<PAGE>
FILED PURSUANT TO RULE 424(a)
REGISTRATION NO. 333-09357
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 AUGUST 29, 1996
PROSPECTUS
3,750,000 SHARES
LOGO
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 and $639,000 for the fiscal years ended
December 31, 1994 and 1995, 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. 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 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
5
<PAGE>
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. The Company is currently developing its color technology
for incorporation into a printer but has not yet shipped any color products.
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 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.
8
<PAGE>
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 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
9
<PAGE>
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. The Company
does not maintain any key person life insurance policies. 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 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.
10
<PAGE>
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.
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 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
11
<PAGE>
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."
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."
12
<PAGE>
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. 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. Under
the terms of the Company's revolving line of credit, the Company currently is
prohibited from paying dividends on its Common Stock.
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. 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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, 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. See "Risk Factors--International
Activities."
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 SIX MONTHS ENDED
DECEMBER 31, ------------------
--------------------- 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
18
<PAGE>
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 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
19
<PAGE>
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.
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.
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.
20
<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.
21
<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%.
22
<PAGE>
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.
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.
23
<PAGE>
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
24
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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."
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<PAGE>
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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<PAGE>
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
- ---------------------------------------------------------------------------------
MONO-
PRODUCT DESCRIPTION CHROME MFP COLOR
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------
Operating System
- ---------------------------------------------------------------------------------
PeerlessPage Imaging Operating System X X
---------------------------------------------------------------
MFP Extensions *
---------------------------------------------------------------
Contone Color Extensions *
- ---------------------------------------------------------------------------------
Page Description Languages
- ---------------------------------------------------------------------------------
PeerlessPrint5E HP PCL 5E Compatible Language
Interpreter X X
- ---------------------------------------------------------------------------------
PeerlessPrint5C HP PCL 5C Compatible Color Language
Interpreter *
- ---------------------------------------------------------------------------------
PeerlessPrint6 HP PCL 6 Compatible Language
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 * *
- ---------------------------------------------------------------------------------
X=Shipping
*=Under development
</TABLE>
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
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<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,
significantly reduce the memory and processing power required for contone
color laser printers and enhance printing of grey scale images on 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
33
<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,
34
<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
35
<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.
36
<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
---- --- --------
<S> <C> <C>
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
Reginald Cardin................ 49 Vice President and Chief Technology Officer
David R. Fournier.............. 43 Vice President, Sales and Field 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 tool 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.
37
<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.
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.
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
38
<PAGE>
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.
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
39
<PAGE>
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.
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.
40
<PAGE>
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 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
41
<PAGE>
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.
42
<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 71.5% $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 495,622 options granted to employees of the
Company in 1995, including the Named Executive Officers.
(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.
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
43
<PAGE>
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.
44
<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 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, 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, $629,000, $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 in the event of a change in control,
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.
45
<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.
46
<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
47
<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.
48
<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.
49
<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.
50
<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.
51
<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
52
<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."
53
<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,
54
<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.
55
<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.
56
<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 SIX MONTHS ENDED
DECEMBER 31, 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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, 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 SIX MONTHS ENDED
DECEMBER 31, 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.
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 stock option
plan:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS
---------------- ENDED JULY 31,
1993 1994 1995 1996
---- ---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period................................... 222 94 88 65
Options exercised......................... (61) -- (13) (10)
Options forfeited......................... (67) (6) (10) --
--- --- --- ---
Options outstanding at end of period...... 94 88 65 55
=== === === ===
</TABLE>
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. With respect to the options to acquire 65 shares of common stock
outstanding at December 31, 1995, per share exercise prices are $0.21 and
$0.53. There was no stock option activity under this plan during the month of
January 1996.
F-18
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 JULY 31,
1993 1994 1995 1996
---- ---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period................................... 147 188 309 774
Options granted........................... 115 137 503 186
Options exercised......................... (1) (2) (3) (36)
Options forfeited......................... (73) (14) (35) (37)
--- --- --- ---
Options outstanding at end of period...... 188 309 774 887
=== === === ===
</TABLE>
Options were granted at a per share exercise price of $0.53 during the year
ended December 31, 1993 and at per share exercise prices ranging from $0.53 to
$1.43 and $1.43 to $1.65 during the years ended December 31, 1994 and 1995,
respectively. 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
----------------
<S> <C>
Options outstanding at February 1, 1996.................. --
Options granted.......................................... 562
Options exercised........................................ --
Options forfeited........................................ (2)
---
Options outstanding at July 31, 1996..................... 560
===
</TABLE>
Unaudited:
During the period May 1, 1996 to July 31, 1996, the Company granted options
to purchase 562 shares of its common stock at per share exercise prices
ranging from $3.30 to $9.00. 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 these
options. 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.
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 are derived from the following geographic regions:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, -----------------
--------------------- 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>
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<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>
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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................................................................ 24
Management.............................................................. 37
Certain Transactions.................................................... 45
Principal and Selling Stockholders...................................... 47
Description of Capital Stock............................................ 50
Shares Eligible for Future Sale......................................... 52
Underwriting............................................................ 54
Legal Matters........................................................... 55
Experts................................................................. 55
Additional Information.................................................. 56
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.
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3,750,000 SHARES
LOGO
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
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