<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1996
REGISTRATION NO. 333-09357
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PEERLESS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 5008 95-3732595
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
---------------
2381 ROSECRANS AVENUE
EL SEGUNDO, CA 90245
(310) 536-0908
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
EDWARD A. GAVALDON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2381 ROSECRANS AVENUE
EL SEGUNDO, CA 90245
(310) 536-0908
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
GREGORY C. SMITH, ESQ. LAIRD H. SIMONS, III, ESQ.
BRETT D. WHITE, ESQ. EILEEN DUFFY ROBINETT, ESQ.
COOLEY GODWARD CASTRO HUDDLESON & JEFFERY L. DONOVAN, ESQ.
TATUM FENWICK & WEST LLP TWO PALO ALTO
FIVE PALO ALTO SQUARE 3000 EL CAMINO SQUARE PALO ALTO, CA 94306 (415)
REAL PALO ALTO, CA 94306-2155 (415) 494-0600
843-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 27, 1996
PROSPECTUS
3,750,000 SHARES
LOGO
PEERLESS
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
Of the 3,750,000 shares of Common Stock offered hereby, 2,500,000 shares are
being sold by the Company, 1,163,828 shares are being sold by the Selling
Stockholders and 86,172 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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS (3)
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<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
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Total (4)................ $ $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) Includes $ from the sale of warrants to the Underwriters by certain
of the Selling Stockholders.
(4) The Company and certain Selling Stockholders have granted the Underwriters
a 30-day option to purchase up to an additional 562,500 shares of Common
Stock solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively.
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for the shares will be available
for delivery on or about , 1996 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
<PAGE>
[Description: The image will depict a circle entitled "Peerless Embedded
Imaging System" with arrows directed at digital document products, such as a
monochrome printer, multifunction product and color printer (with an
indication that the latter is under development).]
Peerless Systems Corporation A leader in embedded imaging systems
The evolution of digital document products which offer a combination of print,
copy, fax and scan functions has eroded the boundaries between the previously
distinct digital document product market sectors and created a need for a
common embedded imaging system solution. Peerless provides an advanced
software-based embedded imaging system for a variety of digital document
products, including networked monochrome printers, multifunction ("MFP"), and,
in the future, color products.
[Description: The image will depict a color electronic document, the text of
which says "Text, graphics and photographs now have more potential than ever
to be used in creative ways as affordable color laser technology becomes a
reality", displayed on a computer screen, identifying the photographic, text
and line art elements within the document. These elements are then represented
in a display list, operated on by the PeerlessPage Imaging Operating System
and a Peerless QuickPrint co-processor. The image then depicts the page of
text and graphics being segmented into bands, followed by the page emerging
from a printer, followed by the page as printed.]
Recognizes objects; text, line art, photographs. Converts recognized objects
to compact object-based display list. Processes display list in real-time
using software-based imaging technology. Transmits page continuously in bands.
Peerless embedded imaging systems can enable the page image to be processed in
real-time with reduced memory and processor requirements while providing
higher quality output and faster document production.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a document image as a collection of pixels, the
Peerless object-based image processing technology recognizes basic imaging
elements in the document, differentiating between text, line art and
photographs much as the human eye does. Peerless' software then creates a
compact display list of image objects as an intermediate representation of the
document to be printed. This display list is a more concise means of
representing the imaging information of the document, enabling complex imaging
data to be processed more quickly and with less memory, typically without
resorting to compression techniques that degrade the image. For high-
performance applications, the display list can be processed in real-time with
assistance from a Peerless-designed graphics co-processor embedded in the
digital document product. Peerless technology segments the page into a series
of bands which are then transmitted continuously to the digital document
product more efficiently and faster than many traditional imaging approaches.
Color technology under development.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Peerless logo is a trademark of the Company. The Company has applied for
registration of the PeerlessPage, PeerlessPrint, PSIO, QuickPrint and
WinEXPRESS trademarks. This Prospectus also includes trade names and
trademarks of companies other than the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
THE COMPANY
Peerless Systems Corporation ("Peerless" or the "Company") is a leading
provider of software-based embedded imaging systems to original equipment
manufacturers ("OEMs") of digital document products. Digital document products
include printers, copiers, fax machines, scanners and emerging color products,
as well as multifunction products ("MFPs") that perform a combination of these
imaging functions. In order to process digital text and graphics, digital
document products rely on a core set of imaging software and supporting
electronics, collectively known as an embedded imaging system. The Peerless
family of products and engineering services provides advanced embedded imaging
technologies that enable the Company's OEM customers to develop digital
printers, copiers and MFPs quickly and cost effectively. The Company markets
its solutions directly to customers such as Adobe, Canon, Digital Equipment
Corporation, IBM and Xerox.
To date, a majority of embedded imaging systems have been developed and
produced internally by OEMs. However, rapid changes in technology and end-user
requirements have created increased challenges for OEMs, particularly in the
area of embedded imaging systems. These changes include increased technical
complexity, the increased role of networking, the emergence of MFPs and the
demand for color imaging. As a result, OEMs increasingly are relying on outside
embedded imaging systems suppliers to provide their embedded imaging system
solutions.
The Company's embedded imaging system solution is based on its proprietary
object-based image processing technology that enables its OEMs to increase
print quality and speed while reducing cost. The Company has designed its real-
time, 32-bit PeerlessPage Imaging Operating System and supporting technology to
accelerate image processing and to enhance resolution. The multitasking
operating system also enables the Company to manage concurrent processing of
digital document product tasks for the MFP marketplace. The Company also has
designed its embedded imaging technology with a modular architecture that
addresses a broad spectrum of digital document product technologies and that
may be tailored to individual OEM requirements. Peerless offers its OEMs the
flexibility to add functionality, such as networking support, languages or
multifunction features and, in the future, color, to their digital document
products as their needs dictate. Peerless' scalable technology enables the
Company to serve both the low-cost and high-performance sectors of the market.
Peerless also offers engineering services to allow OEMs to outsource the
development of the entire embedded imaging system for a digital document
product. As a result, the Company provides OEMs with the ability to offer a
broadened array of digital document products, further leveraging their core
investment in the Company's embedded imaging system solution.
The Company's goal is to establish certain basic components of its embedded
imaging system solution, notably its imaging operating system and its Peerless
Standard Input/Output interface, as de facto standards for the digital document
product industry. The Company believes it can achieve reduced costs for its OEM
customers through multivendor acceptance of its standardized solutions.
The Company was incorporated in California on April 28, 1982, and will
reincorporate in Delaware concurrent with the closing of this offering. The
Company's principal offices are located at 2381 Rosecrans Avenue, El Segundo,
California 90245, and the Company's telephone number is (310) 536-0908.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,500,000 shares
Common Stock offered by the Selling
Stockholders................................... 1,250,000 shares (1)
Common Stock to be outstanding after the
offering....................................... 10,205,614 shares (2)
Use of proceeds................................. Repayment of indebtedness and
equipment lease lines, working
capital and other general corporate
purposes
Proposed Nasdaq National Market symbol.......... PRLS
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
YEARS ENDED DECEMBER 31,
------------------------------------------- JUNE 30, JULY 31,
1991 1992 1993 1994 1995 1995 (3) 1996 (3)
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues......... $ 4,988 $ 4,934 $ 5,241 $ 9,336 $10,413 $4,732 $7,088
Cost of revenues....... 2,175 3,351 5,436 5,675 5,254 2,432 3,361
Operating expenses..... 3,938 5,327 4,470 4,645 5,523 2,770 3,288
Income (loss) from
operations............ (1,125) (3,744) (4,665) (984) (364) (470) 439
Net income (loss)...... $(1,163) $(3,851) $(4,824) $(1,226) $ (639) $ (597) $ 222
Pro forma net income
(loss) per share (4).. $ (0.08) $ 0.04
Shares used in pro
forma per share
calculation (4)....... 7,085 8,637
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (5) AS ADJUSTED (5)(6)
-------- ------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 194 $ 194 $26,216
Working capital (deficit)....................... (2,630) (2,630) 24,147
Total assets.................................... 3,960 3,960 29,982
Long-term obligations........................... 4,202 1,132 853
Redeemable Preferred Stock...................... 5,938 -- --
Total stockholders' equity (deficit)............ (11,579) (2,571) 24,485
</TABLE>
- --------------------
(1) Includes 86,172 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 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) 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>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------- MONTH ENDED ----------------
JANUARY 31, JUNE 30, JULY 31,
1991 1992 1993 1994 1995 1996 (1) 1995 (1) 1996 (1)
------- ------- ------- ------- ------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product licensing..... $ 1,969 $ 1,457 $ 1,586 $ 4,394 $ 4,774 $ 329 $2,420 $2,438
Engineering services
and maintenance...... 3,019 3,477 3,655 4,942 5,639 396 2,312 4,650
------- ------- ------- ------- ------- ----- ------ ------
Total revenues....... 4,988 4,934 5,241 9,336 10,413 725 4,732 7,088
------- ------- ------- ------- ------- ----- ------ ------
Cost of revenues:
Product licensing..... 4 122 341 218 143 5 74 65
Engineering services
and maintenance...... 2,171 3,229 5,095 5,457 5,111 564 2,358 3,296
------- ------- ------- ------- ------- ----- ------ ------
Total cost of
revenues............ 2,175 3,351 5,436 5,675 5,254 569 2,432 3,361
------- ------- ------- ------- ------- ----- ------ ------
Gross margin........ 2,813 1,583 (195) 3,661 5,159 156 2,300 3,727
------- ------- ------- ------- ------- ----- ------ ------
Operating expenses:
Research and
development.......... 1,699 2,388 1,766 1,767 2,088 127 1,077 1,038
Sales and marketing... 1,667 1,904 1,656 1,878 2,142 156 1,080 1,164
General and
administrative....... 572 1,035 1,048 1,000 1,293 119 613 1,086
------- ------- ------- ------- ------- ----- ------ ------
Total operating
expenses............ 3,938 5,327 4,470 4,645 5,523 402 2,770 3,288
------- ------- ------- ------- ------- ----- ------ ------
Income (loss) from
operations............ (1,125) (3,744) (4,665) (984) (364) (246) (470) 439
Interest expense, net.. 3 49 96 118 176 17 65 167
------- ------- ------- ------- ------- ----- ------ ------
Income (loss) before
provision for income
taxes................. (1,128) (3,793) (4,761) (1,102) (540) (263) (535) 272
Provision for income
taxes................. 35 58 63 124 99 7 62 50
------- ------- ------- ------- ------- ----- ------ ------
Net income (loss)...... $(1,163) $(3,851) $(4,824) $(1,226) $ (639) $(270) $ (597) $ 222
======= ======= ======= ======= ======= ===== ====== ======
Pro forma net income
(loss) per share (2).. $ (0.08) $ 0.04
======= ======
Shares used in pro
forma per share
calculation (2)....... 7,090 8,644
</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
DECEMBER 31, SIX MONTHS ENDED
--------------------- ------------------
JUNE 30, JULY 31,
1993 1994 1995 1995 1996
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product licensing................. 30.3% 47.1% 45.8% 51.1% 34.4%
Engineering services and mainte-
nance............................ 69.7 52.9 54.2 48.9 65.6
----- ----- ----- ----- -----
Total revenues.................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Product licensing................. 6.5 2.3 1.4 1.6 0.9
Engineering services and
maintenance...................... 97.2 58.5 49.1 49.8 46.5
----- ----- ----- ----- -----
Total cost of revenues............ 103.7 60.8 50.5 51.4 47.4
----- ----- ----- ----- -----
Gross margin...................... (3.7) 39.2 49.5 48.6 52.6
----- ----- ----- ----- -----
Operating expenses:
Research and development.......... 33.7 18.9 20.0 22.8 14.6
Sales and marketing............... 31.6 20.1 20.5 22.8 16.5
General and administrative........ 20.0 10.7 12.4 13.0 15.3
----- ----- ----- ----- -----
Total operating expenses.......... 85.3 49.7 52.9 58.6 46.4
----- ----- ----- ----- -----
Income (loss) from operations...... (89.0) (10.5) (3.4) (10.0) 6.2
Interest expense, net.............. 1.8 1.3 1.7 1.4 2.4
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes...................... (90.8) (11.8) (5.1) (11.4) 3.8
Provision for income taxes......... 1.2 1.3 1.0 1.3 0.7
----- ----- ----- ----- -----
Net income (loss).................. (92.0)% (13.1)% (6.1)% (12.7)% 3.1%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1995 and July 31, 1996
The Company's total revenues were $7.1 million in the six months ended July
31, 1996 and $4.7 million in the six months ended June 30, 1995. The Company's
product licensing revenues for the six months ended July 31, 1996 and the six
months ended June 30, 1995 remained constant at $2.4 million, with an increase
in recurring licensing revenues being offset by a decrease in one-time
licensing revenues. Recurring licensing revenues increased as a result of an
increase in the number of products incorporating the Company's
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
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evolved from 8-bit to 32-bit platforms that often must employ special
techniques to manage large data files and minimize memory costs. Most embedded
imaging systems use compression techniques to reduce the size of data files,
which can result in reduced image quality. The increased complexity of digital
document products, the rapid pace of technological change and the increased
memory requirements have created increased challenges for digital document
product manufacturers, particularly in the core areas of image processing and
operating system architecture.
Increased Role of Networking. Within the office environment, digital
document products increasingly are deployed in a networked configuration.
According to projections by IDC, 62% of laser printers sold in the United
States in 1995 were estimated to have been connected to enterprise networks,
and this percentage is expected to increase to 78% by 1999. Because multiple
local area network protocols and network operating systems are deployed in the
corporate network environment, networked digital document products must
support a broad array of networking technologies to maximize accessibility by
various user groups. The network environment is also changing rapidly and
becoming increasingly complex, with a growing requirement for remote network
management that extends across both local area networks and wide area
networks. In addition, because the majority of office digital document
products are networked, the image processing intelligence may be partitioned
and located anywhere within the network: at the site of document or image
origination; at a server; or, as is typically the case today, inside the
digital document product itself. In some instances, such as printing to a
remote location, it can be advantageous to perform image pre-processing and
compression at the document origination site, prior to transmission over
usage-sensitive facilities. In order to accommodate the emerging needs of the
networked office environment, an optimal embedded imaging system must employ a
modular architecture capable of serving and managing distributed corporate
resources.
Emergence of Multifunction Products. The advent of MFPs has eroded the
boundaries between the previously distinct printer, copier, fax and scanner
market sectors. MFPs, ranging from small home products to large office
devices, offer several of these functions for significantly less cost than
would otherwise be incurred by purchasing these products separately. Each of
the dominant vendors in the printer, copier and fax markets now has introduced
MFPs, which have required each of them to broaden its imaging expertise. At
the same time, the need for concurrent processing of multiple digital document
product functions has created the need for real-time, multitasking operating
system support.
Demand for Color Imaging. Although many office computers have color
displays, and the graphical content available to office users via the World
Wide Web makes heavy use of color, most digital document products found in
today's office environment generate monochrome output. In the 1990s, color
laser printers have been introduced into the office marketplace. Many of these
have been limited by unit costs in excess of $7,500, printing speeds measured
in minutes per page for complex images, and output that does not support
photoquality requirements. In the small office/home office market, most inkjet
printers now support color but are typically limited by output speeds of one
or less pages per minute. Although digital document engine manufacturers have
developed contone (photoquality) hardware technology that is now capable of
supporting high speed photoquality color printing, the output produced by
today's digital document products, in many cases, continues to be limited by
existing embedded imaging systems. Today's embedded imaging systems are
challenged by the transition from monochrome to contone color output because
the simultaneous implementation of four planes of color coupled with up to
eight bits per pixel increases the digital document data stream by a factor of
up to thirty-two. As a result, there is need for embedded imaging systems that
can support the accelerated performance requirements of color output.
Increased Reliance on Outsourcing. In addition to the engineering challenges
generated by changing technology, digital document product manufacturers
increasingly are subject to a variety of market pressures. Competition in the
marketplace, coupled with end-user demand for greater performance at reduced
cost and shortening product life cycles, has created a growing need to reduce
time-to-market and engineering costs. Digital document product manufacturers
increasingly are electing to outsource imaging software and supporting
electronics design to embedded imaging systems suppliers in order to include
new imaging technologies and minimize development time and cost. The increased
role of networking, the emergence of
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MFPs, the demand for color imaging and the increased technical complexity
associated with products meeting these market changes have accelerated this
trend towards outsourcing. As digital document product manufacturers move to
incorporate imaging technologies from outside suppliers, their internal
resources are freed to focus on their core competencies in product
differentiation, marketing and distribution. Additionally, there has been no
established comprehensive embedded imaging system standard for the digital
document product industry to date. However, as the digital document product
market sectors converge and as the complexity of imaging technology
intensifies, the Company believes digital document product manufacturers will
realize a significant competitive advantage by utilizing a single open
embedded imaging system standard across all digital document product market
sectors.
THE PEERLESS SOLUTION
Peerless is a leading provider of embedded imaging systems for the digital
document product market. The Company's family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively.
The Company's embedded imaging system solution is based on its proprietary
object-based image processing technology, which can reduce the size of digital
document product imaging files with virtually no noticeable loss of visual
quality. This proprietary technology enables the Company's OEM customers to
reduce memory cost and increase print quality and speed while eliminating or
reducing the need for the use of a compression technology. When optimized,
this component of the embedded imaging system can provide significant cost
savings and performance differentiation to digital document product
manufacturers.
The Company has designed its embedded imaging technology with a modular
architecture that addresses a broad spectrum of digital document product
technologies and that may be tailored to an individual OEM's requirements.
