No Effect on Right to Terminate
-------------------------------
I acknowledge that, unless otherwise specified in a writing separate
from this Agreement, my employment or other work relationship with Company
is based on the understanding that Company or I may terminate such
relationship at any time, for any reason, with or without cause. I further
acknowledge that nothing in this Agreement is intended as or constitutes a
limitation on the right of either Company or myself to terminate such
relationship at will.
9. Independent Contractor
----------------------
If I am an independent contractor engaged by Company to perform
services for Company rather than an employee, I agree that the term
"employment" as used herein shall mean and refer to my engagement by Company
to perform services as an independent contractor.
10. General Provisions
------------------
a) Governing Law. This Agreement will be governed by the laws of the
-------------
State of California.
<PAGE>
b) Entire Agreement. This Agreement sets forth the entire agreement and
----------------
understanding between Company and me relating to the subject matter herein
and merges all prior discussions between us. No modification of or amendment
to this Agreement, nor any waiver of any rights under this Agreement, will
be effective unless in writing signed by the party to be charged. Any
subsequent change or changes in my duties, salary or compensation will not
affect the validity or scope of this Agreement. This Agreement is not
intended to limit any rights that Company may have under any other agreement
or at law with respect to inventions, original works of authorship, trade
secrets or other proprietary rights.
c) Enforceability. If any provision of this Agreement shall be
---------------
determined, under applicable law, to be overly broad in duration,
geographical coverage, substantive scope, or otherwise, such provision shall
be deemed narrowed to the broadest term permitted by applicable law and
shall be enforced as so narrowed. If any provision of this Agreement
nevertheless shall be unlawful, void, or unenforceable, it shall be deemed
severable from and shall in no way affect the validity or enforceability of
the remaining provisions of this Covenant.
d) Successors and Assigns. This Agreement will be binding upon my
-----------------------
heirs, executors, administrators and other legal representatives and will be
for the benefit of Company, its successors, and its assigns.
e) Expenses. The prevailing party in any action or proceeding between
---------
myself and Company arising out of or related to this Agreement shall be
entitled to recover from the other party all of its costs and expenses,
including without limitation reasonable attorney's fees, incurred in
connection with such action or any appeal of such action.
Date: Peerless Systems Corp. "Hired Party"
----------------
By: By:
--------------------- --------------------------
<PAGE>
EXHIBIT C-3
-----------
NOTICE REGARDING CONFIDENTIALITY
(POSTSCRIPT SUPPORT SOURCE)
1. Peerless Systems Corp. ("Peerless") is in possession of
certain Adobe Support Information of Adobe Systems Incorporated ("Adobe")
which Peerless has received pursuant to the Third Party Development and
License Agreement between Peerless and Adobe dated_______ 1992 ("License
Agreement").
2. To further the purposes of the License Agreement, and in
consideration of the disclosure to Recipient of proprietary information of
Adobe, including internal source code, interface specifications, and related
source documentation for the PostScript software and related Adobe
information, all of which is of a confidential nature and which contains
valuable trade secrets, know-how, and proprietary information of Adobe (the
"Adobe Support Information"), Recipient agrees to comply with the terms
hereof regarding confidentiality of information.
3. Recipient agrees not to use the Adobe Support Information for
any purpose except for the specific purposes which Peerless or Adobe
authorize in writing. Recipient agrees not to disclose the Adobe Support
Information to any person at any time except to employees of Adobe and to
the Designated Third Parties listed below who have entered into this form of
a Confidentiality Agreement. Recipient agrees to use his or her best efforts
to prevent any unauthorized use or disclosure of the Adobe Support
Information, and to promptly notify Adobe of any such unauthorized use of
which Recipient learns.
4. All materials including, without limitation, programs,
recorded information, documents, drawings, models, apparatus, sketches,
designs, and lists furnished to Recipient by Peerless or Adobe which are
designated in writing to be the property of Adobe will remain the property
of Adobe and will be returned to Adobe promptly at its request, together
with any copies or modifications thereof.
5. Recipient acknowledges that Adobe is a party to this
Agreement, and that unauthorized use or disclosure of the Adobe Support
Information will result in irreparable and continuing damage to Adobe for
which there will be no adequate remedy at law. If Recipient fails to comply
with the terms of this Agreement, Adobe and/or Peerless shall be entitled to
equitable relief to protect its interests, inducing but not limited to
injunctive relief, in addition to any other rights and remedies provided by
law.
6. This Agreement will be governed in all respects by the laws
of the State of California as such laws are applied to agreements entered
into and to be performed entirely within California between California
residents. If any provision of this Agreement is held to be invalid, the
parties agree that such invalidity will not affect the validity of the
remaining portions of this Agreement, and agree to substitute for the
invalid provision a valid provision which most closely approximates the
intent and economic effect of the invalid provision. Recipient will not
assign or transfer any rights or obligations under this Agreement without
the prior written consent of Adobe. This Agreement contains the entire
understanding of the parties regarding the matters set forth herein. This
Agreement may be modified only by a writing signed by all parties. The
<PAGE>
waiver by Adobe of a breach of any provision of this Agreement by Recipient
will not operate or be interpreted as a waiver of any other or subsequent
breach by Recipient.
7. The effective date of this Agreement shall be
-------------------------
RECIPIENT: PEERLESS SYSTEMS CORP.
By: By:
------------------------------- --------------------------------
Print Name: Print Name:
----------------------- -------------------------
Date: Date:
----------------------------- -------------------------------
ADOBE SYSTEMS INCORPORATED: DESIGNATED THIRD PARTIES:
1585 Charleston Road
PO Box 7900 #1
Mountain View, CA 94039-7900 ----------------------------------
Name
By:
---------------------------------- ------------------------------------
(Date Confidentiality Agreement)
Print Name: #2
-------------------------- ----------------------------------
Date: Name
------------------------------- -------------------------------
<PAGE>
EXHIBIT D
---------
DEVELOPMENT SITE
(POSTSCRIPT SUPPORT SOURCE)
Peerless' use and storage of the Adobe Support Information shall be restricted
to the following development site:
Name of Development Site: Address:
------------------------- --------
Peerless Systems Corp. 2629 Manhattan Beach Blvd.
Redondo Beach, California 90278
<PAGE>
EXHIBIT E
---------
RESTRICTED OEM CUSTOMERS
------------------------
[*]
[* Confidential Treatment Requested]
<PAGE>
EXHIBIT F
---------
TRAINING AND SUPPORT
(POSTSCRIPT SUPPORT SOURCE)
1. Training.
--------
a. Adobe agrees to permit up to a combined total of twelve (12) Authorized
Employees and Authorized Contractors of Peerless to attend an Adobe-provided
Adobe Source training class for up to two (2) days during the term of this
Agreement at no additional charge (other than the travel and living expenses
described below).
b. If Peerless and Adobe agree that Adobe should provide any additional
training, technical, or development assistance, Peerless shall pay Adobe, at
Adobe's then current standard hourly rates, for time expended by Adobe personnel
in providing such training, technical, or development assistance. Peerless shall
also bear all reasonable travel and living expenses of Adobe personnel who
provide services or training at an Peerless site outside of the greater San
Francisco Bay Area.
2. Support.
-------
a. Support Services. If Peerless purchases the support services for a particular
----------------
Reference Port and pays the applicable Annual Fee, set forth in Exhibit M
---------
(Royally Payments), Adobe shall provide Peerless with the Adobe Support
(as defined in Paragraph 2(d) (General Description of Adobe Support) below)
commencing upon the date of this Agreement or the applicable Reference Port
appendix. Adobe Support shall include delivery to Peerless of Updates of that
Reference Port.
b. Discontinuance. Adobe Support may, at Adobe's option, be discontinued if
--------------
Peerless fails to pay in a timely manner any Annual Fee referred to in Exhibit M
---------
(Royalty Payments). The foregoing services, if discontinued, may be reinstated
by Peerless, at any time during the term hereof, upon Peerless' payment to Adobe
of an Annual Fee for each intervening year for which such payment was not made.
The same provision for reinstatement shall apply in the event that Peerless
chooses to begin purchasing Adobe Support in the second or any subsequent year
following the year in which Peerless received the initial delivery of that
particular Reference Port from Adobe hereunder.
c. Modifications Resulting from Updates. Any modifications to the Revised Adobe
------------------------------------
Software necessitated by the release of an Update of a Reference Port to
Peerless hereunder shall be the sole responsibility of Peerless, and Adobe shall
have no responsibility to assist Peerless in such effort except to test the
modified Revised Object in accordance with the provisions of Exhibit H (Test
---------
Procedures).
d. General Description of Adobe Support. "Adobe Support" means (i) the delivery
------------------------------------
of Updates of a Reference Port and (ii) the problem resolution services
described below with respect to Problems (as defined below) in the Reference
Port.
e. Description of Problem Resolution Services Provided by Adobe.
------------------------------------------------------------
<PAGE>
(1) Product Problem Reports (PPRs). Peerless shall submit to Adobe, by
------------------------------
electronic mail, facsimile, or personal delivery, Product Problem Reports
("PPR") in the form attached hereto as Attachment 1 (Product Problem Report) to
------------
identify any Problems (as defined in Paragraph 2(e)(2) (Classification of
Problems) below). Adobe may modify the form of PPR from time to time and shall
provide the new form to Peerless.
(2) Classification of Problems. "Problem" means any problem in the Reference
--------------------------
Port which causes the Reference Port (including the Unmodified Core) not to
execute as part of the designated Reference System or otherwise not to operate
substantially in accordance with the Documentation or any other problem that
Peerless discovers in the Reference Port or the Adobe Support Information.