Peerless offers its OEMs the flexibility to add functionality, such as
networking support, languages or multifunction features and, in the future,
color, to their digital document products as their needs dictate. Peerless
also offers engineering services to allow OEMs to outsource the development of
the entire embedded imaging system for a digital document product. As a
result, the Company provides OEMs with the ability to offer a broadened array
of digital document products, further leveraging their core investment in the
Peerless imaging solution. The Company's imaging solutions include the
following technologies and services:
Real-time, Scalable, Multitasking and Distributed Operating System. The
Company has designed its real-time, 32-bit PeerlessPage Imaging Operating
System and supporting technology to accelerate image processing and to enhance
resolution. The scalable nature of the Company's technology enables it to
serve both the low-cost and high-performance sectors of the market. As a
result, the Company's solution has been licensed for a wide range of
applications, from personal printers to shared high speed digital document
products. The multitasking operating system employed in the Peerless imaging
solution also enables the Company to manage concurrent processing of digital
document product tasks for the MFP marketplace. Furthermore, the Peerless
imaging solution may be implemented to operate in a distributed fashion,
allowing for portions of the imaging processing task to take place in the
originating host computer, in the digital document product, or elsewhere in
the network. As a result, Peerless technology provides OEMs with the
flexibility to offer a range of performance and configuration options.
Standards-Based Language Offerings. The Company provides its OEMs with page
description languages ("PDLs") that conform to the most widely used standards
today, Adobe's PostScript Software and Hewlett-Packard's Printer Control
Language ("PCL"). The Company offers PeerlessPrint technology, which emulates
Hewlett-Packard's PCL. The Company also cooperates with Adobe to deliver
Adobe's PostScript Software. As a result, the Company's OEMs are able to
obtain a complete imaging solution, including PDLs, from a single source. In
addition, Peerless is developing a PC-based printing language, WinEXPRESS.
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ASIC Solutions. The Company designs application specific integrated circuit
("ASIC") solutions for the digital document product marketplace that provide a
silicon-based implementation of key components of its imaging software. The
Company has designed an integrated processor combining its basic digital
document product functionality with an industry-standard 32-bit
microprocessor. For the high-performance sector of the market, the Company
offers specialized co-processors that accelerate the Peerless imaging software
and incorporate controller functionality and imaging features to provide both
cost savings and performance enhancements.
Networking Solutions. The Company has designed a standardized networking
interface, the Peerless Standard Input/Output ("PSIO") interface, to enable
its digital document product OEMs to reduce custom development costs for their
networking solutions. In addition, Peerless supports a broad array of
networking protocols, allowing its OEM customers to address the majority of
end-user networking requirements. To accommodate the need for remote network
management of digital document products over LANs and across wide area
networks, including intranets, the Company supplies management information
block ("MIB") tables that may be utilized by open industry-standard network
management systems.
Engineering Services. For those OEMs that wish to outsource the development
of some or all of the embedded imaging system for a digital document product,
the Company offers engineering services to design a comprehensive solution.
This can include controller design and custom engineering for vendor-specific
features that complement the Company's standard imaging solutions.
PEERLESS STRATEGY
The Company's objective is to become the leading supplier of embedded
imaging systems technology for digital document products. Key elements of the
Company's strategy to accomplish this objective are as follows:
Maintain and Enhance Market Leadership Position. The Company's standardized
embedded imaging system has been adopted by major digital document product
vendors such as Canon, Digital Equipment Corporation, IBM and Xerox. The
Company believes that OEMs increasingly are demanding broad expertise and a
common embedded imaging systems foundation from embedded systems suppliers in
order to accelerate time-to-market and to allow them to focus on their core
competencies. The Company believes that its expertise and technology meet
these demands and intends to expand its customer base and assist its new and
existing OEMs in extending their product lines into new market sectors,
thereby achieving wider market penetration of the Company's family of imaging
solutions. The Company believes that its imaging technology can be extended to
additional markets other than digital document products and may pursue such
markets as they evolve.
Extend Technology Leadership. The Company's strategy is to continue to
introduce embedded imaging technology innovations designed to increase
performance, reduce cost and address a broader range of emerging digital
document product requirements, including MFP and color applications.
Furthermore, the Company's goal is to establish certain basic components of
its embedded imaging system solution, notably its imaging operating system and
its PSIO interface, as de facto standards for the digital document product
industry. The Company believes it can achieve reduced costs for its OEM
customers through multivendor acceptance of its standardized solutions.
Develop and Enhance Strategic Relationships. The Company intends to develop
and enhance its relationships with key participants in the digital document
product market. For example, the Company is a licensed third-party co-
developer of Adobe. The Company provides a high-performance, integrated Adobe
PostScript solution which permits its OEM customers to benefit from the entire
family of the Company's imaging products in a multiple language printing
environment. Adobe, as the sole limited partner of Adobe Ventures, L.P.,
currently has a significant equity position in the Company. See "Principal and
Selling Stockholders."
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Extend Product Line. The Company targets both the high-performance and the
low-cost sectors of the digital document product market. For the high-
performance sector, the Company focuses on direct OEM relationships with
digital document product vendors by offering its high-performance family of
imaging products complemented by semi-customized and/or turnkey solutions. The
Company is also extending its high-performance products into the MFP and, in
the future, color markets. For the low-cost sector, the Company has designed
ASICs that contain a standardized, basic set of document imaging software
coupled with a microprocessor core provided by a semiconductor manufacturer.
These ASICs are manufactured by companies such as Motorola, which market these
semiconductor solutions directly to OEMs addressing the low-cost sector of the
digital document product market.
Leverage Engineering Services. The Company provides engineering services to
its OEMs, when requested, to provide comprehensive solutions or to customize
the Company's technology in accordance with specific needs. In doing so, the
Company distinguishes itself from those third-party systems providers that do
not have the ability to provide comprehensive solutions and must limit their
sales to licensing of existing, generic technology. By providing engineering
services, the Company enhances its embedded imaging systems expertise which it
can then use to improve the technology for its standard products.
Implementation of the Company's strategy is subject to numerous risks and
uncertainties. See "Risk Factors--Dependence on Market Success of Third
Parties," "--Risks Associated with Technological Change; Dependence on the
Digital Document Product Market," "--Risks Associated with Product
Development; Product Delays," "--Risks Associated with Developing Markets" and
"--Competition."
TECHNOLOGY
The Company strives to develop for the embedded imaging systems marketplace
unique technologies that provide meaningful improvements in performance and
cost for Peerless' OEMs. The Company incorporates complementary technologies,
or makes its technologies compatible with third-party technologies, in order
to provide its customers with a more comprehensive imaging solution.
Object-Based Image Processing. Most embedded imaging systems utilize similar
methods of processing document imaging information. They convert a file that
represents a document page into a bitmap and then process all page elements as
a collection of pixels. Because bitmaps generate large files, the image
processing task can become time-consuming, requiring subsequent document pages
to be stored in memory while previous pages are being processed. To
accommodate memory limitations, file compression technologies are often
utilized. These compression technologies frequently result in a loss of
clarity and detail in the printed document and require significant processing
power.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a page image as a collection of pixels, the Peerless
object-based image processing technology recognizes basic imaging elements in
the document, differentiating between text, line art and photographs much as
the human eye does. Peerless' software then creates a display list of image
objects as an intermediate representation of the document to be printed. This
display list is a more concise means of representing the imaging information
of the document, enabling complex imaging data to be processed more quickly
and with less memory, typically without resorting to compression techniques
that degrade the image. For high-performance applications, the display list
can be processed in real-time with assistance from a Peerless-designed
graphics co-processor embedded in the digital document product. Because
Peerless technology can enable the page image to be processed in real-time,
concurrent with the transmission of the document print file, memory
requirements can be reduced and performance can be enhanced. Furthermore, the
image quality or resolution can be reduced to accommodate limitations in the
digital document product's memory, or progressively enhanced by installation
of additional digital document product memory. The Company's object-based
image processing technology provides more significant benefits as the image
processing workload increases, which occurs with increased resolution or a
transition from monochrome to color. The Company was recently issued two
patents covering certain aspects of its object-based imaging approach.
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Systems Architecture. Many embedded imaging systems in use today were custom
designed for a specific range of digital document product imaging requirements
in dedicated applications. In contrast, the Company's imaging solution
implements a general-purpose imaging architecture. The Company has developed
standardized interfaces for the Company's family of solutions that enable the
Peerless imaging solution to be ported to a variety of platforms, languages
and applications. For example, the standardized PeerlessPage interface
provides the ability to support multiple printing languages, and the
PeerlessPage Imaging Operating System is both platform- and device-independent
and able to accommodate a variety of print engines and controller
architectures. The Company has also developed an applications interface that
enables the support of features such as spooling, stored macros, stored forms,
electronic collation and stapling.
The Company's architecture employs a modular and layered structure to
accommodate segmentation of the Peerless imaging solution. The Company
believes that this modular architecture will become increasingly important to
its competitive position as the imaging industry evolves. For example, the
ability to partition portions of the Peerless embedded imaging solution into
separate modules that can reside in independent locations on the network
allows the Company to address emerging applications such as host-based
printing.
Technology Partners. As part of its technology strategy, the Company has
established relationships that permit it to offer to its customers
complementary technologies through technology partners. For example, Peerless
has licensed (for internal development purposes) the right to use Adobe's
PostScript Software to enable the Company's products to be used with Adobe's
PostScript Software, and the Company's relationship with Adobe permits the
Company to offer a convenient and optimized Adobe PostScript-enabled solution.
Furthermore, the Company has a relationship with Emulex which enables the
Company to support network printing under a wide range of networking
technologies. In addition, the Company incorporates font rasterizers into its
imaging solution to enable its OEMs to license font technology from providers
such as Agfa and Bitstream.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. During this initial phase, the
Company will receive certain non-refundable advances of proposed licensing
fees. If this initial phase results in the development of acceptable product
specifications and development schedules, the agreement provides for the
license of Peerless technologies to, and development of technologies for, this
manufacturer.
If the license and development portions of agreement become effective, they
will provide for the possible payment to the Company of additional engineering
services and maintenance fees and substantial licensing fees. The agreement
provides that the manufacturer may terminate the relationship for any reason
upon sixty days notice and with notice in the event of a material breach. If
the agreement is terminated for a material breach by the Company, the
manufacturer is entitled to a return of the substantial majority of the
licensing fees previously paid other than those attributable to per unit
royalties. No assurance can be given as to the ability of the Company to
complete acceptable product specifications, which is the trigger for the
effectiveness of the license and development portions of the agreement. If
completed, no assurance can be given as to the ability of the Company to
perform in accordance with the terms of the agreement or as to the ability or
willingness of the manufacturer to continue developing, marketing and selling
proposed products covered by the agreement. The failure to timely complete
acceptable product specifications, or, if completed, the termination of the
agreement or the inability or unwillingness of the Company or the manufacturer
to perform in accordance with the terms of the agreement or as presently
anticipated by the Company, would have a material adverse effect on the
Company's future prospects and operating results.
For a discussion of certain risks relating to the Company's technology, see
"Risk Factors--Dependence on Adobe Relationships," "Dependence on Sole Source
Providers" and "--Dependence on Intellectual Property Rights; Risk of
Infringement; Trademark Disputes."
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CUSTOMERS AND MARKETS
Customers
Peerless markets its imaging products to OEMs manufacturing digital document
products for the high-performance sector of the office market and to
semiconductor OEMs in the low-cost sector of the office and personal use
market. With the exception of Adobe, the Company has derived substantially all
of its revenues in recent years from direct sales to digital document product
OEMs. OEM customers and their digital document products incorporating the
Company's technologies include:
<TABLE>
<CAPTION>
SELECTED PEERLESS OEM CUSTOMERS
- ---------------------------------------------------------------------------------
OEM
CUSTOMER OEM PRODUCTS DESCRIPTION PEERLESS PRODUCTS INCLUDED
- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
Canon GP-55F, GP-30F 30ppm MFP PeerlessPage,
Multi-PDL-A1 PeerlessPrint5E, Adobe
PostScript Integration
---------------------------------------------------------------------
LBP-1260 Plus 12ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration,
QuickPrint 1600, PSIO
---------------------------------------------------------------------
Laser Shot 8ppm Kanji Laser PeerlessPage, Adobe
LBP-730 Printer PostScript Integration,
QuickPrint 1700, PSIO
- ---------------------------------------------------------------------------------
Digital 5100 8ppm Laser Printer PeerlessPage,
Equipment PeerlessPrint5E, Adobe
PostScript Integration, PSIO
---------------------------------------------------------------------
Corporation LN17 17ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration, PSIO
- ---------------------------------------------------------------------------------
IBM Network Printer 12, 17, 24ppm Laser PeerlessPage,
12, 17, 24 Printers PeerlessPrint5E, Adobe
PostScript Integration,
QuickPrint 1700, PSIO,
Peerless Printer MIB
- ---------------------------------------------------------------------------------
Xerox 4505, 4510, 4520 5, 10, 20ppm Laser PeerlessPage,
Printers PeerlessPrint5E, Adobe
PostScript Integration, PSIO
---------------------------------------------------------------------
DocuPrint 4517 17ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration, PSIO
</TABLE>
For a discussion of certain risks relating to the Company's reliance on its
OEM customers, see "Risk Factors--Dependence on Market Success of Third
Parties" and "--Concentration of OEM Customers."
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Markets
High-Performance Digital Document Product Market. The high-performance
sector of the digital document product market is characterized by digital
document products ranging in price from approximately $1,000 to in excess of
$20,000 each. These products typically offer high performance differentiated
by customized features. In many cases, digital document product manufacturers
demand turnkey, customized embedded imaging solutions that include imaging
software, controller design and network interface card design. As a result of
these unique requirements, Peerless typically addresses the high-performance
sector of the digital document product market via direct OEM relationships
with individual digital document product manufacturers. The Company's major
digital document product manufacturer customers, based on percentage of total
revenues, in the calendar year 1995 and the six months ended July 31, 1996,
included: Xerox, with 25% and 13%, respectively; Canon, with 22% and 19%,
respectively; and IBM, with 15% and 14%, respectively. Many of the services
and licensing arrangements with the Company's OEMs are provided on a project-
by-project basis, are terminable with limited or no notice, and, in certain
instances, are not governed by long-term agreements.
Small Office/Home Office Market. The low-cost sector of the digital document
product market, sometimes called the Small Office/Home Office ("SOHO") market,
is characterized by digital document products with prices under $1,000 that
typically emphasize price/performance over customized features. In most
instances, it is not cost effective for digital document product manufacturers
to invest in a customized embedded imaging solution in addressing this market.
For the SOHO market, Peerless has designed a family of ASICs that embed basic
components of the Company's imaging software into semiconductor firmware.
Peerless has licensed these designs to semiconductor manufacturers, such as
Motorola, that have the rights to manufacture and sell these ASICs directly to
digital document product manufacturers. Motorola sells a Peerless-based
printing ASIC, the 68322, and pays Peerless a royalty on each ASIC sold. See
"Risk Factors--Dependence on Sole Source Providers."
For a discussion of certain risks relating to the Company's customers and
markets, see "Risk Factors--Dependence on Market Success of Third Parties" and
"--Concentration of OEM Customers."
PEERLESS PRODUCTS AND SOLUTIONS
Peerless provides comprehensive solutions for embedded imaging system
applications. The Company delivers its products to its OEM customers in two
ways: licensing of the Company's standard imaging products for the OEM
customer's internal product development; and turnkey product development
whereby the Company provides the additional engineering services necessary to
integrate the appropriate standard products into a complete embedded imaging
system solution optimized to the OEM's specific requirements.
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Products
The following table describes the Company's products and products under
development and their applicable solutions.
<TABLE>
<CAPTION>
PEERLESS PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
- ---------------------------------------------------------------------------------
APPLICABLE SOLUTIONS
- ---------------------------------------------------------------------------------
MONO-
PRODUCT DESCRIPTION CHROME MFP COLOR
- ---------------------------------------------------------------------------------
Operating System
- ---------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
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 * *
- ---------------------------------------------------------------------------------
</TABLE>
X=Shipping
*=Under development
Development and commercialization of the Company's products and technology
is subject to numerous risks and uncertainties, including risks associated
with technological change, product development delays and difficulties,
developing markets and dependence on the Company's OEMs, strategic
relationships and the digital document product market. No assurance can be
given that such products incorporating the Company's technology will be
developed and shipped in a timely manner or at all. See "Risk Factors."
Operating System. PeerlessPage is a complete imaging operating system
including a high-performance real-time operating system kernel, printing
engine driver, object-based image processing model, graphics library, font
management, hard disk management, print job management and user control panel
interface. Color extensions to PeerlessPage are currently under development to
support the unique requirements of
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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
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<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,
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<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
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<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.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of July
31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Edward A. Gavaldon............. 51 President, Chief Executive Officer and
Chairman of the Board
Hoshi Printer.................. 54 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
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.
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<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
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<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
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<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.