Peerless will use its reasonable business judgment to classify Problems in
accordance with the classifications set forth below in the PPR which Peerless
submits to Adobe.
<PAGE>
ATTACHMENT 1
------------
PRODUCT PROBLEM REPORT
Attached Product Problem Report
<PAGE>
September 10, 1992
========================================================================
PRODUCT PROBLEM REPORT TEMPLATE
========================================================================
Title: OEM internal tracking no. - short one line title of problem
- -----
A single line, short description of the problem. This line may be prefixed by an
OEM's internal problem tracking code for cross reference purposes.
Severity: 4-0
- --------
OEM's proposed severity code. The severity code is based on a general
understanding of the nature and effect of the reported problem. Adobe maintains
the right to alter the severity code submitted by the OEM after consulting with
the OEM. The severity code is based on the following general considerations:
4 - most severe, no work-around, must be fixed
3- fairly severe, difficult to work-around, must be fixed
2- easy work-around, should be fixed in a subsequent release
1- cosmetic or minor problem
0- enhancement or request for design change
Priority: A-C
- --------
OEM's requested priority for resolving the reported problem. This will help
Adobe's Co-development engineering support personnel when prioritizing the OEM's
support needs. The priority code is based on the following general
considerations:
A - move to the top of the priority queue - may result in priority B and C
items being delayed
B - respond to when not working on priority A issues
C - as time permits
Date: date report sent to Adobe
- ----
Name: OEM's project name
- ----
The OEM's project name. This is most applicable if the OEM has multiple ongoing
projects with Adobe.
Version: PostScript/documentation version, date
- -------
The version of PostScript interpreter in question. For documentation, the
document's date should also be included.
Contact: contact at OEM company/e-mail/phone number
- -------
<PAGE>
The primary contact for technical communications at the OEM's site. Include the
person's name and appropriate method of contact
Description: multi-line detailed description of the issue/problem
- -----------
A detailed description of the problem or issue. There is no set limit to the
length of the description which may include small sections of C language code or
PostScript language code. If it becomes necessary to send multiple pages of C or
PostScript language code, these should be transferred electronically by UNIX
UUCP file transfer and referenced in the Files entry below.
To facilitate replication of the reported problem, the following additional
information should also be supplied:
Host computer,
Operating system, application, driver and their respective version numbers,
Exact error message text,
Front panel configuration,
Communications protocol in use (i.e. serial, baud rate, etc.)
Files: list of files that have been UUCP"d to Adobe
- -----
List of files referenced in the above Description of problem section.
========================================================================
<PAGE>
EXHIBIT G
---------
SAMPLE FORMAT FOR REFERENCE PORT APPENDIX
(POSTSCRIPT SUPPORT SOURCE)
I. Description of Reference Port.
II. Description of Reference System.
IlI. Schedule for Delivery of Adobe Deliverables.
IV. Description of Adobe Screening Test Suite.
V. Description of Additional Development Materials.
VI. Description of Other Adobe Software and Related
Documentation.
VII. Training and Technical Support.
VIII. Font Programs.
IX. Technical Coordinators.
<PAGE>
EXHIBIT H
---------
TEST PROCEDURES
(POSTSCRIPT SUPPORT SOURCE)
1. Adobe Screening Test Suite. Adobe shall provide Peerless with a special
--------------------------
version, if any, of the Adobe Screening Test Suite to be utilized by Peerless in
testing each Licensed System in accordance with the milestones set forth in the
applicable Licensed System appendix.
2. Peerless Testing. Prior to submission of each Revised Object to Adobe for
----------------
testing in accordance with the terms hereof, Peerless shall verify that the
Revised Object satisfies all tests in the Adobe Screening Test Suite (or such
subset thereof as is specified in the applicable licensed System appendix). The
First Commercial Shipment of a Licensed System, and any updated version thereof,
shall not be permitted until acceptance by Adobe of the Peerless Deliverables.
To permit testing by Adobe of the final release version of the Revised Object,
Peerless shall, at Adobe's option, in accordance with a mutually agreeable
schedule, provide Adobe with a comprehensive report of the test results of such
Peerless testing which will include all printer output and test results of the
Adobe Screening Test Suite, output samples thereof, and a reproduction release
of the Peerless Deliverables.
3. Adobe Testing.
-------------
(a) Adobe shall be entitled to test the machine readable version of the Revised
Object and, if approved, the Revised Support Source for each Licensed System
prior to First Commercial Shipment and prior to First Commercial Shipment of a
Licensed System containing an engineering change order (ECO) or prior to
effectiveness of a field change order (FCO) affecting such Revised Object for a
Licensed Systems previously approved by Adobe.
(b) Peerless shall notify Adobe at least ninety (90) days in advance of the
estimated date of delivery of the Peerless Deliverables to Adobe for testing.
Subsequently, Peerless shall give Adobe at least thirty (30) days' advance
notice of its anticipated delivery of the Peerless Deliverables for testing, and
provided Peerless meets such timetable, Adobe shall have thirty (30) days, or
such other period as specified in an applicable Licensed System appendix,
following Peerless' delivery of the Peerless Deliverables (and all necessary
Loaned Equipment) to do the following: (i) to test the quality of the Peerless
Deliverables for conformity with the Adobe Screening Test Suite developed by
Adobe and, at Adobe's option, with any other tests and procedures or any updated
or enhanced versions of the Adobe Screening Test Suite, to verify that Peerless
has not modified the Adobe Software beyond the Scope of modifications permitted
by Paragraph 2.1 (License to Use Reference Port Support Source and Adobe Support
Information) of the Agreement, and (ii) to verify that the overall quality of
the Peerless Deliverables complies with the quality level for Adobe products, as
reasonably determined by Adobe from time to time.
(c) Adobe shall conduct the initial testing of the final release version of the
Revised Object free of charge. Adobe shall inform Peerless of the results of
such testing and, if Adobe is unable to accept the Revised Object, the basis for
a finding of nonconformity or failure of the Revised Object to conform to the
criteria specified above. In the event that the Peerless Deliverables do not
conform to the above criteria, Peerless shall use reasonable effort to promptly
correct any
<PAGE>
nonconformity and resubmit the same for retesting by Adobe. This process shall
continue until Adobe accepts the Peerless Deliverables.
(d) Thereafter, if Peerless modifies the Peerless Deliverables, Peerless shall
retest the Peerless Deliverables pursuant to Paragraph 2 (Peerless Testing)
above and resubmit the same as modified to Adobe for testing pursuant to this
Paragraph.
(e) Should the modified Peerless Deliverables not conform to Adobe's acceptance
criteria, as described above, Peerless shall use reasonable effort to promptly
correct any nonconformity and resubmit the same for retesting by Adobe.
(f) Peerless shall, within a commercially reasonable time following Adobe's
acceptance of Peerless Deliverables, update pre-production units shipped for
beta or evaluation purposes prior to First Commercial Shipment.
4. Adobe Retesting Waived. Under certain circumstances such as, for example,
----------------------
when Peerless makes modifications to the Peerless Deliverables to correct a
minor non-conformance or to implement a minor feature enhancement for its
customers, Adobe may request and Peerless shall provide Adobe with the
comprehensive test results from Peerless' testing of the modified Peerless
Deliverables using the Adobe Screening Test Suites. If Adobe determines from its
review of the test results that the modified Peerless Deliverables meet all of
the tests in the Adobe Screening Test Suite and if it is able to verify to its
satisfaction that the overall quality of the modified Peerless Deliverables
complies with Adobe's quality standards, Adobe may, in its sole discretion,
waive the requirement for its retesting of the Peerless Deliverables. If
requested by Adobe, Peerless shall supply Adobe with a declaration signed by an
authorized representative of Peerless attesting to the accuracy of such test
results supplied to Adobe hereunder.
<PAGE>
EXHIBIT I
---------
ADOBE DELIVERABLES
(POSTSCRIPT SUPPORT SOURCE)
The Adobe Deliverables for the initial or any subsequent Reference Port shall
consist of: one (1) master copy of the Reference Port, Documentation, Adobe
Screening Test Suite and the documentation of the Adobe Screening Test Suite, as
described In the Reference Port appendix and one (1) master copy of the
Reference Port in object code form suitable for execution on a Reference System
including the appropriate controller and printer engine required to that the
compiled object code version of the Reference Port executes as part of the
Reference System in accordance with the warranty provisions set forth in
Paragraph 7.1 ("Reference Port Warranties") of the Agreement.
- --------- ---
<PAGE>
EXHIBIT J
---------
MINIMUM TERMS OF
PEERLESS DEVELOPMENT AGREEMENT
Any Peerless Development Agreement shall contain the following provisions:
1. Peerless and the OEM Customer shall acknowledge and agree that Peerless has
no right to grant a license to use of distribution rights to the Revised Object
and that only Adobe has such right.
2. Peerless and the OEM Customer shall acknowledge and agree that Adobe shall
not provide any warranty, proprietary rights indemnification, or support
services to the OEM Customer regarding the Revised Object developed by Peerless
and the Licensed System appendix shall note no such warranty, indemnification or
support services from Adobe.
3. Peerless and the Customer shall acknowledge and agree that prior to any
distribution of the Revised Object by the OEM Customer, Adobe must test and
accept the Revised Object per the terms of the Agreement between Adobe and
Peerless.