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<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
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<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
(including beneficial ownership of 10,150 shares of Common Stock issuable
pursuant to the net exercise of warrants); (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 80,553 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 8,055 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 12,889 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 86,172 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 $ (2,571)
======== ======== ======== ======== ========
</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........... 7,086 8,644
====== ======
</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>
<CAPTION>
NETWORKED MULTIFUNCTION
MONOCHROME MARKET MARKET COLOR MARKET
----------------- ------------- ------------
<S> <C> <C>
. Low cost networkable . Low cost networkable . Networkable color laser
office laser printers inkjet and laser-based printers
MFPs to high speed
copier-based MFPs
. 1 to 40 pages per . 1 to 40 pages per . 1 to 10 color pages
minute minute per minute
. 600 to 1200 dots . 600 to 1200 dots . 600 to 1200 dots
per inch per inch per inch
. Gray scale support . Multitasking support for . Contone color quality
print, copy, fax and
scan features
. Multiprotocol network . Multiprotocol network . Multiprotocol network
support support support
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPEC-
TUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAV-
ING BEEN AUTHORIZED BY THE COM-
PANY, ANY SELLING STOCKHOLDER OR
ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY TO ANY
PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PER-
SON TO WHOM IT IS UNLAWFUL. NEI-
THER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLI-
CATION 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 AF-
TER THE DATE OF THIS PROSPEC-
TUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,750,000 SHARES
[LOGO OF PEERLESS SYSTEMS CORPORATION]
PEERLESS
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee, the NASD filing fee and the Nasdaq National
Market application fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 19,333
NASD filing fee................................................. 6,106
Nasdaq National Market application fee.......................... 43,000
Blue sky qualification fee and expenses......................... 15,000
Printing and engraving expenses................................. 110,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 175,000
Transfer agent and registrar fees............................... 10,000
Miscellaneous................................................... 221,561
--------
Total........................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and executive
officers and may indemnify its other officers, employees and other agents to
the fullest extent not prohibited by Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its stockholders. These provisions do not
eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise. In addition, the Indemnity Agreement filed as
Exhibit 10.19 to this Registration Statement provides for indemnification by
Selling Stockholders of the Registrant and its officers and directors for
certain liabilities arising under the Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1993, except as otherwise noted, the Registrant has sold and
issued the following unregistered securities:
(1) In June, July and October 1993, the Registrant issued an aggregate of
1,501,177 shares of Series B Preferred Stock convertible into 1,520,792
shares of Common Stock and warrants to purchase an aggregate of 615,627
shares Common Stock to a group of accredited investors for cash in the
aggregate amount of $2,055,004 and the cancellation of convertible
promissory notes in the aggregate principal amount of $1,407,950.
(2) In September 1993, the Registrant issued a warrant to purchase 75,268
shares of Series B Preferred Stock, at an exercise price of $2.33 per
share, in connection with the execution and delivery of a Master Lease
Agreement dated as of July 9, 1991, Equipment Schedule #VL-3 and #VL-4, and
related Summary Equipment Schedules.
(3) In November 1993, the Registrant issued a warrant to purchase 26,666
shares of Common Stock, at an exercise price of $1.13 per share, in
connection with bank line of credit transactions.
(4) In June 1994, the Registrant issued a warrant to purchase 13,333
shares of Common Stock, at an exercise price of $2.55 per share, in
connection with bank line of credit transactions.
(5) In December 1994 and January 1995, the Registrant issued an aggregate
of 59,452 shares of Common Stock, pursuant to the Deferred Compensation
Stock Purchase Plan, for $84,729.55.
(6) In February 1995, the Registrant issued a warrant to purchase 4,333
shares of Common Stock, at an exercise price of $2.97 per share, in
connection with equipment lease transactions.
(7) In October 1995, the Registrant issued 7.00% Convertible Debentures
in the aggregate principal amount of $3,070,000 (the "Debentures"). The
Debentures are convertible into 1,169,518 shares of Common Stock at a
conversion price of $2.63 per share.
(8) In December 1995, the Registrant issued an aggregate of 159,535
shares of Common Stock, pursuant to the Employee Stock Purchase Plan, for
an aggregate of $227,352.10.
(9) From inception to July 31, 1996, the Registrant granted incentive
stock options and nonstatutory stock options to employees, directors and
consultants covering an aggregate of 1,877,706 shares of the Registrant's
Common Stock, at a weighted average exercise price of $1.91 per share.
Options to purchase 1,490,957 shares are currently outstanding. Options to
purchase 250,899 shares of Common Stock have been canceled or have lapsed
without being exercised. The Registrant has sold 135,850 shares of its
Common Stock to employees, directors and consultants pursuant to exercise
of stock options. Options to purchase 833,189 shares remained available for
grant.
The sale and issuance of securities in the transactions described in
paragraphs (1) through (4), (6) and (7) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) adopted
thereunder. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to distribution
thereof. Appropriate legends are affixed to the stock certificate issued in
such transactions. All recipients either received adequate information about
the Registrant or had access, through employment or other relationships, to
such information.
The sale and issuance of securities in the transactions described in
paragraphs (5), (8) and (9) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder, in that
they were issued either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of the Registrant.
3.2 Form of Certificate of Incorporation of the Registrant to be
effective upon the closing of the offering.
3.3+ Bylaws of the Registrant.
Bylaws of the Registrant to be effective upon the closing of the
3.4 offering.
3.5* Form of Agreement and Plan of Merger.
4.1 Reference is made to Exhibits 3.1 through 3.4.
5.1* Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1+ Form of Indemnity Agreement.
10.2+ 1992 Stock Option Plan.
10.3+ 1996 Equity Incentive Plan.
10.4+ Form of Incentive Stock Option.
10.5+ Form of Nonstatutory Stock Option.
10.6+ 1996 Employee Stock Purchase Plan.
10.7++ Third Party Development and License Agreement (the "Adobe Third
Party License") dated September 18, 1992 between the Registrant and
Adobe Systems Incorporated ("Adobe").
Reference Post Appendix #2 to the Adobe Third Party License dated
10.8++ February 11, 1993.
Amendment No. 1 to Adobe Third Party License, dated November 29,
10.9+ 1993.
10.10++ PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Registrant and Adobe.
10.11++ Amendment No. 1 to the PCL License dated October 31, 1993.
10.12++ Letter Modification to the PCL License dated August 5, 1994.
10.13++ Addendum No. 1 to the PCL License dated March 31, 1995.
10.14++ Letter Modification to the PCL License dated August 30, 1995.
10.15(i)+ Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated February 6,
1992.
10.15(ii) First Amendment to Office Lease dated December 1, 1995 between the
Company and Continental Development Corporation.
10.16 Amended and Restated Investor Rights Agreement, dated October 6,
1995.
10.17* Employment Agreement with Lauren Shaw.
10.18* Employment Agreement with Edward Gavaldon.
10.19 Form of Indemnity Agreement among the Registrant and the Selling
Stockholders.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Cooley Godward Castro Huddleson & Tatum. Reference is
made to Exhibit 5.1.
24.1+ Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- ---------------------
+ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements
or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described in Item 14 or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to
be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of El Segundo,
County of Los Angeles, State of California, on the 26th day of August, 1996.
PEERLESS SYSTEMS CORPORATION
By: /s/ Edward A. Gavaldon
----------------------------------
Edward A. Gavaldon
President and Chief Executive
Officer (Principal Executive
Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Edward A. Gavaldon President, Chief August 26, 1996
- ------------------------------------- Executive Officer
Edward A. Gavaldon and Director
(Principal
Executive Officer)
/s/ Hoshi Printer Vice President, August 26, 1996
- ------------------------------------- Finance and
Hoshi Printer Administration,
Chief Financial
Officer and
Secretary
(Principal
Financial and
Accounting Officer)
* Director August 26, 1996
- -------------------------------------
Robert G. Barrett
* Director August 26, 1996
- -------------------------------------
Robert L. North
Director August 26, 1996
*
- -------------------------------------
Lauren L. Shaw
Director August , 1996
- -------------------------------------
Paul D. Levy
*By: /s/ Edward A. Gavaldon
--------------------------------
Edward A. Gavaldon
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of the Registrant.
3.2 Form of Certificate of Incorporation of the Registrant to be
effective upon the closing of the offering.
3.3+ Bylaws of the Registrant.
3.4 Bylaws of the Registrant to be effective upon the closing of the
offering.
3.5* Form of Agreement and Plan of Merger.
4.1 Reference is made to Exhibits 3.1 through 3.4.
5.1* Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1+ Form of Indemnity Agreement.
10.2+ 1992 Stock Option Plan.
10.3+ 1996 Equity Incentive Plan.
10.4+ Form of Incentive Stock Option.
10.5+ Form of Nonstatutory Stock Option.
10.6+ 1996 Employee Stock Purchase Plan.
10.7++ Third Party Development and License Agreement (the "Adobe Third
Party License") dated September 18, 1992 between the Registrant and
Adobe Systems Incorporated ("Adobe").
10.8++ Reference Post Appendix #2 to the Adobe Third Party License dated
February 11, 1993.
10.9+ Amendment No. 1 to Adobe Third Party License, dated November 29,
1993.
10.10++ PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Registrant and Adobe.
10.11++ Amendment No. 1 to the PCL License dated October 31, 1993.
10.12++ Letter Modification to the PCL License dated August 5, 1994.
10.13++ Addendum No. 1 to the PCL License dated March 31, 1995.
10.14++ Letter Modification to the PCL License dated August 30, 1995.
10.15(i)+ Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated February 6,
1992.
10.15(ii) First Amendment to Office Lease dated December 1, 1995 between the
Company and Continental Development Corporation.
10.16 Amended and Restated Investor Rights Agreement, dated October 6,
1995.
10.17* Employment Agreement with Lauren Shaw.
10.18* Employment Agreement with Edward Gavaldon.
10.19 Form of Indemnity Agreement among the Company and Selling
Stockholders.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Cooley Godward Castro Huddleson & Tatum. Reference is
made to Exhibit 5.1.
24.1+ Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
PEERLESS SYSTEMS CORPORATION
I.
The name of this corporation is Peerless Systems Corporation.
II.
The address including street, number, city, and county of the registered
office of the corporation in the State of Delaware is 1013 Centre Road, City of
Wilmington, County of New Castle. The name of the registered agent of the
corporation in the State of Delaware at such address is The Prentice-Hall
Corporation System, Inc.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is thirty-five
million (35,000,000) shares. Thirty million (30,000,000) shares shall be Common
Stock, each having a par value of one tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of one
tenth of one cent ($.001).
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
<PAGE>
V.
A. For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time (i) with cause by the affirmative vote of the holders of a
majority of the voting power of all the then-outstanding shares of voting stock
of the Corporation, entitled to vote at an election of directors (the "Voting
Stock") or (ii) without cause by the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-
outstanding shares of the Voting Stock.
3. Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock. The Board of Directors shall
also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws, and no action shall be taken by the stockholders by written consent.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
2.
<PAGE>
VI.
A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
VIII.
The name and mailing address of the Sole Incorporator is as follows:
Kris S. Tamashiro
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
3.
<PAGE>
IN WITNESS WHEREOF, this Certificate has been subscribed this 12th day of
August, 1996 by the undersigned who affirms the statements made herein are true
and correct.
------------------------------------
Kris S. Tamashiro, Sole Incorporator
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
PEERLESS SYSTEMS CORPORATION
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I PAGE
<S> <C>
OFFICES..................... 1.
Section 1. Registered Office............................ 1.
Section 2. Other Offices................................ 1.
ARTICLE II
CORPORATE SEAL.............. 1.
Section 3. Corporate Seal............................... 1.
ARTICLE III
STOCKHOLDERS' MEETINGS...... 1.
Section 4. Place of Meetings............................ 1.
Section 5. Annual Meeting............................... 1.
Section 6. Special Meetings............................. 3.
Section 7. Notice of Meetings........................... 4.
Section 8. Quorum....................................... 4.
Section 9. Adjournment and Notice of Adjourned Meetings. 5.
Section 10. Voting Rights................................ 5.
Section 11. Joint Owners of Stock........................ 5.
Section 12. List of Stockholders......................... 5.
Section 13. Action Without Meeting....................... 6.
Section 14. Organization................................. 6.
ARTICLE IV
DIRECTORS................... 6.
Section 15. Number and Term of Office.................... 6.
Section 16. Powers....................................... 6.
Section 17. Vacancies.................................... 7.
Section 18. Resignation.................................. 7.
Section 19. Removal...................................... 7.
Section 20. Meetings..................................... 7.
(a) Annual Meetings.............................. 7.
(b) Regular Meetings............................. 7.
(c) Special Meetings............................. 8.
(d) Telephone Meetings........................... 8.
(e) Notice of Meetings........................... 8.
(f) Waiver of Notice............................. 8.
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 21. Quorum and Voting............................. 8.
Section 22. Action Without Meeting........................ 9.
Section 23. Fees and Compensation......................... 9.
Section 24. Committees.................................... 9.
(a) Executive Committee........................... 9.
(b) Other Committees.............................. 9.
(c) Term.......................................... 10.
(d) Meetings...................................... 10.
Section 25. Organization.................................. 10.
ARTICLE V
OFFICERS..................... 11.
Section 26. Officers Designated........................... 11.
Section 27. Tenure and Duties of Officers................. 11.
(a) General....................................... 11.
(b) Duties of Chairman of the Board of Directors.. 11.
(c) Duties of Chief Executive Officer............. 11.
(d) Duties of President........................... 11.
(e) Duties of Vice Presidents..................... 12.
(f) Duties of Secretary........................... 12.
(g) Duties of Chief Financial Officer............. 12.
Section 28. Delegation of Authority....................... 12.
Section 29. Resignations.................................. 12.
Section 30. Removal....................................... 13.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION............ 13.
Section 31. Execution of Corporate Instruments............ 13.
Section 32. Voting of Securities Owned by the Corporation. 13.
ARTICLE VII
SHARES OF STOCK.............. 14.
Section 33. Form and Execution of Certificates............ 14.
Section 34. Lost Certificates............................. 14.
Section 35. Transfers..................................... 14.
</TABLE>
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 36. Fixing Record Dates.......................... 15.
Section 37. Registered Stockholders...................... 15.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION..... 15.
Section 38. Execution of Other Securities............... 15.
ARTICLE IX
DIVIDENDS................... 16.
Section 39. Declaration of Dividends.................... 16.
Section 40. Dividend Reserve............................ 16.
ARTICLE X
FISCAL YEAR................. 16.
Section 41. Fiscal Year................................. 16.
ARTICLE XI
INDEMNIFICATION............. 17.
Section 42. Indemnification of Directors, Executive
Officers, Other Officers, Employees and
Other Agents................................ 17.
(a) Directors and Executive Officers............ 17.
(b) Other Officers, Employees and Other Agents.. 17.
(c) Expenses.................................... 17.
(d) Enforcement................................. 18.
(e) Non-Exclusivity of Rights................... 18.
(f) Survival of Rights.......................... 18.
(g) Insurance................................... 18.
(h) Amendments.................................. 19.
(i) Saving Clause............................... 19.
(j) Certain Definitions......................... 19.
ARTICLE XII
NOTICES..................... 20.
Section 43. Notices..................................... 20.
</TABLE>
iii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
(a) Notice to Stockholders....................... 20.
(b) Notice to Directors.......................... 20.
(c) Affidavit of Mailing......................... 20.
(d) Time Notices Deemed Given.................... 20.
(e) Methods of Notice............................ 20.
(f) Failure to Receive Notice.................... 20.
(g) Notice to Person with Whom Communication
Is Unlawful.................................. 21.
(h) Notice to Person with Undeliverable Address.. 21.
ARTICLE XIII
AMENDMENTS................... 21.
Section 44. Amendments................................... 21.
ARTICLE XIV
LOANS TO OFFICERS............ 22.
Section 45. Loans to Officers............................ 22.
</TABLE>
<PAGE>
BYLAWS
OF
PEERLESS SYSTEMS CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be at 1013 Centre Road, City of Wilmington, County
of New Castle; and the name of the registered agent of the corporation in the
State of Delaware at such address is the Prentice-Hall Corporation System, Inc.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
<PAGE>
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as
a proponent to a stockholder proposal. Notwithstanding the foregoing, in order
to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of
2.
<PAGE>
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the corporation in accordance with the provisions of paragraph
(b) of this Section 5. Such stockholder's notice shall set forth (i) as to each
person, if any, whom the stockholder proposes to nominate for election or re-
election as a director: (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section 5.
At the request of the Board of Directors, any person nominated by a stockholder
for election as a director shall furnish to the Secretary of the corporation
that information required to be set forth in the stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the corporation unless nominated in accordance with
the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
(d) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (iv) by the holders of shares entitled to cast not
less than ten percent (10%) of the votes at the meeting, and shall be held at
such place, on such date, and at such time as the Board of Directors, shall fix.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine
3.
<PAGE>
the time and place of such special meeting, which shall be held not less than
thirty-five (35) nor more than one hundred twenty (120) days after the date of
the receipt of the request. Upon determination of the time and place of the
meeting, the officer receiving the request shall cause notice to be given to the
stockholders entitled to vote, in accordance with the provisions of Section 7 of
these Bylaws. If the notice is not given within sixty (60) days after the
receipt of the request, the person or persons requesting the meeting may set the
time and place of the meeting and give the notice. Nothing contained in this
paragraph (b) shall be construed as limiting, fixing, or affecting the time when
a meeting of stockholders called by action of the Board of Directors may be
held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote cast,
excluding abstentions, at any meeting at which a quorum is present shall be
valid and binding upon the corporation; provided, however, that directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by the statute or by the Certificate
of Incorporation or these Bylaws, the affirmative vote of the majority
(plurality, in the case of the election of directors) of the votes cast,
including abstentions, by the holders of shares of such class or classes or
series shall be the act of such class or classes or series.
4.
<PAGE>
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents (if such consents are allowed
pursuant to these Bylaws) shall have the right to do so either in person or by
an agent or agents authorized by a proxy granted in accordance with Delaware
law. An agent so appointed need not be a stockholder. No proxy shall be voted
after three (3) years from its date of creation unless the proxy provides for a
longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
5.
<PAGE>
SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the stockholders
by written consent.
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the Chief
Executive Officer, or, if the Chief Executive Officer is absent, a chairman of
the meeting chosen by a majority in interest of the stockholders entitled to
vote, present in person or by proxy, shall act as chairman. The Secretary, or,
in his absence, an Assistant Secretary directed to do so by the Chairman, shall
act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors
of the corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16 POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
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SECTION 17. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
SECTION 18. RESIGNATION. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
SECTION 19. REMOVAL. Subject to the rights of the holders of any series
of Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
SECTION 20. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
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(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the Chief Executive Officer or any two of
the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, facsimile, telegraph or telex, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 21. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
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SECTION 22. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 23. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 24. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, including without limitation the power or authority
to declare a dividend, to authorize the issuance of stock and to adopt a
certificate of ownership and merger, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the Bylaws of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.