<PAGE>
EXHIBIT K
---------
SECURE PROCEDURES FOR HANDLING ADOBE SUPPORT INFORMATION
(POSTSCRIPT SUPPORT SOURCE)
1. Authorized Employees. Peerless agrees that it will not (a) disclose all or
--------------------
any portion of the Adobe Support Information to third parties, with the
exception of authorized employees ("Authorized Employees") and authorized
contractors ("Authorized Contractors") (subject to Peerless' having obtained
authorization for use of such contractors in accordance with Paragraph 7 (Prior
Approval of Contractors) below) (i)who require access thereto for a purpose
authorized by this Agreement and (ii) who have signed the appropriate employee
or contractor agreement substantially in the form attached as Exhibit C-1
-----------
(Employee Nondisclosure Agreement) or Exhibit C-2 (Contractor Agreement), as
-----------
applicable and (iii) who sign a notice of confidentially in the form attached to
Exhibit C-3 (Notice Regarding Confidentiality) prior to the initial access to
- -----------
Adobe Support Information.
2. Adobe Support Information.
-------------------------
a. Peerless shall ensure that all Adobe Support Information received from Adobe,
and copies made thereof, will be properly marked or otherwise appropriately
identified as Adobe Support Information before being made available to
Authorized Employees and Authorized Contractors hereunder.
b. Peerless shall ensure that the same degree of care is used to prevent the
unauthorized use. dissemination. or publication of the Adobe Support Information
as Peerless uses to protect its own confidential information of a like nature,
but in no event shall the safeguards for protecting such Adobe Support
Information be less than a reasonably prudent business would exercise under
similar circumstances. Peerless shall take prompt and appropriate action to
prevent unauthorized use or disclosure of Adobe Support Information by the
Authorized Employees and Authorized Contractors.
c. Authorized Employees and Authorized Contractors shall be instructed not to
copy Adobe Support Information on their own, and not to dispose Adobe Support
Information to anyone not authorized to receive it.
d. Adobe Support Information shall be handled, used, and stored solely at the
Development Site.
3. Trade Secrets. The techniques, algorithms, and processes contained in the
-------------
Adobe Software and Font Programs which have been developed, acquired, or
licensed by Adobe, or any modification or extraction thereof, constitute trade
secrets of Adobe and/or its suppliers, and will be used by Peerless only in
accordance with the terms of this Agreement. Peerless will take all measures
reasonably required to protect the proprietary rights of Adobe and its suppliers
in the Adobe Support Information and will promptly notify Adobe of any lost or
missing items and take all reasonable steps to recover such items.
4. Marketing of Clone Products. If at any time during the term of this
---------------------------
Agreement Peerless chooses to market a product having page description
capabilities that are substantially
<PAGE>
compatible with the PostScript Language ("Clone Product"), it may do so,
provided however, that Adobe may in its sole discretion, and without liability
to Peerless, terminate this Agreement effective sixty (60) days after notice of
termination, except that this right of Adobe to terminate this Agreement shall
not apply to the marketing of any Clone Product which Peerless has entered into
agreement for the development or licensing of prior to the Effective Date. In
the event of such termination, Peerless shall return all copies and portions of
copies of Reference Port Support Source and all other Adobe Support Information
and comply with all of its obligations upon termination of the Agreement as set
forth in Paragraph 9 (Term and Cancellation) of the Agreement.
5. Clone Product Development. The terms of Paragraph 4 (Marketing of Clone
-------------------------
Products) above do not preclude Peerless from developing a Clone Product;
however, if Peerless engages in such Clone Product development during the term
of this Agreement, it shall ensure that there is no sharing of design documents
or schematics supplied by Adobe, the Reference Port Support Source or other
information based upon or derived from the Reference Port Support Source, or
other portions Of Adobe Support Information, or any facilities or personnel with
access to any of the above, with such Clone Product development. Peerless shall
ensure that all Authorized Employees and Authorized Contractors who have had
previous access to Adobe Support Information will be precluded for a period of
twelve (12) months after their latest access to such Adobe Support Information,
including Reference Port Support Source, from being employed in any Clone
Product Development. "Employment in any Clone Product development" shall be
defined as having direct access to, or producing any specifications,
documentation, or source code for, components of a Clone Product. Peerless shall
further ensure that each such employee or contractor shall, concurrent with the
commencement of work on such Clone Product development within Peerless, sign a
written affirmation to Peerless on a form provided by Peerless which states that
each such employee or contractor (a) has neither retained nor had access for a
minimum period of twelve (12) months to any Adobe Support Information, and (b)
will not utilize, or facilitate use of, any Adobe Support Information in such
Clone Product development. This prohibition relating to Clone Product
development shall apply equally to raster-output devices, to display or screen
output devices, or to any other peripheral devices.
6. Obligations Survive Termination. The provisions of Paragraph 5 (Clone Product
-------------------------------
Development) above shall survive the termination, cancellation or expiration of
the Agreement.
7. Prior Approval of Contractors. Notwithstanding the provisions in this Exhibit
-----------------------------
permitting Authorized Contractors to have access to Adobe Support Information,
Peerless may not permit a contractor to come into contact with Adobe Support
Information or engage in the development of Licensed System products hereunder
unless Peerless has first obtained such authorization in writing from Adobe.
Adobe, in its sole discretion, may withhold such approval in the event that a
contractor (or contractor's employer) is engaged in Clone Product development,
either for its own benefit or for the benefit of a third party, or if Adobe
believes that the contractor may be engaged in similar product development, and
Peerless cannot assure Adobe to its satisfaction that contractor, while engaged
in supporting such development activities, will be able to refrain from
commingling or sharing any portion of the Adobe Support Information with any
such Clone Product development.
8. Proprietary Notices. In order to protect Adobe's copyright and other
-------------------
ownership interests, Peerless agrees that as a condition of its rights
hereunder, each copy of the Adobe Support Information, or any portion thereof or
documentation therefor, shall contain a valid copyright
<PAGE>
notice and any other proprietary notices, including the copyright notices of
Adobe's suppliers, which appear on or in the Adobe Support Information and
documentation delivered to Peerless hereunder or as Adobe may require from time
to time. Presence of a copyright notice does not constitute an acknowledgment of
publication.
9. Font Programs. Peerless agrees to hold any unencrypted outline information
-------------
relating to the Font Programs in confidence, disclosing such information only to
Authorized Employees and Authorized Contractors having a need to use such
information as permitted by this Agreement, and to take all reasonable
precautions to prevent disclosure of such information to other parties.
10. Proprietary Rights Audit. During the term of the Agreement and for a period
------------------------
of eighteen (18) months thereafter, Adobe or its authorized representatives
shall have access to such portion of Peerless' records and premises to allow
Adobe to determine whether Peerless is substantially in compliance with this
Exhibit K and Paragraph 4 ("Proprietary Rights; Confidentiality") of the
- --------- -----------
Agreement in no event shall audits be made hereunder more frequently than once a
year. Such access shall be (a) during Peerless' regular business hours, (b)
arranged so that, to the extent possible, Peerless' regular business activities
are minimally disrupted and (c) under the terms of a confidentiality agreement
acceptable to Peerless and executed by the individual(s) conducting such audit.
If such audit reveals that Peerless is not substantially in compliance with its
obligations to protect Adobe's proprietary rights, Peerless shall pay the
reasonable costs of such audit. Otherwise, Adobe shall pay the costs of such
audit. Such payment will not preclude Adobe from exercising any right which It
may have under the Agreement. Peerless shall promptly correct any deficiencies
discovered in the course of the audit.
<PAGE>
EXHIBIT L
---------
ADDITIONAL SECURE PROCEDURES FOR HANDLING
ADOBE RESTRICTED INFORMATION
(POSTSCRIPT SUPPORT SOURCE)
1. Adobe Restricted Information means any portion of Adobe Support Information
----------------------------
that is designated as such in a Reference Port appendix or otherwise in writing
by Adobe. The provisions of this Exhibit L shall apply to such Adobe Restricted
---------
Information in addition to the provisions of Exhibit K (Secure Procedures for
---------
Handling Adobe Support Information).
2. Adobe Restricted Information.
----------------------------
a. Adobe will identify as such all Adobe Restricted Information when supplied to
Peerless either by marking the Adobe Restricted Information that is provided to
Peerless or by designating those portions of the Adobe Support Information which
are Adobe Restricted Information in a Reference Port appendix or in some other
written form. Once identified by Adobe as containing Adobe Restricted
Information, any information based upon or derived from such Restricted
Information, whether in oral or written form, shall be treated by Peerless as
Adobe Restricted Information. Peerless shall ensure that all such Adobe
Restricted Information received from Adobe, and copies made thereof, will be
properly marked or otherwise appropriately identified as Adobe Restricted
Information before being made available to Authorized Employees and Authorized
Contractors hereunder.
b. Peerless agrees that it will not (i) reproduce any portion of any
documentation, source code or hard copy printouts thereof included in Adobe
Restricted Information, in any form or medium. without Adobe's prior written
permission except as necessary for designing, developing, adapting, testing, and
maintaining Revised Support Software and for archival storage: (ii) allow hard
copy printouts of any portion of source code Included in Adobe Restricted
Information to exist except within the secured area as described in Paragraph 5
(Secure Computer System) below; (iii) store or otherwise use source code
included in Adobe Restricted Information except as provided in Paragraph 5
(Secure Computer System) below; (iv) use Adobe Restricted Information for any
purpose not specifically authorized in this Agreement; or (v) handle, use, and
store Adobe Restricted Information except at the Development Site and in
accordance with the security procedures set forth below.
c. Peerless shall establish a set of procedures, as submitted to and approved by
Adobe, or comply with the procedures in Paragraphs 3 (Peerless Log) through 6
(Development Site) of this Exhibit L, which shall govern the handling, use, and
---------
storing of Adobe Restricted Information.
d. All copies of Adobe Restricted Information must be kept in a locked drawer,
cabinet, or room at all times when not in use.
3. Peerless Log. Peerless shall maintain a log listing all Authorized Employees
------------
and Authorized Contractors who have had access to Adobe Restricted Information.