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(c) TERM. The members of all committees of the Board of Directors
shall serve a term on the committee coexistent with that of the Board of
Directors which shall have appointed such committee. The Board of Directors,
subject to the provisions of subsections (a) or (b) of this Bylaw may at any
time increase or decrease the number of members of a committee or terminate the
existence of a committee. The membership of a committee member shall terminate
on the date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason remove
any individual committee member and the Board of Directors may fill any
committee vacancy created by death, resignation, removal or increase in the
number of members of the committee. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 25. ORGANIZATION. At every meeting of the directors, the Chairman
of the Board of Directors, or, if a Chairman has not been appointed or is
absent, the Chief Executive Officer, or if the Chief Executive Officer is
absent, the President, or, in the absence of any such officer, a chairman of the
meeting chosen by a majority of the directors present, shall preside over the
meeting. The Secretary, or in his absence, an Assistant Secretary directed to
do so by the Chief Executive Officer, shall act as secretary of the meeting.
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ARTICLE V
OFFICERS
SECTION 26. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by the
Board of Directors.
SECTION 27. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time.
(c) DUTIES OF CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors, unless the Chairman of the Board of Directors has been
appointed and is present. The Chief Executive Officer shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and officers of the corporation. The Chief Executive
Officer shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(d) DUTIES OF PRESIDENT. The President may assume and perform the
duties of the Chief Executive Officer in the absence or disability of the Chief
Executive Officer or whenever the office of Chief Executive Officer is vacant.
The President shall perform other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the Board of
Directors or the Chief Executive Officer shall designate from time to time.
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(e) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors,
the Chief Executive Officer or the President shall designate from time to time.
(f) DUTIES OF SECRETARY. The Secretary shall attend all meetings of
the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The Chief Executive Officer may direct any
Assistant Secretary to assume and perform the duties of the Secretary in the
absence or disability of the Secretary, and each Assistant Secretary shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board of Directors or the Chief
Executive Officer shall designate from time to time.
(g) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep or cause to be kept the books of account of the corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the corporation in such form and as often as required by the Board of
Directors or the Chief Executive Officer. The Chief Financial Officer, subject
to the order of the Board of Directors, shall have the custody of all funds and
securities of the corporation. The Chief Financial Officer shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the Chief Executive
Officer shall designate from time to time. The Chief Executive Officer may
direct the Treasurer or any Assistant Treasurer, or the Controller or any
Assistant Controller to assume and perform the duties of the Chief Financial
Officer in the absence or disability of the Chief Financial Officer, and each
Treasurer and Assistant Treasurer and each Controller and Assistant Controller
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
or the Chief Executive Officer shall designate from time to time.
SECTION 28. DELEGATION OF AUTHORITY. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
SECTION 29. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the Chief Executive Officer or to
the Secretary. Any such resignation shall be effective when received by the
person or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without
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prejudice to the rights, if any, of the corporation under any contract with the
resigning officer.
SECTION 30. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 31. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 32. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
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ARTICLE VII
SHARES OF STOCK
SECTION 33. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 34. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 35. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall
be made only upon its books by the holders thereof, in person or by attorney
duly authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
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(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
SECTION 36. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 37. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 38. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
Chief Executive Officer, the President or any Vice President, or such other
person as may be authorized by the Board of Directors, and the corporate seal
impressed thereon or a facsimile of such seal imprinted thereon and attested by
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the signature of the Secretary or an Assistant Secretary, or the Chief Financial
Officer or Treasurer or an Assistant Treasurer; provided, however, that where
any such bond, debenture or other corporate security shall be authenticated by
the manual signature, or where permissible facsimile signature, of a trustee
under an indenture pursuant to which such bond, debenture or other corporate
security shall be issued, the signatures of the persons signing and attesting
the corporate seal on such bond, debenture or other corporate security may be
the imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 39. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
SECTION 40. DIVIDEND RESERVE. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 41. FISCAL YEAR. The fiscal year of the corporation shall end on
January 31 of each year unless changed by resolution of the Board of Directors.
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ARTICLE XI
INDEMNIFICATION
SECTION 42. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS,
OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers and, provided, further, that
the corporation shall not be required to indemnify any director or executive
officer in connection with any proceeding (or part thereof) initiated by such
person unless (i) such indemnification is expressly required to be made by law,
(ii) the proceeding was authorized by the Board of Directors of the corporation,
(iii) such indemnification is provided by the corporation, in its sole
discretion, pursuant to the powers vested in the corporation under the Delaware
General Corporation Law or (iv) such indemnification is required to be made
under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(d) of this Bylaw, no advance shall be made by the corporation to an executive
officer of the corporation (except by reason of the fact that such executive
officer is or was a director of the corporation in which event this paragraph
shall not apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
17.
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(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
officer is or was a director of the corporation) for advances, the corporation
shall be entitled to raise a defense as to any such action clear and convincing
evidence that such person acted in bad faith or in a manner that such person did
not believe to be in or not opposed to the best interests of the corporation, or
with respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. Neither the failure of
the corporation (including its Board of Directors, independent legal counsel or
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this Bylaw shall not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
18.
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(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(i) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the
giving of testimony in, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative.
(ii) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and
expenses of any nature or kind incurred in connection with any
proceeding.
(iii) The term the "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents,
so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of
this Bylaw with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(iv) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of
the corporation as, respectively, a director, executive officer,
officer, employee, trustee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
(v) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the
19.
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corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 43. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any
20.
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privilege, pursuant to any notice sent him in the manner above provided, shall
not be affected or extended in any manner by the failure of such stockholder or
such director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action
or meeting which shall be taken or held without notice to any such person with
whom communication is unlawful shall have the same force and effect as if such
notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 44. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the Voting Stock. The
Board of Directors shall also have the power to adopt, amend, or repeal Bylaws.
ARTICLE XIV
21.
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LOANS TO OFFICERS
SECTION 45. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
22.
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EXHIBIT 10.15(ii)
FIRST AMENDMENT TO OFFICE LEASE
This First Amendment to Lease Agreement (hereinafter referred to as the
"Amendment") made this 1st day of December, 1995 by and between CONTINENTAL
DEVELOPMENT CORPORATION, a California corporation, hereinafter referred to as
"Lessor", and PEERLESS SYSTEMS, INC., a California corporation, successor in
interest to The Peerless Group, Inc., hereinafter referred to as "Lessee."
W I T N E S S E T H :
WHEREAS, Lessor and Lessee entered into that certain Lease Agreement
("Lease") dated February 6, 1992, whereby Lessor leased to Lessee and Lessee
hired from Lessor certain office space known as Suite 400 in the building
commonly known as 2381 Rosecrans Avenue, El Segundo, California, together with
all improvements therein and appurtenances thereto; and
WHEREAS, Lessor granted to Lessee in Paragraph 54 of the Lease the right to
acquire additional premises in the Building; and,
WHEREAS, Lessor and Lessee are desirous of amending the Lease by this First
Amendment to Office Lease in the manner set forth below in order to add such
additional premises to the Premises.
NOW, THEREFORE, in consideration of the mutual covenants, terms and
conditions contained herein, and of other good and valuable consideration, it is
agreed as follows:
1. PREMISES
The description of the Premises appearing in Paragraph 1.2 and depicted in
Exhibit A of the Lease is hereby modified to include and show the additional
premises added to the Premises hereby (the "Additional Premises") and which
Additional Premises shall be depicted on Exhibit "AA" which is attached hereto
and by this reference made a part hereof.
2. RENTABLE AREA OF THE PREMISES
The Rentable Area of the Premises set forth in Paragraph 1.2 shall be
increased by an additional 4,417 rentable square feet, making the new total
rentable area of the Premises 29,586 rentable square feet.
3. TERM
The term appearing in Paragraph 1.5 of the Lease shall be extended by three
(3) years to end on March 31, 2001.
4. BASE RENT
The monthly base rent for the Premises shall be, from January 1, 1996
through March 31, 1996 to Forty-Nine Thousand Five Hundred Ninety-Eight Dollars
and Nineteen Cents ($49,598.19); and shall increase commencing on the later of
April 1, 1996 or the Commencement Date as shown in Section 6.1 of the Work
Letter attached hereto through March 31, 2001 to Fifty One Thousand Six Hundred
Fifty-Two Dollars and Twenty Cents ($51,652.20).
Page 1 of 4
<PAGE>
5. PARKING
Lessee may take up to fifteen (15) additional parking permits at the
prevailing parking rates for the Building. As of the date of this Amendment
each permit is $45.00 per month for unreserved, and $65.00 per month for
reserved.
6. LESSEE'S PRO RATA SHARE OF THE BUILDING
The Lessee's Share of Operating Expense Increase set forth in Provision
1.10 shall be increased by two point three four nine percent (2.349%) which
represents the Lessee's Share of Operating Expense Increase of the additional
premises added to the Premises hereby making the total Lessee's Share of
Operating Expense Increase equal to the amount of fifteen point three seven six
percent (15.376%).
7. LESSEE IMPROVEMENTS
Notwithstanding the terms of the Lease, the construction of the Lessee
Improvements in the Additional Premises shall be conducted in accordance with
Lessor's Work Letter Agreement and Schedule 1 thereto, both of which are
attached hereto as Exhibit "C" and Schedule 1, respectively. Said Work Letter
Agreement shall replace and supersede in its entirety the Construction Work
Letter and its Schedule 1 which are attached to the Lease. Furthermore,
notwithstanding anything contained in the Lease to the contrary, Lessor hereby
agrees to provide Lessee with a Lessor's Construction Allowance in the amount of
Twenty-Five Dollars and No Cents ($25.00) per usable square foot for the
construction of the Lessee Improvements in the Additional Premises. Therefore,
the total amount of the Lessor's Construction Allowance equals the sum of
Ninety-Eight Thousand One Hundred Fifty Dollars and No Cents ($98,150.00).
8. EXPANSION SPACE
Subject to existing first right provisions with other tenants of the
Building (defined as 2361 and 2381 Rosecrans Avenue), Lessor grants Lessee for
the Term a first right to lease any available space in the Building, including
but not limited to all space contiguous to the Premises on the same terms and
conditions of its present lease as amended, except that:
(i) the Base Rent shall be calculated at (a) $1.60 per rentable square
foot per month for any expansion space taken before April 1, 1997, and (b) at
Ninety-Five Percent (95%) of the then fair market rental value as determined
herein below for any expansion space taken April 1, 1997 or later,
(ii) a minimum term of Thirty-Six (36) months is required for any such
expansion space,
(iii) all space subject hereto shall be taken "as is" with a Lessor's
Construction Allowance equal to a fraction (of which the numerator is the number
of months of the term for such expansion space and the denominator is Sixty
(60)) of the Lessor's Construction Allowance that the Lessor would offer on the
open market at that time for space in similar condition to such expansion space.
Upon each space becoming available which would be subject to the terms of
this Paragraph, Lessor shall notify Lessee in writing of the availability of
such space, including the square footage, floor plan and any pre-existing
conditions. Upon receipt of such notice from Lessor, Lessee shall have twenty
(20) days in which to exercise its right to lease such expansion space in
accordance with the terms of this Paragraph.
Page 2 of 4
<PAGE>
This first right provision is combined with the assignability rights and
restrictions provided for in Paragraph 12 of the Lease.
For the expansion space taken April 1, 1997 or later the Base Rent shall be
determined as follows:
(i) Within fifteen (15) days of receipt by Lessor of Lessee's Option
Notice, Lessor shall deliver written notice (the "Lessor's Notice") to Lessee
advising Lessee of Lessor's opinion of the fair market rental value (the
"Value") of the Premises;
(ii) If Lessor's opinion of the Value of the Premises is acceptable to
Lessee, then Lessee shall so notify Lessor in writing within fifteen (15) days
of receipt by Lessee of Lessor's Notice, and the Lease shall, thereafter, be
extended for the Option Term.
(iii) In the event Lessee challenges Lessor's opinion of the Value of
the Premises, Lessee shall deliver written notice thereof (the "Lessee's
Notice") to Lessor within fifteen (15) days of receipt by Lessee. In such
Lessee's Notice, Lessee shall also advise Lessor of Lessee's opinion of the
Value of the Premises. If Lessee fails to deliver Lessee's Notice to Lessor
containing the required information within such fifteen (15) day time period,
then same shall be considered as Lessee's acceptance of Lessor's Opinion of the
Value of the Premises. If Lessee timely delivers the Lessee's Notice, and if
Lessor and Lessee cannot agree upon the Value of the Premises within fifteen
(15) days after Lessor's receipt of Lessee's Notice, then the Value of the
Premises shall be determined by appraisal in accordance with this Rider. All
costs of such appraisal shall be paid by Lessee; provided, however, that Lessor
shall hire and pay for its own broker as provided in Paragraph 3 hereof, and the
costs incurred by Lessor therefor shall be paid by Lessee to Lessor within five
(5) business days following demand therefor from Lessor.
(iv) DETERMINATION OF VALUE BY APPRAISER. Lessor and Lessee shall
appoint a mutually acceptable MAI appraiser with at least five (5) years
experience in valuing office buildings within the general area of the Premises
to also determine whether Lessor's or Lessee's opinion of the Value is more
accurate. The decision of the appraiser shall be binding on both of the parties
hereto. The Value of the Premises as determined, herein shall be the Base Rental
for the Term of the Expansion Space Lease.
(v) DEFINITION OF VALUE OF THE PREMISES. The Value of the Premises
shall be determined based upon rentals then being charged for other space
similarly situated and within Class A buildings located in the El
Segundo/Manhattan Beach market of equivalent condition and amenities as the
Building and the Project, and first occupied between 1985 and 1995, taking into
account the size, location, floor level, the length of the term of the Expansion
Space Lease, the extent of services to be provided, and any other relevant terms
and conditions, but, in each instance, including "tenant concessions," if any,
then being offered to prospective new tenants in the Building or comparable
buildings. The term "tenant concessions" shall mean so-called free rent, half
rent or other reduced rent, free parking or reduced parking charges, load factor
for rentable area of the Premises that is lower than that calculated in
accordance with BOMA, etc. All Base Rental payable during the Expansion Space
Lease shall be payable in the same manner and under the same terms and
conditions as Base Rental is paid during the Original Term.
(vi) ARBITRATION. In the event of a dispute regarding the Value of the
Premises or the Base Rental during the Option Term, the matter shall be
submitted to arbitration in Los Angeles County, before, and pursuant to the then
applicable commercial rules and regulations of the American Arbitration
Association or any successor organization ("AAA"). The parties hereby
incorporate by reference as though fully set forth herein California Code of
Civil Procedure Sections 1283, 1283.1 and 1283.05, relating to discovery during
an arbitration. The parties hereby agree that either or any party to the
arbitration may seek any and all provisional remedies, including, but not
limited to, temporary restraining orders, preliminary injunctions, permanent
injunctions, writs of attachment,
Page 3 of 4
<PAGE>
temporary protective orders, obtain receivers, utilize claims and deliveries and
obtain writs of possession, and that by doing so, it is specifically agreed that
the moving party has not waived the right to arbitrate or continue to arbitrate.
Each party shall, within thirty (30) days after either party files a request for
arbitration, name one arbitrator from among the arbitrators acceptable to the
AAA, and the two arbitrators shall appoint a third arbitrator; the failure of a
party to timely appoint an arbitrator shall be deemed a waiver of the right by
such party to appoint an arbitrator and to have the matter heard by more than
one arbitrator. In such proceeding, the arbitrator(s) shall determine who is a
substantially prevailing party and award to such party its reasonable
attorneys', accountants' and other professionals' fees and other costs incurred
in connection with such proceeding. The award of the arbitrator(s) shall be
final, binding upon the parties, un-appealable and may be entered in and
enforced by any court of competent jurisdiction. Such court may add to the award
of the arbitrator(s) all additional reasonable attorneys' fees and costs
incurred by the prevailing party in attempting to enforce such award.
9. EFFECTIVE DATE
This Amendment shall be deemed effective as of November 6, 1995. The
payment of Base Rental for the Additional Premises shall commence on the
Commencement Date as defined in Paragraph 6 of the Work Letter Agreement
attached hereto and made a part hereof.
10. BROKERAGE
Lessor and Lessee each hereby represent and warrant to the other that is
has not engaged or dealt with any real estate brokers, salesperson, finders or
other persons entitled to any compensation relating to this Lease, except for
Lee & Associates. If Lessee's or Lessor's representation and warranty contained
in this paragraph is inaccurate, then that Party hereby agrees to indemnify,
defend, and hold the other harmless from and against any and all liabilities,
costs, and expenses (including, without limitation, attorney's fees) incurred in
connection with the claims of any brokers, salespersons, finders, or other
persons.
11. GENERAL TERMS
All of the terms, covenants, conditions, provisions and agreements of the
Lease, except as amended herein, shall remain in full force and effect and shall
apply to the premises described in Paragraph 1 of this Agreement.
12. DEFINED TERMS
All terms used in this Agreement, unless otherwise specified herein to the
contrary, shall have the same meaning as in the Lease.
LESSOR: LESSEE:
CONTINENTAL DEVELOPMENT
CORPORATION, PEERLESS SYSTEMS, INC.,
a California corporation a California corporation
By: /s/ Richard C. Lindquist By: /s/ William S. Wood
----------------------------- -------------------
Richard C. Lindquist William S. Wood
Its: President Its: Vice President - Finance
By: /s/ Leonard E. Blakesley, Jr. By:
----------------------------- -------------------
Leonard E. Blakesley, Jr.
Its: Secretary Its: ------------------
<PAGE>
ADDITIONAL PREMISES
[Additional Premises Diagram]
Additional Premises - 4,417 rentable square feet
2381 Rosecrans Avenue
Fourth Floor
El Segundo, CA 90245
EXHIBIT "AA"
<PAGE>
EXHIBIT "C"
WORK LETTER AGREEMENT
---------------------
THIS WORK LETTER AGREEMENT (the "Agreement") supplements the First
Amendment to Office Lease (the "Amendment"), executed concurrently herewith, by
and between Lessor and Lessee, covering those certain premises described Section
1 of the First Amendment to Office Lease (the "Premises"). All terms not
defined herein shall have the same meanings as set forth in the Lease.
1. CONSTRUCTION OF BASE BUILDING.
-----------------------------
1.1 BASE BUILDING IMPROVEMENTS. Lessor has constructed through its
--------------------------
contractor, the Base Building Improvements consisting of a parking facility and
building shell. The building shell includes, but may not be limited to, the
following: (a) bare, trowel finished, concrete slab floors; (b) furnished
core area, including elevators and common area elevator lobbies, toilet rooms,
electrical rooms, telephone rooms, janitorial closets, exit stairs, and
mechanical shafts; (c) primary heating, ventilating and air conditioning service
stubbed out to the floor, including main supply air duct and heating hot water
supply mains; (d) distribution system including VAV boxes to be provided as part
of the Tenant Improvements (defined below); (e) primary fire sprinkler system in
open floor plan configuration (any modification to such sprinkler system for
the Lessee shall be a part of the Tenant Improvements); (f) main electrical
panels on each floor (but not including breakers and distribution); and (g)
primary distribution for the fire safety system required by applicable code for
unoccupied buildings (including the primary fire sprinkler system with
construction heads and alarms described above). Modification and connection to
the fire safety system for the Premises, as occupied, shall be a part of the
Lessee Improvements. Thereafter, Lessor shall furnish and install within the
Premises those improvements and items of general construction (the "Lessee
Improvements") shown on the plans and specifications prepared and approved by
Lessor and Lessee pursuant to Section 2 below, in compliance with all applicable
codes (including Americans With Disabilities Act codes as interpreted and
enforced by the City of El Segundo at the time the Lease was signed),
ordinances, permits, rules, and regulations. All Base Building Improvements and
Lessee Improvements shall be constructed pursuant to this Work Letter and shall
be performed only by Lessor's contractor. Lessor shall be responsible for any
and all latent defects to the building structure during the term of the Lease.
1.2 CONSTRUCTION REPRESENTATIVES. Lessor hereby appoints the following
----------------------------
person as Lessor's representative: Cathy Cole Portner ("Lessor's
------------------
Representative") to act for Lessor in all matters covered by this Agreement.
Lessee hereby appoints the following person as Lessee's representative: Chuck
-----
Wilde ("Lessee's Representative") to act for Lessee in all matters covered by
- -----
this Agreement. Lessor and Lessee shall have the right to rely on the approval,
authorization, consent or other action of each such representative, until
advised in writing that some other person has been appointed by either Lessor or
Lessee, as applicable, and has such authority. All other inquiries, requests,
instructions, authorizations, and other communications with respect to the
matters covered by this Agreement shall be made to Lessor's Representative or
Lessee's Representative, as the case may be. Either party may change its
representative under this Agreement at any time by written notice to the other
party.
2. CONSTRUCTION PLANS AND WORKING, DRAWINGS FOR TENANT IMPROVEMENTS.
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2.1 PREPARATION OF SPACE PLANS, ORIGINAL COST ESTIMATE, AND
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PROGRAMMING INFORMATION. Lessor has caused P. Patrick Murray, Inc. (the Space
- -----------------------
Planner) to prepare preliminary plans (the "Space Plans"). Lessee and Lessor
acknowledge and agree that Lessee's Programming Information (as defined in 2.2)
has been provided by Lessee and incorporated in the Space Plans. The Space
Planner, after approval and acceptance of the Space Plans, and upon direction by
the Lessor, shall prepare a cost estimate for the construction of the Lessee
Improvements (the "Original Cost Estimate"). Upon approval of the Space Plans
and Original Cost Estimate the Lessor shall direct the Space Planner to prepare
the Working Drawings pursuant to the procedure set forth in this Agreement.
Page 1 of 7
<PAGE>
2.2 APPROVAL OF THE SPACE PLANS AND THE ORIGINAL COST ESTIMATE.
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Lessee shall review and approve in writing the Space Plans which shall include
the following information: any special electrical requirements, telephone
requirements, plumbing requirements, special heat generating equipment, special
HVAC requirements, including amps (start-up and running), number and sizes of
offices, number of secretarial stations, special data processing equipment,
and special finishes (the "Programming Information") and the Original Cost
Estimate. The Lessor shall review the Space Plans and the Original Cost Estimate
including such Programming Information and, if acceptable to Lessor, Lessor will
approve the Space Plans, the Original Cost Estimate, and Programming
Information.
2.3 REVISIONS TO THE SPACE PLANS AND WORKING, DRAWINGS/ESTIMATED COST
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OF CHANGES.
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2.3.1 PROCEDURES FOR REVISIONS. If Lessee shall thereafter
------------------------
request any change(s) in the Base Building Improvements or Lessee Improvements
specified in the Space Plans or Working Drawings, Lessee shall promptly so
advise Lessor in writing; and Lessor, Lessee, and Lessor's Space Planner shall
promptly confer to determine and prepare all revisions to the Space Plans,
Working Drawings, or any other associated documentation required to implement
such changes. Following preparation of such revisions, which Lessor's Space
Planner shall promptly complete, Lessor shall submit to Lessee (i) the revised
Space Plans, Working Drawings and/or other documents, (ii) an estimate of the
cost of constructing such revisions (including, without limitation, estimations
of architectural and engineering fees, governmental agency fees, Lessor's
general contractor's overhead and supervision fees, and Lessor's administrative
fees) relative to the work reflected in the changes to the Space Plans and/or
Working Drawings (the "Estimated Cost of Change"), and (iii) a statement of the
delay in Lessee's occupancy of the Premises, if any, that will be occasioned by
the changes. LESSOR DOES NOT GUARANTEE THE ACCURACY OF SUCH ESTIMATED COST OF
CHANGES. Unless Lessee disapproves of such revisions and/or Estimated Cost of
Change within three (3) business days of delivery of such revisions and
Estimated Cost of Changes they shall be deemed accepted and agreed to by Lessee,
and thereafter Lessor may proceed. If within the applicable three (3) business
day period Lessor receives Lessee's written disapproval of the revised Space
Plans, Working Drawings, and/or Estimated Cost of Change, then Lessee shall
meet with Space Planner and Lessor's contractor (if necessary) within three (3)
business days thereafter to make further revisions. The procedure shall be
followed as set forth above until Lessee has approved (or been deemed to have
approved) the revised Space Plans, Working Drawings, and/or Estimated Cost of
Change. Any time consumed in revising the Space Plans, Working Drawings, or in
revising the Estimated Cost of Change beyond the initial three (3) business day
approval period shall be considered a Lessee Delay (defined below) and shall not
delay the Commencement Date of the Lease or rental payments, whether or not the
suite is occupied.
2.3.2 RESPONSIBILITY FOR ACTUAL CHANGE COSTS. Lessee shall be
--------------------------------------
responsible for the actual costs of the Lessee initiated changes described in
Section 2.3.1, as evidenced by, but not limited to, contractor and supplier
invoices, and other cost elements more fully described in Section 3.4 (the
"Actual Costs of Changes"), to the extent such changes exceed the aggregate of
Original Cost Estimate.
2.4 WORKING DRAWINGS.
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2.4.1 ACCEPTANCE. Upon approval of the Space Plans, Lessor shall
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cause the Space Planner to prepare detailed construction drawings and
specifications for the Lessee Improvements based solely upon the approved Space
Plans (the "Working Drawings"). These are to be completed and submitted to the
Lessee within fifteen (15) business days after execution and delivery of the
Amendment. Upon submittal of the Working Drawings to Lessee, Lessee shall have
five (5) business days in which to give written notice to Lessor of Lessee's
acceptance or rejection of the Working Drawings. Unless Lessor receives Lessee's
written rejection within said five (5) business day period, the drawings shall
be deemed approved by Lessee (the "Approved Working Drawings"). The Approved
Working Drawings shall create no responsibility of, or liability in, the Lessor
for the completeness of such plans, their design sufficiency or compliance with
applicable statutes, ordinances, or regulations. Any such responsibility or
liability shall be that of the Architect, Engineer, and/or Space Planner. The
Working Drawings shall
(i) be compatible with the Base Building shell and core,
and with the design, construction and equipment of the
Building;
Page 2 of 7
<PAGE>
(ii) comply with all applicable laws and ordinances and
the rules and regulations of all governmental
authorities having jurisdiction;
(iii) comply with all Lessor's and Lessee's Underwriters
and all applicable insurance regulations for a fire
resistant Class A building of its type and height;
(iv) include locations and complete dimensions of all
items to be constructed; and
(v) provide a breakdown of all equipment which shall
include, without limitation, equipment type,
electrical requirements, telephone requirements,
plumbing requirements, special heat generating
equipment, special HVAC requirements, including amps
(start-up and running), watts, BTU output, number and
sizes of offices, number of secretarial stations,
special data processing equipment, and special
finishes.
In preparation of Approved Working Drawings, no deviation shall be permitted
from the standards as set forth in Schedule 1 hereto (the Standards) unless
approved in writing by both parties. Lessee must request and receive written
approval of Lessor for any deviations of lesser quality than that set forth in
the Standards (set forth in Schedule I), or for deviations that fail to conform
to applicable governmental regulations, or that require additional Building
services, delay the Commencement Date or the Lessee Improvement Construction
Schedule, or would be of a nature or quality inconsistent with Lessor's overall
plan or objectives for the Building.
2.4.2 REJECTION. As set forth in Section 2.4.1 above, Lessee
---------
shall have five (5) business days, after submission of the Working Drawings to
Lessee, in which to give written notice to Lessor of Lessee's rejection of the
Working Drawings. If Lessee reasonably determines that the Working Drawings fail
to specify work and improvements in accordance with the Space Plans or in
accordance with good practice and workmanship, Lessee shall be entitled to
reject the Working Drawings as non-conforming. Whether or not Lessee so
determines, Lessee shall be entitled to request other changes to the Working
Drawings (and, if necessary, in the Space Plans), which shall be handled as
provided in Section 2.3.1 hereof. If Lessee reasonably determines that the
Working Drawings are non-conforming, Lessor shall promptly cause the Working
Drawings to be appropriately revised and re-submitted to Lessee, and the time
consumed thereby shall not be deemed a Lessee Delay.
2.5 FINAL WORK COST AND SCHEDULE. Within ten (10) business days
----------------------------
after Lessee's approval or deemed approval of the Approved Working Drawings,
Lessor will furnish to Lessee a final work cost, including the cost for any
Lessee initiated revisions incorporated not later than ten (10) business days
prior to the date such final work cost is due, based upon the Approved Working
Drawings (the "Final Work Cost" further defined below in Section 3.5) and a
Lessee Improvement construction schedule which shall include, but not be limited
to, the scheduling of Lessee's contractors who are installing data/phone lines,
security devices, partitioning, and fixtures. If the Final Work Cost is not
greater than the aggregate of the Original Cost Estimate and Estimated Cost of
Change, Lessor shall be authorized to commence construction.
If the Final Work Cost is greater than the aggregate of the
Original Cost Estimate and Estimated Cost of Change, Lessee shall have three (3)
business days in which to give written notice to Lessor of Lessee's acceptance
or rejection of the Final Work Cost. If Lessee rejects the Final Work Cost,
Lessee shall meet with Lessor, the Space Planner and Lessor's contractor within
five (5) business days to make revisions to the Approved Working Drawings to
bring the Final Work Cost down to an amount acceptable to Lessee. All costs of
such revisions shall be paid by Lessee in accordance with the procedures set
forth in Section 2.3.1. Following such revisions, Lessor shall submit to Lessee,
as soon as reasonably practicable, a new Final Work Cost, and the same procedure
will be followed as set forth above until Lessee has approved the revised
Approved Working Drawings and the Final Work Cost. Lessee shall deposit with
Lesser an amount equal to the Final Work Cost (the "Construction Payment").
Lessor shall not be required to authorize construction to commence until Lessor
has received the Construction Payment.
Page 3 of 7
<PAGE>
Any time consumed in revising the Approved Working Drawings or revising the
Final Work Cost shall be considered a Lessee Delay and shall not delay the
Commencement Date of the Lease. In no event shall errors attributable solely to
the Lessor or its contractor, or failure of Lessor or its contractor to adhere
to the timeframes herein, constitute a Lessee Delay.
2.6 BIDDING. Lessor has determined that it will contract with a
-------
general contractor for the construction of Tenant Improvements referred to
herein. In order to assure that the Lessee Improvements are constructed as
inexpensively as reasonably possible, Lessor will solicit bids from at least
three sub-contractors on each substantial aspect of the Lessee Improvements
work. Such sub-contractors may at the discretion of the Lessor be those
subcontractors chosen by the Lessor to install or construct similar work
throughout the Building.
The general contractor, sub-contractors, and material suppliers shall
warrant their work and products for one (1) year after delivery.
2.7 CONSTRUCTION
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2.7.1 LESSEE IMPROVEMENTS. All Lessee Improvements to be
-------------------
constructed or installed in the Premises shall be performed by Lessor's
designated general contractor in accordance with the Approved Working Drawings.
No work shall commence until the Approved Working Drawings are filed with the
governmental agencies having jurisdiction thereof and all required building
permits have been obtained. Lessor shall have no obligation to Lessee for
defects in design, workmanship or materials, but shall use its reasonable best
efforts to enforce the contractor's obligations thereto. Lessor shall include in
the contract of the Lessor's general contractor and any and all sub-contractor
contracts (who are in privity of contract with the Lessor) a subrogation clause
for the benefit of Lessee whereby Lessee shall be subrogated to Lessor's rights
of action against the Lessor's general contractor and/or any sub-contractors for
breach of contract, negligence, or other causes of action should Lessor fail or
refuse to pursue such actions. Any changes to the construction work may be made
only (a) upon written request by Lessee approved in writing by Lessor, or, (b)
as may be required by any governmental agency, or, (c) as may be required due to
structural or unanticipated field conditions. Each such requested change shall
be in writing, describing the change, and submitted to Lessor for approval.
Lessor shall then prepare a written approval containing the costs of such change
and the time required to perform Tenant Expenditure Authorization or TEA. All
costs of such changes are to be borne by the Lessee. Any time consumed by or for
changes to the Lessee Improvements shall be considered a Lessee Delay if it
causes an extension of the completion date set forth in the Lessee Improvement
construction time schedule.
2.7.2 ADDITIONAL LESSEE WORK. In the event Lessee desires any
----------------------
work in the Premises in addition to the Base Building Improvements and/or the
Lessee Improvement constructed in accordance with the Approved Working Drawings
("Additional Lessee Work"), Lessee shall make a written request to Lessor for
such Additional Lessee Work. The drawings, plans, and specifications for such
work shall be prepared by arranging with Lessor, or with prior reasonable
approval of Lessor, with consultants of Lessee's own selection. All plans and
specifications for Additional Lessee Work shall be subject to review and
reasonable approval by Lessor, as set forth in this Agreement, to insure, among
other things, that the work is compatible with all other construction, including
all electrical and mechanical systems within the Building. Upon such written
request, and approval of same by Lessor, Lessor shall submit to Lessee, for
approval, a TEA describing the change, cost estimate, amount of delay, and any
schedule adjustment as a result of such Additional Lessee Work. Lessee shall
approve the TEA, in writing, within five (5) business days following receipt
thereof, and, together with said approval shall pay Lessor the cost of such
agreed upon change provided such costs, or any portion thereof, are in excess of
the Lessee's Allowance described below. Lessor may refuse to make any changes
until Lessee approves the TEA in writing and makes such payment. In the event
Lessee fails to approve same within the five (5) business day period, then
Lessor may elect:
(i) to agree to the foregoing on the Lessee's behalf
(Lessee to promptly pay the required amounts to Lessor
for costs including, but not limited to, lost rent, if
any);
Page 4 of 7
<PAGE>
(ii) to withdraw the change request on Lessee's behalf; or
(iii) to proceed with the original Lessee Improvements,
delaying any portion as reasonably necessary to
accommodate the Additional Lessee Work. Any time
consumed for changes to the Lessee Improvements, or
delays pursuant to Section 2.7.2 above, shall be
considered a Lessee delay and shall not delay the
Commencement Date of the Lease.
Except as otherwise agreed to by Lessor in its reasonable discretion,
Lessee shall not engage in its own contractor or subcontractor to perform any
---
Tenant Improvements.
2.7.3 LESSEE ACCESS FOR INSTALLATION OF FIXTURES AND EQUIPMENT.
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Lessor shall notify Lessee approximately twenty (20) days prior to the date
Lessor's contractor estimates that the Additional Premises will be substantially
complete. Lessee's contractors shall be permitted to enter the Additional
Premises for the limited purpose of installing Lessee's fixtures, communication
and data cabling, telephone equipment and security systems.