Peerless agrees to comply with Adobe's requests, from time to time, to provide
Adobe with copies of the list and updates thereto and of all such
Confidentiality Agreements entered into by Peerless with its Authorized
<PAGE>
Employees and Authorized Contractors and not previously provided to Adobe.
Peerless guarantees the compliance of all such Authorized Employees and
Authorized Contractors with their obligations under such Notices Regarding
Confidentiality. Peerless agrees not to provide access to Adobe Restricted
Information to any employee or contractor for the purpose of using such Adobe
Restricted Information to develop any product other than Revised Adobe Software.
Peerless shall advise all Authorized Employees and Authorized Contractors of
their responsibilities under their confidentiality agreement, both at the time
such person's access to Adobe Restricted Information commences and at the time
such access ceases.
4. Access to Written Adobe Restricted Information. Access to any written Adobe
----------------------------------------------
Restricted Information shall be controlled through the following procedures:
b. Secure Computer System Security Provisions.
------------------------------------------
(1) Access to Adobe Restricted Source which is installed on the Secure Computer
System will be limited to (a) Peerless' Authorized Employees and Authorized
Contractors. and (b) the SSA for the purposes of system maintenance and backups.
(2) All such individuals included above shall have signed a confidentiality
agreement in the form attached as Exhibit C-3 (Notice Regarding
-----------
Confidentiality).
(3) Access to the Secure Computer System will be controlled by password
identification. Passwords will be issued and controlled by the SSA.
(4) Backups of Adobe Restricted Source will be administered by the SSA and will
be securely archived within the controlled access site containing the Secure
Computer System or at a site approved in writing by Adobe. All backup tapes
containing Adobe Restricted Source shall be labeled "Peerless Confidential" and
shall be subject to Peerless' maximum security measures. Network system
maintenance shall be conducted under the supervision of the SSA by Authorized
Employees and Authorized Contractors.
(5) Adobe Restricted Source which is delivered to Peerless will be transported
to the Peerless SSA by one of the following methods: (a) on magnetic media by a
mutually agreed upon carrier, or (b) transmitted by a phone line to a call-back
modem inked to Peerless' Secure Computer System and located within Peerless'
secured site. Such modem shall normally be disconnected and locked-away with
access controlled by the SSA.
(6) Revised Object from Adobe Restricted Source will be made available for use
at other Development Site(s) located outside of the secured area for the purpose
of linking with other software related to development of a Licensed System.
Transfer of such Revised Object from the secured area will occur through
physical transport on magnetic media and will be managed by the SSA. All
unneeded symbol tables. etc. will be removed from the Revised Object prior to
transfer.
(7) Revised Object may be rendered into EPROMS outside of the Development Site
when necessary and in accordance with the terms of the Adobe OEM License
Agreement.
6. Development Site.
----------------
<PAGE>
If more than one Development Site is listed in Exhibit D (Development Site),
Peerless will maintain a separate Secure Computer System at each such site which
has access to Adobe Restricted Information. Each site will have its own SSA
directly responsible to an officer of Peerless.
7. Competitive Product Development. An employee or contractor who has had access
-------------------------------
to Adobe Restricted Information shall be subject to a twelve (12) month
prohibition against employment in any Competitive Product development measured
from the latest access to Adobe Support Information. A "Competitive Development"
is defined as any product having page description capabilities which are not
substantially compatible with the PostScript language or products having
facilities for rendering outline fonts other than Adobe's Type 1 font
technology. "Employment in any Competitive Product development" is defined as
having direct access, to or producing any specifications, documentation or
source code for, components of a Competitive Product.
<PAGE>
EXHIBIT M
---------
ROYALTY PAYMENTS
(POSTSCRIPT SUPPORT SOURCE)
1. Royalties Payable to Peerless Adobe shall pay to Peerless. royalty equal to
-----------------------------
[*].
2. Terms of Payment of Royalties.
-----------------------------
(a) All royalties due hereunder shall be paid within thirty (30) days after the
date royalties are received from the OEM Customer.
(b) To ensure compliance with the terms of this Agreement. Peerless shall have
the right to have an inspection and audit of all the relevant accounting and
sales books and records of Adobe conducted by an independent certified public
accountant reasonably acceptable to both parties whose fee is paid by Peerless
and shall be conducted during regular business hours and in such a manner as not
to interfere with normal business activities. In no event shall audits be made
hereunder more frequently than once a year. If such inspections should disclose
any under reporting, the delinquent party shall promptly pay the other party
such amount, together with interest thereon at the rate of 1-1/2% per month or
the highest interest rate allowed by law, whichever is lower, from the date on
which such amount became due, and shall pay the reasonable costs of such audit
if the underreporting is greater than five percent (5%).
(c) All payments shall be in United States dollars. Payment to Peerless shall be
made by wire transfer directly to:
Name of Bank: [*]
Address: [*]
Contact:
Account Number: [*]
Routing Number: [*]
[*]
[*Confidential Treatment Requested]
<PAGE>
EXHIBIT N
---------
ADDITIONAL PROVISIONS REGARDING USE OF TRADEMARKS
1. Ownership and Use of Trademarks. Peerless agrees that it will use the
-------------------------------
applicable Adobe Trademarks on all copies, advertisements, brochures, manuals
and other appropriate uses made in the promotion of this Agreement Peerless
acknowledges that Adobe and its suppliers retain exclusive ownership of all
trademark and copyright rights to the Adobe Trademarks, logos, and product
names.
2. Proper Use of Trademarks. When using the Adobe Trademarks, including
------------------------
logotypes, Peerless shall display the appropriate legend, for example: "Adobe
and PostScript are trademarks of Adobe Systems Incorporated." Peerless shall
also display the appropriate symbol(TM) or (C) adjacent to these trademarks. Use
of the Adobe Trademarks will be in accordance with the most current version of
Adobe's Trademark Manual. Peerless agrees not to use any other trademark or
service mark in connection with any of the Adobe Trademarks without Adobe's
prior written approval.
3. Quality Standards. Peerless agrees to maintain quality satisfactory to Adobe
-----------------
in any products or services it supplies in connection with the Adobe Trademarks.
Peerless agrees to cooperate with Adobe in facilitating Adobe's monitoring of
the nature and quality of such products and services, and to supply Adobe with
specimens of use of the Adobe Trademarks upon request.
4. Infringement Proceedings. Peerless agrees to notify Adobe of any unauthorized
------------------------
use of the Adobe Trademarks by others promptly as it comes to Peerless'
attention. Adobe shall have the sole right and discretion to bring infringement
or unfair competition proceedings involving the Adobe Trademarks.
<PAGE>
EXHIBIT 10.13
ADDENDUM NO. 1
EFFECTIVE AS OF MARCH 31, 1995
TO
PCL DEVELOPMENT AND LICENSE AGREEMENT
BETWEEN
ADOBE SYSTEMS INCORPORATED AND PEERLESS SYSTEMS CORPORATION
NAME OF LICENSED SOFTWARE: HP COLOR LASERJET EMULATOR
THIS ADDENDUM sets forth additional and different terms and conditions
particular to the Licensed Software described below and shall be
incorporated by reference into the PCL Development and License Agreement
between PEERLESS SYSTEMS CORPORATION ("Peerless") and ADOBE SYSTEMS
INCORPORATED ("Adobe"), effective as of June 14, 1993, as amended on October
13, 1993, September 22, 1993, and August 5, 1994 (the "Agreement"). Such
different or additional terms are applicable only to the Licensed Software
described below and, unless otherwise specifically stated below, in no way
alter the terms and conditions applicable to other Licensed Software covered
by the Agreement. All capitalized terms used but not defined in this
Addendum shall retain the same meaning as given them in the Agreement, and
such definitions are incorporated herein by reference.
A. LICENSED SOFTWARE: HP Color LaserJet Emulator suitable for the
Adobe 2016 Open Architecture environment (the "Color Emulator") that is
functionally equivalent to the PCL that is found in the newly released HP
Color LaserJet.
B. SPECIFICATIONS: The Color Emulator will operate in accordance
with the specifications set forth in Exhibit A (PostScript 2016 Based HP
---------
Color LaserJet Emulator Specifications) attached hereto. As with the
PeerlessPrint5E language, Peerless shall continue to update the
PeerlessPrint5C language to be compatible with all meaningful HP color
PCL5E-based products as they evolve.
C. DEVELOPMENT SCHEDULE: The development and milestone schedule
(the "Development Schedule") attached hereto as Exhibit B (HP Color LaserJet
---------
Emulator Development Schedule) sets forth the responsibilities of the parties
with respect to the development of the Color Emulator. Development tasks are
shown in the column entitled "Task." The party or parties responsible for a
particular task are shown in the same row as that task under the column
entitled "Responsibility." The date upon which a particular task is to be
completed is shown in the same row as that task under the column entitled
"Date." Each party agrees to complete the tasks for which it is responsible
as shown on the Development Schedule and to provide any deliverables in
connection with those tasks on the relevant dates set forth on the
Development Schedule. The parties agree that any delay by a party in
completing a task upon which tasks of the other party are contingent will
extend the
<PAGE>
completion date for such other tasks on a one-for-one basis for each day of
delay (contingency of tasks is indicated in the Development Schedule).
D. ACCEPTANCE:
1. ACCEPTANCE PROCEDURES. Upon completion of a final production
version of the Color Emulator that operates in accordance with
specifications described in Exhibit A (PostScript 2016 Based HP Color
---------
LaserJet Emulator Specifications) as determined by all Test Suites, Peerless
shall deliver to Adobe such software and any additional deliverables that
Peerless may be required to provide pursuant to the Development Schedule.
Sections 4.2 through 4.6 of the Agreement, and the acceptance procedures set
forth therein, are hereby incorporated by reference into this Addendum.