2.8 LESSEE DELAY. Lessee Delay shall mean any delays causing Lessor
------------
to extend the dates and time periods set forth in the Lessee Improvement
construction schedule resulting from any one or more of the following: (i)
failure by the Lessee to furnish information in accordance with Section 2
hereinabove; (ii) Lessee's request for any special, long lead time materials or
installations as part of the Tenant Improvements; (iii) Lessee's changes in any
drawings, plans or specifications; (iv) any changes initiated by reason of
Lessee's disapproval of cost proposals or resulting in the preparation of
revised cost proposals; (v) field changes to construction work requested or
required by Lessee; (vi) the delivery, installation or completion of any Lessee
finish work performed by Lessee's employees or agents; (vii) any other act or
omission of Lessee; (viii) any delay by Lessee in making payment to Lessor for
Lessee's share of Final Work Cost; or (ix) any act or failure to act by Lessee,
Lessee's employees, agents, architects, independent contractors, consultants
and/or any other person performing or required to perform services on behalf of
Lessee. In no event shall delays attributable to error(s) by Lessor or its
contractor(s), or failure(s) of Lessor or its contractor(s) to adhere to the
time frames herein, constitute a Lessee Delay. In the event of any delay on the
part of the Lessee of greater than the number of days specified herein for
approving or disapproving any plans, construction estimates, price quotations,
drawings or specifications submitted to Lessee, or in making payments required
hereunder, Lessor shall have the right, at its election, to (i) give written
notice to Lessee to cure such delay, and if Lessee fails to cure within ten (10)
days after the giving of such notice, terminate the Lease without further
obligation to Lessee; and, in the event of such a termination, Lessee shall,
within ten (10) business days following demand by Lessor, pay to Lessor any
costs incurred by Lessor in connection with the preparation or review of plans,
construction estimates, price quotations, drawings or specifications under this
Agreement and for all costs incurred in the preparation and execution of the
Lease; or (ii) add to the time for Lessor's completion of the Tenant
Improvements that number of days the Lessee has so delayed and give written
notice thereof to Lessee.
3. LESSOR'S CONSTRUCTION ALLOWANCE AND WORK COST.
---------------------------------------------
3.1 LESSOR'S CONSTRUCTION ALLOWANCE. Lessor's Construction Allowance
-------------------------------
shall mean the amount that Lessor shall pay toward the Final Work Cost (defined
below) for substantially completing the Lessee Improvements in accordance with
the Space Plan(s), and Approved Working Drawings except as set forth in this
section. Lessor's Construction Allowance shall be used solely for the design
and installation of the Lessee Improvements. All items of the Lessee
Improvements, whether or not the cost thereof is covered by the Lessor's
Construction Allowance, shall, at Lessor's option, become the property of Lessor
upon expiration or earlier termination of the Lease and shall remain on the
Premises at all times during the Lease. Lessor shall pay the Final Work Costs
(including costs of Lessee initiated changes to the Lessee Improvements and any
costs of Additional Lessee Work, if any) provided the aggregate of such costs do
not exceed $25.00 per usable square foot ("u.s.f.") of the Additional Premises;
however, Lessee shall not be entitled to any refund in the event costs are less
than that amount, and shall pay all costs over $25.00 per u.s.f. of the
Additional Premises. The Lessor's Construction Allowance will not cover the cost
of any furniture, moveable partitions (other than as may be set forth, if at
all, in the Space plans), plants, appliances, office machines, or equipment or
furnishings not set forth in the Space Plans, Approved Working Drawings, or in
Schedule 1 hereto.
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3.2 ADJUSTMENT OF LESSEE ALLOWANCE. This section has been
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intentionally deleted.
3.3 OVER STANDARD FINANCED AMOUNT. This section has been
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intentionally deleted.
3.4 PAYMENTS TO CONTRACTORS AND OTHERS. Lessor shall be responsible
----------------------------------
for engaging and to the extent of the Lessor's Construction Allowance making all
payments due to contractors, architects, engineers, space planners, or other
involved in the design, approval, and/or construction of the Lessee Improvements
other than any advisor(s) that Lessee may (but shall not be obligated to) retain
solely to assist it in connection with its determination relating to the Lessee
Improvements. Lessor shall make available to Lessee, on Lessee's reasonable
request(s), records of all amounts invoiced or charged by, or paid to, such
persons.
3.5 WORK COST. "Work Cost" means: (i) all design and engineering
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fees incurred in connection with the preparation of the Space Plans and Approved
Working Drawings; (ii) governmental agency plan check, permit and other fees;
(iii) sales and use taxes; (iv) Title 24 fees; (v) testing and inspecting costs;
(vi) the actual costs for: material, labor, contractor's general overhead and
profit charged to Lessor in having Lessee Improvements constructed; (vii) all
other costs to be expended by Lessor in the construction of the Lessee
Improvements, including those costs incurred by Lessor for construction of
elements of the Lessee Improvements in the Additional Premises, which
construction was performed by Lessor prior to the execution of the Amendment by
Lessee and which construction is for the benefit of tenants and is customarily
performed by Lessor prior to the execution of leases for such space in the
Building for reasons of economics. For example, such construction would include
the extension of mechanical (including heating, ventilating and air conditioning
systems) and electrical distribution systems outside of the core of the
Building, wall construction, column enclosures and painting outside of the core
of the Building, ceiling hanger wires and window treatment; and (viii) Lessor's
administration fee in the amount of five percent (5%) of the total of all costs
set forth in items (i) through (vii) above.
3.6 ADVANCES AND REIMBURSEMENT. At such time, if any, as Lessor has
--------------------------
paid Work Costs in excess of the Lessor's Construction Allowance and from time
to time thereafter, Lessor may invoice Lessee for such excess amount(s) and
Lessee will reimburse Lessor for such amount(s) to the extent Lessee is
responsible for such amount(s) under the terms of this agreement, by check
delivered to Lessor within thirty (30) days after receipt of such invoice.
4. SUBSTANTIAL COMPLETION. The work to be performed by Lessor under this
----------------------
Agreement shall be deemed substantially completed on the date on which Lessor
(i) delivers a Temporary Certificate of Occupancy ("TCO"), issued by the
relevant governmental authority; or (ii) certifies that any remaining work is
fully described by Lessor's architect or project manager on a "Punch List" and
can reasonably be expected to be completed with due diligence by the Lessor's
contractor and will not substantially adversely affect Lessee's ability to
occupy said Premises.
5. FREIGHT ELEVATOR. Lessor shall, consistent with its obligation to
----------------
other tenants then in occupancy in the Building, make the freight elevator
reasonably available to Lessee in connection with initial decorating, furnishing
and moving into the Premises. Lessee shall pay for any additional costs incurred
by after-hours operation of the freight elevator. Such delivery shall be
scheduled with Lessor at least five (5) business days in advance and shall not
cause a delay of construction materials and building and tenant usage.
6. COMMENCEMENT DATE.
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6.1 The Commencement Date shall be the earliest of (a) the date
Lessee takes possession of the Premises other than for purposes of construction;
(b) the date the Premises are substantially completed (as defined in Paragraph 4
above) and tendered; or (c) the date such substantial completion would have
occurred but with Lessee Delays added to such date.
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6.2 POSSESSION OF SPACE. If, for any reason other than Lessee
-------------------
Delays, Lessor cannot deliver possession of the Premises to Lessee on the
Commencement Date, as set forth in Section 6.1 above, or perform any other
covenant in this Agreement, the Amendment shall not be void or voidable, nor
shall Lessor be liable to Lessee for any loss or damage resulting therefrom, nor
shall such failure affect the obligations of Lessee hereunder, except that all
rent (excepting any and all months of abated rent) shall be abated during the
period between the Commencement Date and the time when Lessor delivers
possession. However, if the aggregate of delays other than Lessee Delays exceed
one hundred twenty (120) days, then after such one hundred twentieth (120th)
day, Lessee may terminate this Amendment on the day which is thirty (30) days
after the date Lessee delivers written notice to Lessor of the passage of the
one hundred twentieth (120th) day of such delay (except that this Amendment
shall not so terminate if the Commencement Date has occurred pursuant to Section
6.1 prior to expiration of such thirty (30) day period).
7. GENERAL.
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7.1 LESSOR'S PRIOR WRITTEN APPROVAL. All approvals by Lessor or
-------------------------------
Lessor's Architects or Engineers, of the Working Drawings, Space Plans, or any
other plans and specifications for Tenant Improvements or Additional Lessee Work
or changes thereto or any improvements or installations in the Premises prepared
on behalf of Lessee shall not in any way bind Lessor or constitute a
representation or warranty by Lessor as to the adequacy or sufficiency of such
drawings, plans or specifications, or the improvements to which they relate; but
such approval shall merely evidence the consent of Lessor to Lessee's drawings,
plans or specifications.
7.2 FAILURE TO PAY AMOUNTS DUE. Any failure by Lessee to pay any
--------------------------
amounts due hereunder in a timely manner or as required herein shall be an event
of default under the Lease the same in effect as a failure to pay rent. Any
failure by Lessee or Lessor to perform any of its other obligations hereunder,
shall constitute an event of default under the Lease, entitling the non-
defaulting party to all of its remedies under the Lease, at law and in equity.
DATED: 12-14-95
LESSEE: LESSOR:
PEERLESS SYSTEMS, INC., CONTINENTAL DEVELOPMENT CORPORATION,
a California corporation a California corporation
By: /s/ William S. Wood By: /s/ Richard C. Lundquist
-------------------- -----------------------------
William S. Wood Richard C. Lundquist
Its: Vice President-Finance President
By: By: /s/ Leonard E. Blakesley, Jr.
-------------------- -----------------------------
Leonard E. Blakesley, Jr.
Its: Its: Secretary
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Page 7 of 7
<PAGE>
SCHEDULE 1 TO EXHIBIT C
WORK LETTER AGREEMENT
Dated: December 01, 1995
By and between: Peerless Systems, Inc., Lessee; and,
Continental Development Corporation, Lessor
The Premises shall be constructed in accordance with Lessor's Standard
Improvements, as follows:
1. PARTITIONS:
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A. Standard Interior Partitions:
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2-1/2" x 25 gauge metal studs at 24" on center, with one layer of 5/8"
thick type "X" drywall on each side to underside of ceiling tile.
Provide seismic bracing as required. All joints are to be taped,
visible joints to be spackled and sanded ready for painting.
* Allowance - one (1) linear foot for each 10 useable square feet
(u.s.f.) of floor area. **
B. Demising Partitions
-------------------
2-1/2" x 25 gauge metal studs at 24" on center, slab to slab with one
layer of 5/8 thick type "X" Gypsum wall board from slab to slab and
one layer of 5/8" thick type "X" gypsum wall board from slab to 6"
above grid. Provide 2-1/2" thick full batt sound insulation. All
joints are to be taped, visible joints to be spackled and sanded ready
for painting.
* Allowance - one half (1/2) of demising partitions shall be included in
the interior partition allowance between unrelated tenants as
required.
Alt.: 2-1/2 x 25 Gauge metal studs at 24" on center, with 5/8" thick type
---
"X" Gypsum wall board to 6" above grid on both sides, with 2-1/2"
thick full batt insulation. (Finished wall height 9'-6"). All joints
are to be taped, visible joints to be spackled and sanded ready for
painting.
2. FINISHES:
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A) Paint - Tenant walls (including building standard perimeter drywall,
tenant side of corridor walls and columns) with Sinclair matte paint
1700 Sinwall 2 coats.
B) Color to be selected from Landlord's standard samples.
* Allowance - at all building standard partitions including column wraps
and perimeter.
3. WINDOW COVERING:
---------------
A) Levelor Riviera or equal brushed aluminum perforated horizontal
blinds.
* Allowance - One per each exterior window.
4. CARPETING:
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A) Carpet by Designweave Monaco 32 oz. cut pile installed over pad.
* Allowance - for 90% of the floor area.
B) Color to be selected from Landlord's standard samples.
<PAGE>
C) Base - All carpeted area to receive 4" top set straight rubber carpet
base. Burke or equal.
** All square footage numbers are based upon useable square footage.
(u.s.f.)
5. FLOORING:
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A) Vinyl Composition Tile (V.C.T.) by "Armstrong" standard Execelon tile.
Provide minimum floor prep as required.
* Allowance for 10% of the floor area.
B) Color to be selected from Landlord's standard samples.
C) All tile areas to receive 4" top set cove rubber base. Burke or
equal.
6. DOORS, FRAMES AND HARDWARE:
--------------------------
A) Interior Office Doors
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1. 3'-0" x 7'-10" solid core, 1-3/4" thick, solid core cherry wood
veneer, stained with satin lacquer finish, plain sliced veneer
(pre-finished & pre-machined).
2. 3'-0" x 8'-0" aluminum frame (Western integrated or equal).
Anodized bronze finish.
3. Schlage D53PD Rhodes, lever latch set, 626 finish.
4. Two (2) pair of full mortise hinges per door.
5. Floor mounted door stop, Trimco W1213ES.
* Allowance - one (1) door assembly per 350 sq. ft. of floor area.
B) Tenant Entry Doors
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1. 3'-0" x 7'-10" solid core, 1-3/4" thick, solid core cherry wood
veneer, stained with satin lacquer finish, plain sliced veneer
(pre-finished & pre-machined). Twenty minutes fire rated
assembly.
2. 3'-0" x 8'-0" aluminum frame (Western integrated or equal).
Anodized bronze finish. Twenty minutes fire rated assembly.
3. Schlage L9453 lockset with O6A lever. 626 finish.
4. Two (2) pair of full mortise hinges per door.
5. Norton 8502 closer with sprayed aluminum finish.
6. Floor mounted door stop, Trimco satin chrome finish W-1213ES.
7. Pemko threshold 173A.
* Allowance - minimum required by code or one (1) door assembly for
3,000 sq. ft. or less of floor area or two (2) door assemblies
for more than 3,000 sq. ft.
<PAGE>
7. _______ TELEPHONE, LIGHTING
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A) Electrical Receptacles
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1. One building standard wall mounted duplex outlet providing 110
Volt service. "White" color, as manufactured by Leviton Decora
Series.
* Allowance - one (1) per 100 sq. ft. of floor area.
B) Telephone or Data Wall Outlet
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1. Single-gang outlet box in stud wall. 3/4" conduit stubbed to 6"
above ceiling with pull cord. Lessee to provide white cover
plate.
* Allowance - one (1) per 200 sq. ft. of floor area.
C) Switches
--------
Wall mounted light switch, white color, rocker type as manufactured by
Leviton Decora Series. 1 per 360 square feet.
D) Lighting
--------
One (1) 2 x 4 fully recessed fluorescent fixture. Three (3) each
standard 35 watt lamps with deep cell parabolic lens. (18 cells)
Lithonia or equal.
* Allowance one (1) per 80 sq. ft. of floor area.
8. CEILINGS
--------
A) 2 x 2 suspended ceiling system, "Donn Fine Line", or equal, White with
"Armstrong Cirrus" ceiling tile, or equal.
1. Provide compression posts as required.
2. Provide wall angle at ceiling penetrations and perimeters.
* Allowance - contiguous within demised premises.
9. FIRE PROTECTION
---------------
A) Ceiling mounted white Semi-recessed type fire sprinklers per local
code.
* Allowance one (1) per 144 sq. ft. of floor area laid out in open space
configuration.
10. CABINET WORK/MILLWORK:
---------------------
A) Telephone backboard fire rated 4'-0" x 8'-0" x 3/4"
* Allowance one (1) per tenant space.
11. HEATING, VENTILATING, AND AIR CONDITIONING (H.V.A.C.)
-----------------------------------------------------
A) Interior Zone
* Allowance one (1) per 1,000 sq. ft. of floor area. 40% of zones.
B) Exterior Zone
* Allowance one (1) per 1,000 sq. ft. of floor area. 60% of zones.
<PAGE>
12. LIFE SAFETY:
-----------
A) One (1) building standard horn.
* Allowance one (1) per 1,000 sq. ft. of floor area.
13. ENERGY MANAGEMENT:
-----------------
14. SIGNAGE:
-------
<PAGE>
EXHIBIT 10.16
PEERLESS SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
OCTOBER 6, 1995
1.
<PAGE>
TABLE OF CONTENTS
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<TABLE>
PAGE
<C> <S> <C>
1. Certain Definitions................................................... 1
-------------------
2. Transferability....................................................... 3
---------------
2.1 Restrictions on Transferability................................. 3
-------------------------------
2.2 Restrictive Legend.............................................. 4
------------------
2.3 Notice of Proposed Transfers.................................... 4
----------------------------
3. Registration Rights................................................... 5
-------------------
3.1 Requested Registration.......................................... 5
----------------------
3.2 Company Registration............................................ 7
--------------------
3.3 Expenses of Registration........................................ 8
------------------------
3.4 Registration Procedures......................................... 8
-----------------------
3.5 Indemnification................................................. 9
---------------
3.6 Information by Holder........................................... 10
---------------------
3.7 Rule 144 Reporting.............................................. 10
------------------
3.8 "Market Stand-off" Agreement.................................... 11
----------------------------
3.9 Form S-3........................................................ 11
--------
3.10 Transfer of Registration Rights................................. 12
-------------------------------
3.11 Certain Limitations in Connection with Future Grants of
-------------------------------------------------------
Registration Rights............................................. 12
-------------------
4. Affirmative Covenants of the Company.................................. 13
------------------------------------
4.1 Financial Information........................................... 13
---------------------
4.2 Other Information............................................... 13
-----------------
4.3 Assignment of Rights to Information............................. 14
-----------------------------------
4.4 Board of Directors.............................................. 15
------------------
4.5 Right of First Refusal.......................................... 17
----------------------
4.6 Employee Agreements............................................. 19
-------------------
4.7 Director Indemnification........................................ 19
------------------------
4.8 Foreign Investment Real Property Tax Act........................ 19
----------------------------------------
4.9 Restrictions.................................................... 19
------------
5. Purchase Right Respecting Shareholder Sales of Common Stock........... 20
-----------------------------------------------------------
6. Right of Co-Sale Respecting Shares.................................... 21
----------------------------------
6.1 Right of Co-Sale................................................ 21
-----------------
6.2 Transfer of Shares.............................................. 22
------------------
6.3 Binding Effect of Right of Co-Sale.............................. 23
----------------------------------
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C>
6.4 Termination of Right of Co-Sale................................. 23
-------------------------------
6.5 Exceptions...................................................... 23
----------
6.6 Parties to Agreement............................................ 23
--------------------
6.7 Legends......................................................... 24
-------
6.8 Conditions to Exercise of Investor's Rights..................... 24
-------------------------------------------
6.9 Transferability................................................. 24
---------------
7. Miscellaneous......................................................... 24
-------------
7.1 Governing Law................................................... 24
-------------
7.2 Successors and Assigns.......................................... 24
----------------------
7.3 Entire Agreement................................................ 24
----------------
7.4 Notices, etc.................................................... 24
------------
7.5 Delays or Omissions............................................. 25
-------------------
7.6 Counterparts.................................................... 25
------------
7.7 Severability.................................................... 25
------------
7.8 Amendments...................................................... 25
----------
</TABLE>
<PAGE>
PEERLESS SYSTEMS CORPORATION
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the "Agreement") is
made and entered into as of October 6, 1995, by and among PEERLESS SYSTEMS
CORPORATION, a California corporation (the "Company"), certain holders of the
Company's Preferred Stock and the "Founders", as hereinafter defined, (each, an
"Equity Investor" and, collectively, the "Equity Investors") and those
purchasers of the Company's 7.00% Convertible Debentures Due 2001 (the
"Debentures") pursuant to that certain Convertible Debenture Purchase Agreement
(the "Debenture Purchase Agreement") of even date herewith (each, a "Debenture
Holder" and, collectively, the "Debenture Holders"). This Agreement shall be
amended without further action by the parties hereof upon the execution of this
Agreement by additional purchasers pursuant to the Debenture Purchase Agreement
in order to include as Registrable Securities (as hereinafter defined) the
additional shares of Common Stock issuable upon conversion of the Debentures
thereby and the holders of such shares as parties hereto.
RECITALS
(a) The Equity Investors have previously purchased shares of the Company's
capital stock and in connection therewith have entered into that certain Amended
and Restated Stock Rights Agreement dated as of May 5, 1993.
(b) The Equity Investors, recognizing and acknowledging the benefit to the
Company and each Equity Investor from the sale of the Debentures, desire to
further amend and restate the Amended and Restated Stock Rights Agreement, as
set forth herein, and to rename such agreement "Amended and Restated Investors'
Rights Agreement" in order to induce the purchase of Debentures by the Debenture
Holders, in accordance with the terms and provisions of the Debenture Purchase
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants, and conditions set forth in this Agreement:
1. Certain Definitions. As used in this Agreement, the following terms shall
-------------------
have the following respective meanings:
"Comdisco Warrant" shall mean that certain Warrant Agreement dated
September 12, 1991 by the Company in favor of Comdisco, Inc., a Delaware
corporation, and any amendments, modifications and supplements thereto.
1.
<PAGE>
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Founders" shall have the meaning set forth in Section 6.6 hereof.
"Guarantee Warrants" shall mean the warrants issued to Battery Ventures II
L.P., Lauren L. Shaw and Barbara B. Renshaw and Capform VII in connection with
the execution of certain Guarantee Agreements between such persons and entities
and Silicon Valley Bank in 1993.
"Holder" shall mean any holder of outstanding Registrable Securities.
"Initiating Holders" shall mean any Holder or Holders of not less than
forty percent (40%) of the then outstanding Registrable Securities.
"Investor" shall mean an Equity Investor or Debenture Holder (collectively,
the "Investors").
"Registrable Securities" means (i) shares of the Company's Common Stock
issued or issuable pursuant to the conversion of the (A) Series A Preferred
Stock acquired pursuant to the Series A Purchase Agreement or the Series A1
Preferred Stock issued upon conversion of the Series A Preferred Stock, (B) the
Series B Preferred Stock acquired pursuant to the Series B Purchase Agreement or
the Series B1 Preferred Stock issued upon conversion of the Series B Preferred
Stock and (C) the Debentures, (ii) shares of Common Stock issued or issuable
pursuant to the exercise of the Series A Warrants, the Series B Warrants, the
Guaranty Warrants or upon conversion of the Preferred Stock issued or issuable
pursuant to the exercise of the Comdisco Warrant or the Second Comdisco Warrant,
(iii) shares of Common Stock owned by the Founders, and (iv) shares of the
Company's Common Stock issued as a dividend or other distribution with respect
to, or in exchange or in replacement of, the shares referred to in clauses (i),
(ii) or (iii) above, excluding in all cases, however (including exclusion from
the calculation of the number of outstanding Registrable Securities), any
Registrable Securities sold by a person in a transaction, including a
transaction pursuant to a registration statement under this Agreement or a
transaction pursuant to Rule 144, in which his rights under this Agreement are
not transferred. None of the Series A Preferred Stock, the Series B Preferred
Stock, the Series A1 Preferred Stock, the Series B1 Preferred Stock, the
Comdisco Warrant, the Second Comdisco Warrant, the Series A Warrants, the Series
B Warrants or the Debentures are Registrable Securities hereunder.
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with Sections 3.1, 3.2 and 3.9 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single special
counsel for the Holders, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).
2.
<PAGE>
"Restricted Securities" shall mean the securities of the Company required
to bear the legend set forth in Section 2.2 hereof.
"Second Comdisco Warrant" shall mean that certain Warrant Agreement dated
February, 1993 by the Company in favor of Comdisco, Inc., a Delaware
corporation, and any additional warrant issued to Comdisco for the purchase of
Series A Preferred Stock or Series B Preferred Stock pursuant to the terms of
such Warrant Agreement, and any amendments, modifications and supplements to
such warrants.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"Shares" shall mean the shares of Series A Preferred Stock and Series A1
Preferred Stock, and Series B Preferred Stock and Series B1 Preferred Stock of
the Company purchased by the Equity Investors pursuant to the Series A Purchase
Agreement and the Series B Purchase Agreement, respectively, together with any
of the Company's securities issued upon conversion of such shares or as a
dividend, or other distribution with respect to, or in exchange or in
replacement of such shares.
"Series A Warrants" shall mean the warrants to purchase shares of Common
Stock issued to certain Equity Investors pursuant to the Series A Purchase
Agreement.
"Series B Warrants" shall mean the warrants to purchase shares of Common
Stock issued to certain Equity Investors pursuant to that certain Purchase
Agreement dated December 22, 1992, or pursuant to the Series B Purchase
Agreement.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
2. Transferability.
---------------
2.1 Restrictions on Transferability. The Shares, the Debentures, the
-------------------------------
Series A and Series B Warrants and any Common Stock into which the Shares, the
Debentures or the Series A and Series B Warrants may be convertible or
exercisable (the "Underlying Shares"), shall not be transferable except upon the
conditions specified in this Agreement, which conditions are intended to insure
compliance with the provisions of the Securities Act, or, in the case of Section
3.8 hereof, to assist in an orderly distribution. Each Investor will cause any
proposed transferee of the Shares, the Debentures, the Series A and Series B
Warrants or the Underlying Shares held by such Investor to agree to take and
hold such securities subject to the provisions and upon the conditions specified
in this Agreement.
3.
<PAGE>
2.2 Restrictive Legend. Each certificate representing (i) the Shares, (ii)
------------------
the Debentures, (iii) the Warrants, (iv) the Underlying Shares and (v) any
securities issued in respect of the Shares, the Debentures, the Warrants or the
Underlying Shares shall (unless otherwise permitted by the provisions of Section
2.3 below) be stamped or otherwise imprinted with a legend in the following form
(in addition to any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
2.3 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 2.3. Prior to any proposed
transfer of any Restricted Securities, unless there is in effect a registration
statement under the Securities Act covering the proposed transfer, the holder
thereof shall give written notice to the Company of such holder's intention to
effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall be
accompanied (except in the following cases, with respect to which the
requirements set forth in the balance of this sentence need not be complied
with: transactions in compliance with Rule 144 so long as the Company is
furnished with evidence of compliance with such Rule; transactions involving the
distribution of Restricted Securities by any Investor which is a general or
limited partnership to any of its partners, or retired partners, or to the
estate of any of its partners or retired partners assuming that the Company
receives representations regarding the facts of the distribution reasonably
requested by it; transactions involving the transfer of Restricted Securities by
any holder who is an individual to his family members or to a trust for the
benefit of such shareholder or his family members; or transfers not involving a
change in beneficial ownership) by either (i) an unqualified written opinion of
legal counsel who shall be reasonably satisfactory to the Company addressed to
the Company and reasonably satisfactory in form and substance to the Company's
counsel, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, (ii) a "no
action" letter from the Commission to the effect that the distribution of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, or (iii) such other
showing that may be reasonably satisfactory to legal counsel to the Company,
whereupon the holder of such Restricted Securities shall be entitled to transfer
such Restricted Securities in accordance with the terms of the notice delivered
by the holder to the Company. Each certificate evidencing the Restricted
Securities transferred as above provided shall bear the appropriate restrictive
legend set forth in Section 2.2 above, except that
4.
<PAGE>
such certificate shall not bear such restrictive legend if in the opinion of
counsel for the Company such legend is not required in order to establish
compliance with any provisions of the Securities Act.
3. Registration Rights.
-------------------
3.1 Requested Registration. In case the Company shall receive from
----------------------
Initiating Holders a written request that the Company effect any registration
(other than a registration on Form S-3 or any related form of Registration
Statement) with respect to at least thirty percent (30%) of the Registrable
Securities (provided that, if such registration would be the Company's initial
public offering, the reasonably anticipated aggregate offering price to the
public must be at least Five Million Dollars ($5,000,000)), the Company will:
(a) promptly give written notice of the proposed registration to all
other Holders; and
(b) as soon as practicable, use its diligent best efforts to effect
such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided that the Company shall not be obligated to take any action to effect
any such registration, qualification or compliance pursuant to this Section 3.1:
(i) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(ii) Prior to the one hundred eightieth (180th) day immediately
following the effective date of the registration statement pertaining to the
first underwritten public offering of securities of the Company for its own
account (other than a registration relating solely to a Commission Rule 145
transaction or a registration relating solely to employee benefit plans);
(iii) After the Company has effected two (2) registrations
pursuant to this Section 3.1 and such registrations have been declared or
ordered effective;
(iv) If at the time of the request to register Registrable
Securities the Company gives notice within thirty (30) days of such request that
it is engaged or has fixed plans to engage within ninety (90) days of the time
of the request in an initial firmly underwritten registered public offering as
to which the Holders may include Registrable Securities to the extent permitted
by, and subject to the limitations set forth in, Section 3.2; or
5.
<PAGE>
(v) With respect to any Registrable Securities if all the
Registrable Securities which the Initiating Holders seek to register in such
offering, in the opinion of counsel to the Company, may be sold in a single
three month period under Rule 144.
Subject to the foregoing clauses (i) through (v) and to Section 3.1(d), the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request of the Initiating Holders.
(c) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 3.1, and the Company shall include such information in the written
notice referred to in Section 3.1(a). Notwithstanding the foregoing, if the
distribution will constitute the initial public registration of the Company's
stock, the distribution must be underwritten; if the distribution will not
constitute the initial public registration of the Company's Common Stock, the
distribution need not be underwritten unless the Company shall provide to the
Initiating Holders an opinion from an investment bank with whom the Company
maintains a regular relationship that the fact that the proposed distribution
will not be done in an underwritten manner would materially affect the Company's
ability to register and sell its securities in the next twelve (12) months,
which affect would not accrue if the distribution were to be underwritten. The
right of any Holder to registration pursuant to Section 3.1 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent requested
(unless otherwise mutually agreed by a majority in interest of the Holders and
such Holder) to the extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders.
Notwithstanding any other provision of this Section 3.1, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten and so advises the Initiating Holders in writing, then the
Initiating Holders shall so advise all Holders (except those Holders who have
indicated to the Company their decision not to distribute any of their
Registrable Securities through such underwriting), and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all such Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities owned by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration.
If any Holder disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities and/or other securities
so withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, (i) if by the withdrawal of such
Registrable Securities a greater number of Registrable Securities held by other
Holders may be included in such registration (up to the maximum of any
limitation imposed by the underwriters),
6.
<PAGE>
then the Company shall offer to all Holders who have included Registrable
Securities in the registration the right to include additional Registrable
Securities in the same proportion used above in determining the underwriter
limitation and (ii) if the withdrawal (net of any such additions) leaves the
amount of securities to be sold below the minimum amount set forth in the
introductory paragraph of this Section 3.1, the request for registration shall
be deemed to have been withdrawn by the Initiating Holders for purposes of
Section 3.3 hereof, and the Company shall not be required to proceed with the
registration.
If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
(d) Delay of Registration. If the Company shall furnish to the
---------------------
Initiating Holders a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its shareholders for such
registration statement to be filed on or before the date filing would be
required or, if filed, not to suspend the effectiveness of such registration
statement, and it is therefore essential to defer the filing or suspend
effectiveness, as the case may be, of such registration statement, then the
Company may direct that such request for registration be delayed or suspended
for a period not in excess of one hundred twenty (120) days, such right to delay
a request to be exercised by the Company not more than twice in any one-year
period.
3.2 Company Registration.
--------------------
(a) If at any time or from time to time, the Company shall determine to
register any of its Common Stock, for its own account or for the account of
others (other than the Holders), other than a registration relating solely to
employee benefit plans or a registration relating solely to a Commission Rule
145 transaction or a registration on any registration form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities, the
Company will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) except as limited pursuant to Section 3.2(b), below,
include in such registration (and any related qualification under blue sky laws
or other compliance), and in any underwriting involved therein, all the
Registrable Securities specified in a written request or requests, made within
twenty (20) days after receipt of such written notice from the Company, by any
Holder or Holders.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 3.2(a)(i). In such event the right of any
7.
<PAGE>
Holder to registration pursuant to Section 3.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 3.2, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities from such registration and underwriting. The Company
shall so advise all Holders (except those Holders who have indicated to the
Company their decision not to distribute any of their Registrable Securities
through such underwriting), and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among such Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities owned by such Holders at the time of filing
the registration statement without reduction in the number of securities to be
offered by the Company. No Registrable Securities excluded from the underwriting
by reason of the underwriter's marketing limitation shall be included in such
registration. If any Holder disapproves of the terms of any such underwriting,
such person may elect to withdraw therefrom by written notice to the Company and
the underwriter. The Registrable Securities and/or other securities so withdrawn
from such underwriting shall also be withdrawn from such registration; provided,
however, that, if by the withdrawal of such Registrable Securities a greater
number of Registrable Securities held by other Holders may be included in such
registration (up to the maximum of any limitation imposed by the underwriters),
then the Company shall offer to all Holders who have included Registrable
Securities in the registration the right to include additional Registrable
Securities in the same proportion used above in determining the underwriter
limitation.
3.3 Expenses of Registration. Except as provided below in this Section
------------------------
3.3, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Sections 3.1, 3.2 and 3.9 shall be borne
by the Company. All Registration Expenses incurred in connection with any
registrations pursuant to Section 3.9 and all Selling Expenses incurred in
connection with any registrations hereunder shall be borne by the holders of the
securities so registered pro-rata on the basis of the number of shares so
registered. The Company shall not, however, be required to pay (and the
Initiating Holders shall reimburse the Company) for expenses of any registration
proceeding begun pursuant to Section 3.1, the request of which has been
subsequently withdrawn by the Initiating Holders (unless the withdrawal is based
upon material adverse information concerning the Company of which the Initiating
Holders were not aware at the time of such request (or prior to the payment or
incurrence of such expenses) or unless the Holders of a majority of Registrable
Securities agree to forfeit their right to one requested registration pursuant
to Section 3.1, in which event such right shall be forfeited by all Holders), in
which case such expenses shall be borne by the holders of securities (includ ing
Registrable Securities) requesting such registration in proportion to the number
of shares for which registration was requested. In the event of a failure by
such Holders (together with any other Holders) to bear such expenses (including
reimbursing the Company for any expenses reasonably incurred by it as a result
of the registration request) all Holders shall forfeit one registration for
purposes of Section 3.1 hereof.
8.
<PAGE>
3.4 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 3,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Keep such registration, qualification or compliance effective for a
period of one hundred twenty (120) days or until the Holder or Holders have
completed the distribution described in the registration statement relating
thereto, whichever first occurs; and
(b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request.
3.5 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers,
directors, partners and legal counsel, and each person controlling such Holder,
with respect to which registration, qualification or compliance has been
effected pursuant to this Section 3, and each underwriter, if any, and each
person who controls any underwriter against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on (i) any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other similar document (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, or (ii) any violation by the Company
of any federal, state or common law rule or regulation applicable to the Company
in connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors, partners and legal
counsel, and each person controlling such Holder, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, as incurred, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on (or is alleged to be
based on) any untrue statement or omission (or alleged untrue statement or
omission) based upon written information furnished to the Company in an
instrument duly executed by any Holder of Registrable Securities participating
in the offering or any participating underwriter and stated to be specifically
for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each legal counsel and independent accountant of the Company, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of the Securities Act, and each other such Holder, each of its officers,
directors, and partners and each person controlling such Holder, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged
9.
<PAGE>
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other similar document, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, as incurred, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with written
information furnished to the Company in an instrument duly executed by such
Holder and stated to be specifically for use therein; provided, however, that
the obligations of such Holders hereunder shall be limited to an amount equal to
the proceeds to each such Holder of Registrable Securities sold as contemplated
herein.
(c) Each party entitled to indemnification under this Section 3.5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has received written notice of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the Indemni
fying Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld). The Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party shall bear the
expense of such defense of the Indemnified Party if representation of both
parties by the same counsel would be inappropriate due to actual or potential
conflicts of interest. The failure of any Indemnified Party to give notice as
provided herein shall relieve the Indemnifying Party of its obligations under
this Section 3.5 only to the extent that such failure to give notice shall
materially adversely prejudice the Indemnifying Party in the defense of any such
claim or any such litigation. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
3.6 Information by Holder. The Holder or Holders of Registrable Securities
---------------------
included in any registration shall furnish to the Company such information
regarding such Holder or Holders and the distribution proposed by such Holder or
Holders as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
Section 3.5.