2. TEST SUITES. Adobe and Peerless acknowledge that they will use
the Genoa Test Suites for the HP Color LaserJet Printer. Adobe shall define
test suites and identify acceptance and performance criteria in accordance
with milestone 12 of the Development Schedule. Peerless shall obtain at its
own expense all necessary test suites.
E. APPLICABLE ROYALTIES:
1. ADVANCE ROYALTIES. In an effort to assist Peerless in funding
the development of the Color Emulator, Adobe shall pay Peerless advance
royalties of [*] (the "Advance Royalties") ([*] of which has already been
paid) in installments upon completion of certain milestones and in the
amounts shown on the Development Schedule for a particular milestone under
the column entitled "Payment". Except as otherwise stated in Section E(2)
below, the Advance Royalties shall be subject to the same terms and
provisions of the Agreement as are applicable to the Pre-Paid Royalties (as
defined in Section 8.6 of the Agreement).
(a) In the event that Adobe fails to deliver deliverables required
by the Development Schedule on the date specified in the Development
Schedule and Peerless, through no fault of its own, is unable to meet any
milestone delivery dates that are specified as contingent on such
deliverable as a result of such Adobe-caused delays (contingency of tasks is
indicated in the Development Schedule), Adobe is obligated to make the
milestone payments to Peerless on the Target Dates specified in the
Development Schedule; provided, however, that in no event shall Adobe be
required to make the payments associated with milestones 2 and 15 shown on
the Development Schedule until such milestone is actually met.
(b) In the event that Peerless fails to deliver deliverables
required by the Development Schedule on the dates specified in the
Development Schedule, other than as a result of a failure of Adobe to
deliver deliverables required by the Development Schedule on the dates
specified in the Development Schedule, Adobe shall be entitled to withhold
all subsequent milestone payments until it receives the delayed
deliverables.
2. RECOUPMENT OF ADVANCE ROYALTIES. The parties agree that the
Advance Royalties shall be added to Pre-Paid Royalties, and that such
aggregate amount
[*Confidential Treatment Requested]
<PAGE>
comprised of the Pre-paid Royalties and the Advance Royalties (collectively,
"Total Pre-paid Royalties") shall be recouped [*].
3. OBJECT ROYALTIES. Adobe shall pay Peerless for each copy of the
Color Emulator or any subsequent Peerless Color Product [*].
Pursuant to the foregoing, the parties agree that Subsection 8.2(iii)
of the Agreement is hereby amended and restated to read in full as follows:
"(iii) In the event that Peerless develops Licensed Software
implementing PCL Color Products ("Peerless Color Products") and
provides Adobe with the Adobe version of such Peerless Color Products,
Adobe shall pay Peerless for each copy of Licensed Object or Object
Derivative for such Peerless Color Products shipped or delivered by
Adobe or any Adobe Sub-Licensee an amount equal to [*]."
4. COLOR EMULATOR PRICES. Adobe shall have the sole discretion to
determine prices with respect to the Color Emulator. Adobe agrees, however,
not to discount prices of the Color Emulator by an amount proportionately
greater than the amount by which it discounts PostScript software pricing.
5. FORECASTS. Commencing June 1995, Adobe shall provide to
Peerless semi-annual forecasts of revenues expected from the licensing of
the Color Emulator.
F. ADDITIONAL OBLIGATIONS:
1. SHIPMENT OF PEERLESS PCL5E. Adobe agrees to offer PCL5E
provided by Peerless as a PCL option for the Adobe 2016 Open Architecture
(the "PCL5E for 2016"), provided that (i) Peerless delivers and Adobe
accepts the PCL5E for 2016 and (ii) sufficient customer demand exists at the
time of and after Adobe's acceptance of the PCL5E for 2016. This Section
F(1) does not create any obligation on the part of Adobe to offer PLC5E for
any subsequent Adobe architectures.
G. DESIGNATED PERSONS.
1. Technically qualified Peerless contact to respond to
information requested by Adobe:
Larry Feldman Phone #: (310) 297-3267
Director of Software Fax: (310) 536-0058
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
2. Technically qualified Adobe contact to respond to information
requested by Peerless:
[*Confidential Treatment Requested]
<PAGE>
Carmen Hernandez Phone #: (415) 962-4713
Co-Development Consulting
Engineer Fax: (415) 960-2570
Adobe Systems Incorporated
1585 Charleston Road
P.O. Box 7900
Mountain View, CA 94039-7900
3. Adobe Contract Representative:
Marsha Dillon Phone #: (415) 962-6683
Business Development Manager Fax: (415) 965-7430
Adobe Systems Incorporated
1585 Charleston Road
P.O. Box 7900
Mountain View, CA 94039-7900
4. Peerless Contract Representative:
William Wood Phone #: (310) 297-3210
Peerless Systems
Corporation Fax: (310) 536-0058
2381 Rosecrans Avenue
El Segundo, CA 90245
<PAGE>
IN WITNESS WHEREOF, Peerless and Adobe have caused this Addendum No. 1 to
be executed by their duly authorized representatives.
Adobe: OEM:
ADOBE SYSTEMS INCORPORATED
PEERLESS SYSTEMS CORPORATION
By: By:
---------------------------------- ----------------------------------
Print Name: John E. Warnock Print Name: E. A. Gavaldon
-------------------------- --------------------------
Title: CEO Title: President and CEO
------------------------------- -------------------------------
Date: May 3, 1995 Date: April 18, 1995
------------------------------- --------------------------------
<PAGE>
EXHIBIT A
POSTSCRIPT 2016 BASED HP COLOR LASERJET EMULATION SPECIFICATIONS
GENERAL
Release 1. Release 1 of the Color Emulator will be a display list generating
implementation that will use the Adobe display list management approach. If
the Color Emulator uses this approach, the Adobe environment will be able to
run in a compression configuration to reduce memory usage. The emulation will
be tested in a compression configuration. It will have planar frame buffer
organization and be for CMYK devices only. Such initial release will also be
restricted to single bit per pixel support per color component.
Release 2. Release 2 of the Color Emulator will include multi-bit per pixel,
"chunky" composite frame buffer organization and CMY device support.
An additional release will address any additions or changes necessary to
offer functional equivalence to the HP 1200 line of enhanced PCL5 color
inkjet printers or the latest HP PCL5E color inkjet printer on the market.
The requirements for this release will be defined during the development of
Release 1 and Release 2 of the Color Emulator.
The Color Emulator will be a derivative product based on the Adobe PCL5E
product currently in development for delivery on the Adobe PostScript 2016
platform. As such, the Color Emulator will contain the same capabilities
provided in Adobe PCL5E, augmented by provisions to incorporate color. The
Color Emulator will conform with Hewlett-Packard as defined in the following
Hewlett-Packard document, which describes PCL specifications for the HP
Color LaserJet:
PCL5 COLOR TECHNICAL REFERENCE MANUAL, EDITION 1, SEPTEMBER 1994, PART
NO. E00994
In addition, the Color Emulator will conform to those undocumented features
of Hewlett-Packard Color LaserJet that are verified by the test suites
identified in paragraph D(2) of the Addendum.
To the extent that Hewlett-Packard printers do not conform with the above
documentation, the Color Emulator may not exactly emulate a particular
Hewlett-Packard printer or software revision. The Color Emulator will not
abort operation or lose subsequent input in the presence of abnormal or
illegal input.
The Color Emulator will be developed and tested specifically for the Adobe
[*] Reference Platform Controller, driving a [*] print engine. Other
controller or engine combinations are beyond the scope of Release 1 of the
Color Emulator, although the design and implementation will not be
unreasonably limited to this specific platform without mutual consent of
both parties. The features schedule and related reimbursement of Peerless
development costs for
[*Confidential Treatment Requested]
<PAGE>
additional development platforms or engines will be mutually agreed upon at
the time Adobe requests such additional development work.
FLOATING POINT
The HPGL portion of the Color Emulator will be configured for use without
floating point hardware support.
PJL
Hewlett-Packard Printer Job Language (PJL) is, in general, NOT included as
part of the Color Emulator. Adobe product code is responsible for any PJL
parsing and parameter management in its environment. Any new PJL commands in
the HP Color LaserJet product need to be emulated and may require
cooperation from the Peerless code as specified by Adobe. The interface
currently provided in Adobe PCL5E (obtain the NVRAM/Front Panel information
from the Adobe product code per Adobe's specification of the interface and
parsing the PJL Universal Exit command) will continue to be provided in the
Color Emulator.
FONT SUPPORT
The Color Emulator does not include a font rasterizer or font data. The
Color Emulator requires a LaserJet 4 compatible font rasterizer and font
data. Font selection and appearance will match or conform to the Hewlett-
Packard products only to the extent that the font rasterizer and font data
supplied by Adobe do so. The Color Emulator will use the Adobe font system
in the same manner as with Adobe PCL5E.
PRODUCT CODE
Peerless will provide a modified version of the Adobe product code that
implements a model for the eventual product front panel that has the same
basic functionality as the HP Color LaserJet front panel, including printing
of sample pages.
<PAGE>
EXHIBIT B
HP COLOR LASERJET EMULATOR DEVELOPMENT SCHEDULE
<TABLE>
<CAPTION>
MILESTONE TASK WHO DATE PAYMENT
<C> <S> <C> <C> <C>
1 Letter of intent* Joint [*] [*]
2 Sign Addendum No. 1 containing detailed, Joint [*] [*]
agreed upon milestone schedule and
specification
3 Deliver an Onyx Color Reference Platform Adobe [*] [ ]
Version 2016, [*] engine, and color
capable PostScript.
4 Deliver Camelot simulator, "tool chain" Adobe [*] [ ]
necessary to build 2016 and existing PCL5E
product.
5 Provide a knowledgeable technical contact. Adobe [*] [ ]
familiar with the internal 2016 interfaces
that the Color Emulator will use who can
acknowledge and focus appropriate attention
on Peerless' questions within 8 working
hours and interact daily until the necessary
information is fully developed.
6 Deliver detailed engine specification for Adobe [*] [ ]
[*]
7 Deliver comprehensive details, including Adobe [*] [ ]
any new PJL related specifications, of the
software interface between the PDL and
the Adobe Print Engine Driver for the [*].
The 2016 call interfaces must provide
necessary and sufficient capabilities to
support the language requirements defined
in the specification documents.
8 Deliver information for color calibration Adobe [*] [ ]
method, calibration tables, formats, tools,
and the color space standard Adobe uses for
PostScript color products.
</TABLE>
[*Confidential Treatment Requested]
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
9 Validate reference platform, simulator, Joint [*] [*]
and tool chain by replicating then-current
PCL5E in the color development
environment using Adobe/PP5E GRS
package.
10 Delivery and acceptance of detailed Peerless [*] [*]
specification describing how Peerless is
using the 2016 print environment interfaces
for Release 1 of the Color Emulator.
11 Delivery and acceptance of the Color Peerless [*] [*]
Emulator capable of generating monochrome
output using Peerless Color GRS package.
12 Specify test suites and acceptance and Adobe [*] [ ]
performance criteria to be used for final
acceptance.
13 Deliver 2016 with all Color Emulator- Adobe [*] [ ]
relevant interfaces "frozen" for the duration
of the 2016 development cycle.
14 Deliver an Agate Color Reference Platform Adobe [*] [ ]
Version 2016.
15 Delivery and acceptance of the Onyx-based Peerless [*] [*]
Color Emulator capable of generating bi-
level color output suitable for controlled
demonstration.
16 Delivery and acceptance of the Agate-based Peerless [*] [*]
Color Emulator capable of generating bi-
level color output suitable for controlled
demonstration.
17** Delivery and acceptance of Release 1 of the Peerless [*] [*]
Agate-based Color Emulator that satisfies
the acceptance criteria identified pursuant to
milestone 12 above.
18 Delivery and acceptance of detailed Peerless [*] [ ]
specification describing how Peerless is
using the 2016 print environment interfaces
for Release 2 of the Color Emulator.
19 Delivery and acceptance of Release 2 of the Peerless [*] [ ]
Color Emulator.
</TABLE>
[*Confidential Treatment Requested]
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
20 Delivery and acceptance of the Color Peerless [*] [ ]
Emulator for the latest HP PCL5E color
inkjet printer on the market.
</TABLE>
* Payment shall be refunded if milestone 2 is not met.
** Payment not required until milestone is met.
[*Confidential Treatment Requested]
<PAGE>
EXHIBIT 10.17
AGREEMENT
This Agreement (the "Agreement") is made and entered into as of August 23,
1996, between LAUREN L. SHAW ("Shaw") and PEERLESS SYSTEMS COMPANY (the
"Company").
RECITALS
WHEREAS, the Company and Shaw desire to amend and restate that certain
Executive Employment Agreement, dated January 6, 1996 (the "Employment
Agreement").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties agree, effective as of the date of this Agreement,
as follows:
1. COMPENSATION PAYABLE.
(a) Effective as of the date of this Agreement, and on the terms set
forth herein, Shaw hereby resigns as an employee and executive officer of the
Company and from all other positions which he currently holds with the Company,
other than his position as a member of the Board of Directors of the Company.
(b) In consideration for the execution of this Agreement, including
the Consulting Agreement attached as Exhibit A hereto and the Release attached
as Exhibit B hereto, the Company agrees to pay Shaw, without offset, $9,080 bi-
weekly (every other week) (the "Consulting Fees") on each regular pay day of the
Company until the earlier of (i) December 31, 1998 or (ii) the last day of the
15th full month ending after the Company completes a firmly-underwritten public
offering (the "IPO"); provided, that if the underwriters determine to limit the
number of shares to be included in the IPO by Shaw, Renshaw and their affiliated
entities such that less than 1,297,937 (pre-split) Firm Shares (as hereinafter
defined) or less than 102,063 (pre-split) Option Shares are included therein,
the payment of Consulting Fees shall be extended until the last day of the 15th
full month ending after the Company completes another firmly-underwritten public
offering or offerings in which all the Registrable Securities excluded from the
IPO are included as Firm Shares. As a consultant, the Company will not withhold
from the Consulting Fees any amount for taxes, social security or other payroll
deductions. The Company will issue Shaw a 1099 form with respect to Shaw's
Consulting Fees. Shaw acknowledges that he will be entirely responsible for
payment of any such taxes, and he hereby indemnifies and holds harmless the
Company from any liability for any such taxes, or any penalties or interest with
respect thereto which may be assessed by any taxing authority.
In addition, the Company shall pay to Shaw all amounts due for his
accrued and unused vacation, sabbatical and unpaid salary to date, if any, and
out-of-pocket expenses which amount the parties hereto agree to be $26,943, less
standard deductions and withholdings (the "Wage Payment", which, collectively
with the Consulting Fees, is referred to herein collectively as the "Cash
Payment"). The Cash Payment shall constitute all amounts now due or hereafter
1.
<PAGE>
payable by the Company to Shaw arising from this Agreement and the Employment
Agreement, except for the Consulting Premiums subsequently payable if incurred,
as set forth in Section 3 hereof and the legal fees and expenses payable
pursuant to Section 6 hereof. The Wage Payment shall be due and payable upon
execution of this Agreement. This Agreement shall not affect any other
obligations which the Company may have to Shaw (other than pursuant to the
Employment Agreement) under any other written agreement between the Company and
Shaw, or at law (including, without limitation, the indemnification agreement
and other obligations referred to in this Agreement, and the Company's
obligations at law under the Company's charter documents to indemnify Shaw for
liabilities which he may have incurred in the course of his employment by the
Company).
(c) Shaw shall not be obligated to mitigate or attempt to mitigate the
obligations of the Company to make payments to him hereunder, and no amounts
earned by Shaw, whether pursuant to this Agreement or from the parties
unaffiliated with the Company, shall in any manner reduce, abate or otherwise
affect the Company's obligations to make such payments to Shaw.
(d) In the event of death, Shaw's heirs or his estate shall be
entitled to receive payment of the Consulting Fees for the balance of the period
provided in Section 1(b) above.
2. HEALTH INSURANCE. To the extent permitted by the federal COBRA law and
by the Company's current group health insurance policies, Shaw will be eligible
to continue his health insurance benefits at his own expense and, later, to
convert to an individual policy if he wishes. Shaw will be provided with a
separate notice of his COBRA rights.
3. Consultancy.
(a) The Company shall retain Shaw as an independent consultant after
the date hereof, and Shaw agrees to perform such services upon request in
accordance with the terms and provisions of the Consulting Agreement attached as
Exhibit A until December 31, 1998 (the "Consulting Term"). During the Consulting
Term, Shaw shall perform such consulting services as the Board of Directors
shall reasonably request to the extent that the same would not unreasonably
interfere with any activities in which Shaw may then be engaged, and upon the
terms and subject to the conditions set forth in the Consulting Agreement;
provided that Shaw shall not be required to undertake to perform, or to perform,
any consulting services which:
(i) do not exclusively involve executive-level consultation and
advice;
(ii) are not contained in an assignment in written memorandum
form; or
(iii) involve travel outside of Los Angeles or Orange County,
California.
2.
<PAGE>
In addition, Shaw shall not be required, without his consent, to render more
than four hours of consulting services in any calendar week during the
Consulting Term, or to render consulting services in more than three calendar
weeks in any calendar month during the Consulting Term, and Shaw shall have the
right with respect to each consulting assignment to defer performance of such
consulting assignment for up to four calendar weeks from its receipt. Activities
of Shaw in carrying out his duties as a member of the Board of Directors shall
not be deemed to be consulting services subject to this Agreement. Nothing
contained herein shall require the Company to utilize Shaw's consulting services
and therefore incur obligations to pay consulting premiums.
(b) In addition to the Consulting Fees Shaw will receive for his
consulting services, the Company will pay Shaw a premium for such services at
the rate of an additional $150 per hour not to exceed $1,500 per day (the
"Consulting Premiums"). These amounts shall be in addition to, and not in lieu
of, the Consulting Fees set forth above, and will be paid out based on Shaw's
submission of time sheets on a bi-weekly basis. Consulting Premiums, if any,
incurred prior to the IPO will be paid on the last day of the week following the
week in which the IPO closes, and Consulting Premiums, if any, incurred
following the IPO shall be paid promptly, and, in any event within 14 days of
the day on which such services are rendered. In the event that the IPO has not
occurred prior to December 31, 1996, all Consulting Premiums previously
incurred, if any, pursuant to this Section shall then be due and payable and
thereafter shall be paid promptly, and in any event on or prior to January 5,
1997.
(c) Notwithstanding anything to the contrary herein or in the
Consulting Agreement, Shaw shall be entitled to decline assignments from the
Company during a period of up to six weeks (which need not be consecutive) in
each six month period throughout the Consulting Term.
(d) Shaw and the Company shall execute the Consulting Agreement
attached hereto as Exhibit A. In the event that a Change in Control (as
hereinafter defined) has not occurred prior to December 31, 1998, and Shaw
terminates his consulting agreement or is unwilling or unable to perform
services thereunder (other than due to death, incapacity or illness) at any time
prior to the end of the Consulting Term, the Company will not be required to pay
any Consulting Fees or Premiums that have not yet become due to be paid in
accordance with Section 1(b) above. The Company shall not have the right to
refuse to make payments of Consulting Fees, or Consulting Premiums, due to Shaw
based upon the quality or timeliness of the services rendered by him pursuant to
the Consulting Agreement.
(e) Non-Competition. In the event of a Change in Control and without
regard to whether or not Shaw remains engaged as a consultant to the Company or
its successor following such transaction, Shaw agrees upon request to enter into
and to execute an Agreement Not-To-Compete with the Company and/or its
successor. Such agreement shall prohibit Shaw from participating through
employment, ownership or otherwise in any entity or business which competes with
the Company's business for a period lasting until the earlier of December 31,
1998 and three years following the Change in Control. For purposes of this
paragraph, a "Change of Control" shall mean (i) the sale of the Company of all
or substantially all of its
3.
<PAGE>
assets to a single purchaser or to a group of associated purchasers in a single
transaction or a series of related transactions; (ii) the sale, exchange or
other disposition in one transaction or a series of related transactions of one-
half or more of the outstanding capital stock of the Company; or (iii) the
merger, acquisition or consolidation of the Company in a transaction in which
the shareholders of the Company receive less than fifty percent (50%) of the
outstanding voting shares of the new or continuing Company. For purposes of the
prohibition on competition with the Company's business, the Company's business
shall be deemed to mean the business of the Company immediately prior to the
Change in Control. The foregoing shall not be deemed to prohibit Shaw from
owning, directly or indirectly, up to five percent (5%) of the issues and
outstanding stock or securities of a publicly traded Company or entity, even if
competitive with the Company's business.
4. BOARD SERVICES.
Subject to the terms of this Section, Shaw shall remain on the Board of
Directors following the execution of this Agreement. Shaw and the other
directors shall stand for election and shall be subject to removal in accordance
with the Company's Restated Articles of Incorporation (the "Articles of
Incorporation") and Amended and Restated Bylaws (the "Bylaws") and applicable
law. This Agreement shall not amend any provision of the Amended and Restated
Investors' Rights Agreement (the "Investors' Rights Agreement") as currently in
effect. Shaw may resign from the Board of Directors at any time. Shaw shall
receive standard board compensation provided to outside directors of the
Company.
5. DIRECTORS AND OFFICERS INSURANCE; INDEMNIFICATION AGREEMENT.
The Company shall retain directors and officers insurance ("D&O Insurance")
continuously during a period commencing on the effective date of the IPO and
covering any liability of Shaw arising as a result of or while Shaw serves on
the Board of Directors or while Shaw or Renshaw served as officers of the
Company. The insurance shall survive for at least three years following Shaw's
departure as a Board member. Such insurance shall cover and inure to all
current and former executive officers of the Company, including Shaw and
Renshaw. The Company shall promptly enter into indemnification agreements with
Shaw, in a form reasonably satisfactory to Shaw and his counsel.
6. LEGAL FEES; SELLING COSTS; OFFERING.
(a) The Company shall pay (i) all legal fees and expenses reasonably
incurred by Shaw in connection with the preparation of this Agreement and all
ancillary documents related thereto and the rendering of advice to Shaw in
connection with the Agreement and (ii) all costs, fees and expenses (including,
without limitation, all reasonable counsel fees (including separate counsel for
Shaw and Renshaw), filing fees, blue sky fees and other costs and expenses
incurred by Shaw and/or Renshaw in connection with the IPO, but excluding,
however, any underwriting discounts and commissions relating to the shares sold
by them. The legal fees and expenses payable by the Company for Shaw and/or
Renshaw for legal fees under (i) and (ii) above shall not exceed a combined
total of $10,000.
4.
<PAGE>
(b) The Company shall include the shares of Common Stock (including
shares of Common Stock issuable upon exercise of warrants) (the "Registrable
Securities") of Shaw and Renshaw and their affiliated entities in the
registration statement and provide for the resale of such Registrable Securities
in the IPO. Not more than 1,297,937 Registrable Securities (pre split) shall be
included in the underwritten shares (the "Firm Shares") and up to 102,063
Registrable Securities (pre split) shall be included in the underwriters' over-
allotment option (the "Option Shares"). All warrants held by Shaw and Renshaw
may be exercised on a cashless basis for Common Stock at the initial public
offering price and Shaw and Renshaw, if agreed to by the underwriters and if so
provided in the underwriting agreement, shall be afforded the right to sell, as
Firm Shares (subject to the foregoing limitation), their warrants to the
underwriters in connection with the IPO at a price per share underlying such
warrants equal to the difference between (x) initial offering price per share in
the IPO, less underwriting discounts and (y) the exercise price per share of
such warrants. Shaw and Renshaw shall have the absolute and unconditional right
at anytime prior to their execution and delivery of the underwritten agreement
to refuse to sell any of the Firm Shares or the Option Shares if the initial
offering price, underwriting discount or other terms of the IPO are not
acceptable to them.
Notwithstanding the foregoing, if the underwriters determine that
marketing factors, at the time or pricing or otherwise, require a limitation of
the number of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities from such registration and underwriting; provided, that
the shares to be included by all other selling stockholders shall be removed
from the proposed offering before any of the Firm Shares of Shaw or Renshaw are
excluded and shall be limited on a pro rata basis commensurate with the
limitations on the Option Shares of Shaw and Renshaw before any Option Shares of
Shaw or Renshaw are excluded. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitations shall be
included in such registration.
This subsection shall terminate and be of no further force and effect
in the event that the IPO does not occur by April 1, 1997. In such event, Shaw
and Renshaw shall continue to have the registration rights set forth in the
Investors' Rights Agreement.
7. FACILITIES.
(a) Shaw shall be entitled to use his current office space, and the
Company shall provide Shaw with reasonable secretarial and other office support
in the manner and to the extent currently being provided by the Company to Shaw
at the Company's expense for 30 days following the date hereof. Shaw shall
remove his personal belongings and vacate his current office space on or prior
to the 30th day following the date hereof.
(b) During the Consulting Term, the Company shall provide Shaw with
private office space at the Company's facilities and such secretarial support as
is reasonably required to enable Shaw to perform consulting assignments for the
Company. In addition, the Company shall provide Shaw with a computer, printer
and facsimile machine to be located at Shaw's principal residence and to be
sufficient to enable Shaw to perform consulting assignments from such location.
All costs of the foregoing, including maintenance thereof, shall be borne by the
5.
<PAGE>
Company. Shaw will return all such equipment at such time as the Company
notifies him that his services are no longer necessary.
8. OTHER COMPENSATION OR BENEFITS. Shaw acknowledges that, except as
expressly provided or referred to in this Agreement, he will not receive any
additional compensation, severance or benefits with respect to his employment or
consulting with the Company.
9. COUNTERPARTS. This Agreement may be executed in two or more
counterparts and by different parties in separate counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
10. HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
11. SUCCESSORS AND ASSIGNS. All rights, obligations and agreements of the
parties contained in this Agreement shall be binding upon and inure to the
benefit of their respective successors and assigns.
12. CALIFORNIA LAW. This Agreement shall be governed by the laws of the
State of California and shall be construed in accordance therewith.
13. NO WAIVER OR NOTIFICATION. No provision of this Agreement may be
waived except by an agreement in writing signed by the waiving party. A waiver
of any term or provision shall not be construed as a waiver of any other term or
provision. This Agreement supersedes in its entirety the Employment Agreement,
which is of no further force or effect.
14. MISCELLANEOUS. This Agreement, including Exhibit A and Exhibit B,
constitutes the complete, final and exclusive embodiment of the entire agreement
between Shaw and the Company with regard to this subject matter. It is entered
into without reliance on any promise or representation, written or oral, other
than those expressly contained herein, and it supersedes any other such
promises, warranties or representations. This Agreement may not be modified or
amended except in a writing signed by both Shaw and a duly authorized officer of
the Company. If any provision of this Agreement is determined to be invalid or
unenforceable, in whole or in part, this determination will not affect any other
provision of this Agreement and the provision in question shall be modified by
the court so as to be rendered enforceable. No such determination shall limit
the Company's obligation to pay the Consulting Fee, which, except as
specifically set forth herein, is unconditional.
15. EXPENSES. The prevailing party in any action or proceeding between
Shaw and Company arising out of or related to this Agreement shall be entitled
to recover from the other party all of its costs and expenses, including with
limitation reasonable attorneys' fees, incurred in connection with such action
or any appeal of such action.
6.
<PAGE>
IN WITNESS WHEREOF, the parties set forth below have executed this
Agreement as of the date set forth above.
PEERLESS SYSTEMS COMPANY
By: /s/ Edward Gavaldon
-------------------------------------
Edward Gavaldon
/s/ Lauren L. Shaw
-------------------------------------
LAUREN L. SHAW
Exhibit A: Consulting Agreement
Exhibit B: Release
7.
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is entered into by and
between EDWARD A. GAVALDON (the "Executive") and PEERESS SYSTEMS CORPORATION
(the "Company") effective July , 1996.
R E C I T A L S
A. The Executive is presently employed by the Company as President
and Chief Executive Officer.
B. The Board of Directors of the Company (the "Board") recognizes
that the Executive's contribution to the growth and success of the Company has
been substantial. The Board desires to provide for the continued employment of
the Executive and to make certain changes in the Executive's employment
arrangements with the Company in order to reinforce and encourage the continued
attention and dedication to the Company of the Executive as a member of the
Company's management, which the Board has determined is in the best interests of
the Company and its shareholders. The Executive is willing to commit himself to
continue to serve the Company on the terms and conditions provided in the
Agreement.
<PAGE>
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment
----------
The Company agrees to continue to employ Executive, and Executive
hereby agrees to continue to the serve the Company, on the terms and conditions
set forth herein.
2. Term
----
The employment of the Executive by the Company as provided in Section
1 will commence on the date of this Agreement and continue until terminated by
either party as provided in Section 7 below.
3. Position and Duties
-------------------
The Executive shall serve as Chief Executive Officer and President of
the Company, and shall have such responsibilities and authority as may from time
to time be assigned to the Executive by the Board. The Executive shall devote
substantially all of his working time and efforts to the business affairs of the
Company.
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 2
<PAGE>
4. Place of Performance
--------------------
The Executive shall be based at the principal executive offices of the
Company except for required travel on the Company's business to an extent
substantially consistent with present business travel obligations.
5. Compensation and Related Matters
--------------------------------
(a) Salary. Effective June 15, 1996, and during the period of
the Executive's employment under the Agreement, the Company shall pay to the
Executive a salary at a rate of not less than One Hundred Seventy-Five Thousand
Dollars ($175,000) annually, paid bi-weekly in equal installments. This salary
may be further increased or decreased from time to time in accordance with
normal business practices of the Company.
(b) Bonus. The Executive shall be entitled to earn a bonus of
Seventy-Five Thousand Dollars ($75,000) each fiscal year, payable within thirty
(30) days after the closing of each fiscal year of the Company, which bonus
shall be contingent upon the Executive's satisfaction of the criteria for
receipt of such bonus as established by the Compensation Committee of the Board.
Whether the Executive has satisfied the criteria for receipt of a bonus in any
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 3
<PAGE>
fiscal year shall be determined at the sole and exclusive discretion of the
Compensation Committee.
(c) Stock Options. The Executive shall continue to participate in
the Company's 1992 Stock Option Plan pursuant to that Incentive Stock Option
Agreement into which the Company and the Executive entered on January 5, 1995
(attached hereto as Exhibit "A"), and subsequent grants of options to purchase
stock of the Company, as modified by the terms of the Agreement. No option
grants are being made pursuant to this Agreement.
(d) Vacation. The Executive shall accrue and be entitled to take
vacation at a rate of three (3) weeks per year to and including January 5, 2000.
Thereafter, the Executive shall accrue and be entitled to take vacation at the
rate of four (4) weeks per year.
(e) Other Benefits. The Executive shall be entitled to continue
to participate in all of the Company's benefit plans and arrangements generally
available to full time employees, in effect from time to time, which presently
include its medical, dental, disability, group life insurance, section 401(k)
and Cafeteria Plans. In addition,
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 4
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the Executive shall be entitled to all paid holidays given by the Company to its
executives.
(f) Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under the Agreement, including all expenses of travel and
living expenses while away from home on business or at the request of and in the
service of the Company, provided that such expenses are incurred and accounted
for in accordance with the policies and procedures from time to time established
by the Company.
(g) Services furnished. The Company shall furnish the Executive
with office space, stenographic assistance and such other facilities and
services as shall be suitable to the Executive's position and adequate for the
performance of his duties as set forth in Section 3 of the Agreement.
6. Accelerated Vesting of Stock Options on Change in Control
----------------------------------------------------------
(a) Defined Terms. For the purposes of the Agreement, the
following terms shall have the definitions set forth in this Section:
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 5
<PAGE>
i) "Change in Control" shall be (A) a sale of all or
substantially all of the assets of the Company; (B) a merger, consolidation or
similar restructuring of the Company in a transaction or series of transactions
in which the shareholders of the Company immediately prior to the transaction(s)
own, either directly or indirectly, less than Fifty Percent (50%) of the equity
interest or voting power of the surviving corporation immediately following such
transaction(s); (C) the sale to any person or entity (other than to the Company
or any affiliates of the Company) for cash, notes or other property of more than
Fifty Percent (50%) of the outstanding voting securities of the Company; or (D)
the liquidation or dissolution of the Company.
(b) Vesting. Notwithstanding the provisions of Section 1 of
Exhibit "A", in the event of a Change in Control, the entire unexercised portion
of all stock options granted to the Executive by the Company shall become fully
vested and exercisable ten (10) days prior to the occurrence of a Change in
Control.
7. Termination
-----------
The Agreement may be terminated by either party, with or without Cause
or Good Reason as those terms are
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 6
<PAGE>
defined below, upon thirty (30) days' written notice to the other party.
8. Termination Benefits.
--------------------
(a) Defined Terms. For the purposes of the Agreement, the
following terms shall have the definitions set forth in this Section:
i) "Cause" shall mean (A) the death of the Executive; (B)
disability, which shall mean the Executive's absence from his duties under the
Agreement on a full time basis for a period of four (4) consecutive months in
any twelve (12) month period due to physical or mental inability to work; (c)
the Executive's willful and continued failure substantially to perform his
duties under the Agreement and to abide by the Company's policies and
procedures, e.g., trading policies (other than due to disability as defined
above), after demand for substantial performance is delivered by the Company
specifically identifying the manner in which the Company believes the Executive
has not substantially performed his duties; (D) the Executive's willful
engagement in misconduct materially injurious to the Company; or (E) the
conviction of the Executive of a felony.
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 7
<PAGE>
ii) "Good Reason" shall be (A) a Change in Control; (B)
failure by the Company to comply with any material provision of the Agreement
which has not been cured within thirty (30) days after written notice of such
non-compliance has been given by the Executive to the Company; or (C) the
assignment to the Executive without his consent of any duties which would
constitute a material reduction in the importance of the Executive's position,
authority or responsibilities as contemplated by Section 3 of the Agreement, or
any other material adverse change in such position, authority and
responsibility; provided, however, that the hiring of additional management
personnel reporting to the Executive to perform duties and responsibilities
delegated by the Executive shall not constitute a material reduction in the
importance of his position, nor shall it constitute a material adverse change in
his position, authority or responsibility.
iii) "Termination Date" shall be that date that is thirty
(30) days after the Executive or the Company gives written notice of the
termination of the Agreement as provided for in Section 7 of the Agreement.
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 8
<PAGE>
(b) Termination Benefits. The Termination Benefits payable to
the Executive upon termination shall be the following.
i) In the event that the Company terminates the Agreement
with Cause, or the Executive terminates the Agreement without Good Reason, the
Executive shall be entitled to his salary and other benefits through the
Termination Date.
ii) In the event that the Company terminates the Agreement
without Cause or the Executive terminates the Agreement for Good Reason: (A) the
Executive shall be entitled to the continuation of his base salary at the rate
then in effect for one (1) year from the Termination Date, which base salary
shall continue to be paid pursuant to Section 5(a) of the Agreement; (B) the
Company shall reimburse the Executive for any premiums the Executive must pay to
continue benefits pursuant to the Comprehensive Omnibus Budget Recovery Act
("COBRA") for a period of one (1) year from the Termination Date; and (c) in the
event that the Good Reason for termination is other than a Change in Control,
and notwithstanding the provisions of Section 1 of Exhibit "A", all stock
options granted to the Executive by the Company prior to the Termination Date
that
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 9
<PAGE>
would have vested within six (6) months after such Termination Date had the
Executive remained employed by the Company shall be accelerated: provided,
however, that this provision shall only accelerate options to the extent that
such options vest with the passage of time and shall not accelerate or affect
any provision of any options that accelerate or vest on the basis of performance
or any other criteria or events other than the.passage of time.
9. Notice
------
For purposes of the Agreement, notices, demands and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive: Edward A. Gavaldon
2512 Pine Avenue
Manhattan Beach, CA 90277
If to the Company: Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Attn: Legal Counsel
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 10
<PAGE>
10. Successors
----------
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform the
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
transaction shall constitute Good Reason for the Executive's termination of the
Agreement. Neither the rights nor obligations under the Agreement maybe
assigned, transferred, pledged or hypothecated by any party hereto, except as
provided for in this Section.
11. Waiver
------
The waiver by any party hereto of a breach of any of the provisions of
the Agreement by the other party shall not operate or be construed as a waiver
of any subsequent breach hereof by such party.
12. Severability
------------
If any one or more covenants, agreements or provisions herein
contained shall be held or determined for
EDWARD A GAVALDON EMPLOYMENT AGREEMENT - Page 11
<PAGE>
any reason whatsoever to be invalid or unenforceable, either in whole or in
part, then such covenants, agreements or provisions, or portion thereof, shall
be null and void and shall be deemed separable from the remaining covenants,
agreements or provisions hereof and shall in no way affect the validity of any
of the other provisions hereof.
13. Attorney's Fees
---------------
The prevailing party in any action concerning the enforcement or
interpretation of the Agreement shall be entitled to recover reasonable costs
and attorneys' fees.
14. Choice of Law
-------------
The Agreement shall be governed by and construed in accordance with
the laws of the State of California.
15. Entire Agreement
----------------
The Agreement, including Exhibit "A," contains the entire agreement of
the parties with respect to the transactions contemplated hereby, and no party
shall be liable or bound except as expressly provided herein. This Agreement
may only be modified or amended by an agreement signed by the parties.
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 12
<PAGE>
16. Headings
--------
The subject headings of sections of the Agreement are included for the
purposes of convenience only and shall not affect the construction or
interpretation of any term or provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
PEERLESS SYSTEMS CORPORATION
By: /s/ Hoshi Printer
------------------------------
Title: Chief Financial Officer
---------------------------
EXECUTIVE
/s/ Edward A. Gavaldon
---------------------------------
Edward A. Gavaldon
EDWARD A. GAVALDON EMPLOYMENT AGREEMENT - Page 13
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to registration
statement on Form S-1 (File No. 333-09357) of our report dated July 25, 1996,
on our audits of the financial statements of Peerless Systems Corporation. We
also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Newport Beach, California
September 11, 1996