3.7 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to:
10.
<PAGE>
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act at all times after
ninety (90) days after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities to the
general public;
(b) Use its best efforts to then file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (at any time after it has become subject to such reporting
requirements);
(c) So long as an Investor owns any Restricted Securities, to furnish
to the Investor forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as an Investor may reasonably request in availing itself
of any rule or regulation of the Commission allowing an Investor to sell any
such securities without registration.
Notwithstanding the foregoing, in the event that the Company fails to
comply with the covenant of this Section 3.7, the Company shall have no
liability to the Holder unless the Holder has notified the Company of its
intention to sell securities and its inability to sell because of such failure
and the Company fails to remedy such failure within ten (10) days from receipt
of such notice; provided, however, that if such failure is not susceptible of a
remedy within ten (10) days, the Company shall have no liability to the Holder,
notwithstanding the foregoing, if the Company uses its best efforts to remedy
such failure.
3.8 "Market Stand-off" Agreement. Each Holder who is also a holder of more
----------------------------
than one percent (1%) of the Company's outstanding voting stock agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by it during the one hundred eighty (180) day period
following the effective date of a registration statement of the Company filed
under the Securities Act if so requested by the Company and underwriter of
Common Stock (or other securities) of the Company, provided that:
(a) such agreement shall apply only to the first underwritten
registered public offering of the Company; and
11.
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(b) all employees, consultants, officers and directors of the Company
and all other holders of at least five percent (5%) of the Company's voting
securities enter into similar agreements. The Company may impose stop transfer
instructions with respect to the shares (or securities) subject to the foregoing
restriction until the end of such period.
3.9 Form S-3. The Company shall use its best efforts to qualify for
--------
registration on Form S-3 and to that end the Company shall register (whether or
not required by law to do so) its Common Stock under the Exchange Act within six
(6) months following the effective date of the first registration of any
securities of the Company on Form S-l. After the Company has qualified for the
use of Form S-3, the Holders of Registrable Securities shall have the right to
two (2) registrations on Form S-3 thereafter under this Section 3.9 (requests
shall be in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended method of disposition of such
shares by such Holder or Holders), provided that the Company shall not be
required to effect a registration pursuant to this Section 3.9 unless the Holder
or Holders requesting registration propose to dispose of shares of Registrable
Securities which they reasonably anticipate will have an aggregate disposition
price (before deduction of underwriting discounts and expenses of sale) of at
least $1,000,000.
The Company shall give notice to all Holders of Registrable Securities of
the receipt of a request for registration pursuant to this Section 3.9 and shall
provide a reasonable opportunity for other Holders to participate in the
registration. Subject to the foregoing, the Company will use its best efforts
to effect promptly the registration of all shares of Registrable Securities on
Form S-3 to the extent requested by the Holder or Holders thereof for purposes
of disposition.
Notwithstanding the foregoing, the Company shall not be required to qualify
the Registrable Securities pursuant to this Section (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) if at any time the
Company gives notice within thirty (30) days of such request that it is engaged
or has fixed plans to engage within ninety (90) days of the time of the request
in a firmly underwritten registered public offering as to which the Holders may
include Registrable Securities to the extent permitted by, and subject to the
limitations set forth in, Section 3.2; (iii) if, in the opinion of counsel to
the Company, all such Registrable Securities which the Initiating Holders seek
to register in such offering may be sold in a single three month period under
Rule 144. In addition, the provisions of Section 3.1(d) shall apply to this
Section.
3.10 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted under Sections 3.1, 3.2 and 3.9 may be assigned or
otherwise conveyed by any Holder to its shareholders, partners or former
partners (or their estates), to the Holder's family members or a trust for his
or their benefit, or to any transferee who acquires at least one hundred
thousand (100,000) shares (as adjusted for any combinations, consolidations,
stock splits, stock distributions or stock dividends with respect to such
shares) of Registrable Securities other than in the public market; provided in
each case, that the Company is given written notice by such
12.
<PAGE>
transferee at the time of or within a reasonable time after said transfer,
stating the name and address of said transferee, identifying the Registrable
Securities owned by such transferee, and setting forth said transferee's
agreement to be bound by the provisions of this Agreement. Notwithstanding the
foregoing, the rights of any Holder to cause the Company to register Registrable
Securities pursuant to Sections 3.1, 3.2 or 3.9 of this Agreement shall
terminate on the earlier of (i) five (5) years after the date of a registered
public offering of the Company's Common Stock or (ii) the date upon which such
Holder (together with all affiliated individuals or entities) shall hold
(directly or indirectly) less than one percent (1%) of the Company's outstanding
Common Stock.
3.11 Certain Limitations in Connection with Future Grants of Registration
--------------------------------------------------------------------
Rights. From and after the date of this Agreement, the Company shall not enter
- ------
into any agreement with any holder or prospective holder of any securities of
the Company providing for the granting to such holder of registration rights
unless such agreement:
(a) includes the equivalent of Section 3.8 as a term; and
(b) contains provisions substantially similar to those contained in
Sections 3.1(c) and 3.2(b) with respect to the allocation of Registrable
Securities to be included in an underwritten public offering if marketing
factors require a limitation on the number of such securities to be included.
Notwithstanding the foregoing, from and after the Closing Date under the
Debenture Purchase Agreement, the Company shall not enter into any agreement
with any person or persons providing for the granting to such holder of
registration rights superior to those granted to Holders pursuant to this
Section 3, or of registration rights which might cause a reduction in the number
of shares includable by the Holders in any offering pursuant to Section 3.1 or
in any offering subject to Section 3.2 or 3.9, except as provided in such
Sections.
4. Affirmative Covenants of the Company.
------------------------------------
Notwithstanding any provision of the Company's Bylaws regarding delivery or
non-delivery of financial information to shareholders of the Company, the
Company hereby covenants and agrees as follows:
4.1 Financial Information. The Company will furnish the following
---------------------
information to each Investor for so long as such person or entity is a holder of
any Shares, the Debentures, Series A or Series B Warrants, the Comdisco Warrant,
the Second Comdisco Warrant or Underlying Shares:
(a) As soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as of the end of such
year, and a consolidated statement of income and a consolidated statement of
cash flows of the Company and its subsidiaries, if any, for such year, prepared
in accordance with generally accepted accounting principles and setting forth in
each case
13.
<PAGE>
in comparative form the figures for the previous year, all in reasonable detail
and with an audit opinion thereon from independent public accountants of
recognized national standing selected by the Company.
(b) As soon as practicable after the end of the first, second and third
quarterly accounting periods in each year of the Company, and in any event
within forty-five (45) days thereafter, a consolidated balance sheet of the
Company and its subsidiaries, if any, as of the end of each such quarterly
period, and a consolidated statement of income and a consolidated statement of
cash flows of the Company and its subsidiaries, if any, for such period and for
the current year to date, prepared in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and year-end audit adjustments may not have been made. Said
financial statements shall be signed by an officer of the Company who shall
state that such financial statements are in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and year-end audit adjustments may not have been made.
4.2 Other Information. The Company shall furnish the following information
-----------------
to each Investor who requests such information in writing for so long as such
person (i) together with his, her or its affiliates holds at least an aggregate
of one hundred eighty thousand (180,000) Shares, the Debentures, the Series A or
Series B Warrants, the Comdisco Warrant, the Second Comdisco Warrant and
Underlying Shares (on an as-converted-to-Common Stock basis) (as adjusted for
any combinations, consolidations, stock splits, stock distributions or stock
dividends with respect to such securities) and (ii) is not a "Disqualified
Party" as defined in Section 4.3 below:
(a) As soon as practicable after the end of each month, and in any
event within thirty (30) days thereafter, a consolidated balance sheet of the
Company and its subsidiaries, if any, as at the end of such month, and a
consolidated statement of income of the Company and its subsidiaries, if any,
for such month, and for the current fiscal year to date, in each case setting
forth in comparative form the Company's and its subsidiaries', if any, projected
consolidated balance sheets and projected consolidated statements of income for
the corresponding periods (as prepared pursuant to Section 4.1(a)), prepared in
accordance with generally accepted accounting principles, all in reasonable
detail and certified subject to changes resulting from year-end audit
adjustments, by the principal financial officer of the Company; provided,
however, that any financial statements provided hereunder need not contain any
footnotes. To such financial statements that are prepared as of the end of any
fiscal quarter, there shall be appended a discussion and analysis, in reasonable
detail, of such financial statements and the general business condition and
prospects of the Company by management of the Company so as to assist the
recipients in understanding and interpreting such financial statements.
(b) Copies of all reports, registration statements and other material
filed by the Company or any subsidiary with the Securities and Exchange
Commission or with any national securities exchange on which securities of the
Company or any subsidiary may be listed promptly following such filing.
14.
<PAGE>
(c) Each Investor covered by this Section 4.2 has the right to visit
and inspect any of the properties of the Company or any of its subsidiaries, and
to discuss their affairs, finances and accounts with their officers, all at such
reasonable times and as often as may be reasonably requested.
The covenants provided in Sections 4.1 and 4.2 hereof shall be suspended for so
long as the Company is subject to the reporting requirements of Section 13(a) or
15(d) of the Exchange Act.
4.3 Assignment of Rights to Information. The rights granted pursuant to
-----------------------------------
Sections 4.1 and 4.2 may not be assigned or otherwise conveyed by any Investor
or by any subsequent transferee of any such rights without the written consent
of the Company, which consent shall not be unreasonably withheld, provided that,
if the transfer is to any entity that is not a "Disqualified Party," as defined
below, no such written consent shall be required if such entity is (i) a parent,
subsidiary, affiliate, or group member of any Investor, (ii) a partner or
retired partner of any Investor that is a general or limited partnership or any
such partner's estate, or (iii) a transferee who will own at least an aggregate
of one hundred thousand (100,000) Shares or Underlying Shares (as adjusted for
any combinations, consolidations, stock splits, stock distributions or stock
dividends with respect to such securities). For purposes of Section 4 of this
Agreement, the term "Disqualified Party" means any individual or entity that is
a competitor of the Company or a potential competitor, as reasonably determined
by the Company, by virtue of being in the business of providing products for use
in or with any of the following: digital copiers, fax machines, computer
controlled printers, optical scanners, or products employing graphics display
technologies; provided, however, that Adobe and its affiliates shall not be
-------- -------
Disqualified Parties hereunder.
4.4 Board of Directors.
------------------
(a) The Restated Articles of Incorporation (the "Articles") and Bylaws
of the Company presently provide that the Board of Directors shall consist of
five (5) directors. The Company shall not otherwise increase or decrease the
number of directors without the consent of the holders of a majority of the
outstanding Common Stock (without the Preferred Stock voting on an as-converted
basis) and a majority of the Series A Preferred (including Series A1 Preferred)
and Series B Preferred Stock (including Series B1 Preferred) voting together as
a class, as long as at least, in the aggregate, five hundred thousand (500,000)
shares of Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, and Series B1 Preferred Stock (as adjusted for any
combinations, consolidations, stock splits, stock distributions or stock
dividends with respect to such shares) remain outstanding. At the initial
Closing under the Debenture Purchase Agreement, the Board of Directors shall
consist of Lauren L. Shaw, Robert G. Barrett, Barbara B. Renshaw and Edward A.
Gavaldon.
(b) The respective rights of the parties with respect to the election
of directors shall be governed by the Articles, provided, however, that the
Company agrees to reimburse all reasonable travel expenses of the director
designated by Battery Ventures in connection with such director's attendance at
Board of Directors meetings.
15.
<PAGE>
(i) With respect to the director of the Company to be elected by
the holders of the Series A Preferred Stock and Series A1 Preferred Stock voting
together as a single class as set forth in the Articles, each of the Equity
Investors severally agrees to cause the Series A Preferred Stock and Series A1
Preferred Stock held by each such person or entity to be voted, and otherwise to
use such Equity Investor's best efforts, to cause the election of a person
designated by Battery Ventures. The voting agreement contained in this Section
4.4(b)(i) is coupled with an interest and may not be revoked without the consent
of the holders of at least fifty percent (50%) of the outstanding Series A
Preferred Stock purchased pursuant to the Series A Purchase Agreement and the
Agreement of Joinder and the Series A1 Preferred Stock issued upon conversion of
the Series A Preferred Stock.
(ii) With respect to the director of the Company to be elected
by the holders of the Series B Preferred Stock and Series B1 Preferred Stock
(the "Series B Investors"), that director shall be an Independent Series B
Director (as hereinafter defined) elected by at least a fifty percent (50%)
majority vote of the Series B Investors voting together as a class, as set forth
in the Articles. A Series B Director Nominating Committee consisting of Robert
Barrett, Lauren Shaw and Edward Gavaldon shall be created to unanimously
nominate an "Independent Series B Director", which for the purposes of this
Section 4.4(b)(ii) shall mean a person determined by that committee to be
independent. The Series B Investors shall not be required to elect any person
nominated by the committee, but shall be precluded from electing a person not
nominated by the committee. The Series B Director Nominating Committee shall be
dissolved at such time as the Series B Investors elect an Independent Series B
Director, and any change to the Independent Series B Director thereafter shall
be made by a majority vote of the Series B Investors. The voting agreement
contained in this Section 4.4(b)(ii) is coupled with an interest and may not be
revoked without the consent of at least eighty percent (80%0) of the outstanding
Series B Preferred Stock purchased pursuant to the Series B Purchase Agreement
and the Series B1 Preferred Stock issued upon conversion of the Series B
Preferred Stock.
(iii) With respect to the director of the Company to be elected
by the holders of the Common Stock and the Series A Preferred Stock, Series A1
Preferred Stock, Series B Preferred Stock, and Series B1 Preferred Stock (the
"Combined Investors"), that director shall be an Independent Industry Director
(as hereinafter defined) elected by at least a fifty percent (50%) majority vote
of the Combined Investors voting together as a single class (with the Preferred
Stock voting on an as converted basis), as set forth in the Articles. An
Industry Director Nominating Committee consisting of Robert Barrett, Lauren Shaw
and Edward Gavaldon shall be created to unanimously nominate an "Independent
Industry Director", which for the purposes of this Section 4.4(b)(iii) shall
mean a person determined by that committee to be independent. The Combined
Investors shall not be required to elect any person nominated by the committee,
but shall be precluded from electing a person not nominated by the committee.
The Industry Director Nominating Committee shall be dissolved at such time as
the Combined Investors elect an Independent Industry Director, and any change to
the Independent Industry Director thereafter shall be made only by a majority
vote of the Combined Investors. The voting agreement contained in this Section
4.4(b)(ii) is coupled with an interest and may not be revoked without the
consent of at least fifty percent (50%) of the outstanding Common Stock and
Preferred Stock (with the Preferred Stock voting on an as converted basis).
16.
<PAGE>
(iv) With respect to the two (2) directors of the Company to be
elected by the holders of the Common Stock as set forth in the Articles, each of
the Equity Investors severally agrees to cause the Common Stock held by each
person or entity to be voted, and otherwise to use Equity Investor's best
efforts, to cause the election of two (2) directors to be designated by the
Founders, one of which must be and remain the Chief Executive Officer until such
time as a director has been elected under Section 4.4(b)(ii) above. The voting
agreement contained in this Section 4.4(b)(iv) is coupled with an interest and
may not be revoked without the consent of the holders of at least fifty percent
(50%) of the outstanding Common Stock.
(c) The voting agreements contained in Section 4.4(b) above and the
covenants contained in Sections 4.4(a) hereof shall terminate and be of no
further force or effect upon the closing of the Company's initial firm
commitment underwritten public offering of shares of Common Stock pursuant to an
effective registration statement under the Securities Act (the "Initial Public
Offering").
(d) Until such time as the Debentures have been repaid in full and so
long as Morgan Keegan Merchant Banking Fund II, L.P. ("Morgan Keegan") shall
hold at least $500,000 in principal amount of the Debentures, Morgan Keegan
shall have the right to have one member of its management present as a
representative at any meeting of the Company's Board of Directors so long as
such representative is not a Disqualified Party as defined in Section 4.3
hereof. The right granted pursuant to this Section 4.4(e) may not be assigned
or otherwise conveyed by Morgan Keegan or by any subsequent transferee of any
such right without the written consent of the Company, which consent shall not
be unreasonably withheld, provided that, if the transfer is to any entity that
is not a Disqualified Party, no such written consent shall be required if such
entity is (i) a parent, subsidiary, affiliate, or group member of any Investor
or (ii) a transferee who will holds at least $500,000 in aggregate principal
amount of the Debentures.
(e) The Company will schedule at least one meeting of the Company's
Board of Directors in each six week interval. The Board of Directors shall not
fail to meet at least once in each two month period unless the Board of
Directors unanimously decides otherwise.
4.5 Right of First Refusal. The Company hereby grants to each Investor the
----------------------
right of first refusal to purchase his, her, or its pro rata share, or any part
thereof, of New Securities (as defined in this Section 4.5) that the Company may
from time to time propose to sell and issue. Such Investor's pro rata share,
for purposes of this right of first refusal, is the fraction, the numerator of
which is the number of shares of Common Stock issued or issuable to the Investor
pursuant to the conversion and/or exercise of all Shares, Debentures and/or the
Series A or Series B Warrants held by the Investor, and the denominator of which
is the total number of outstanding shares of Common Stock assuming conversion
and/or exercise of all outstanding Preferred Stock, Debentures and the Series A
and Series B Warrants. This right of first refusal shall be subject to the
following provisions:
(a) "New Securities" shall mean any Common Stock or Preferred Stock of
the Company, whether now authorized or not, and rights, options, or warrants to
purchase said Common Stock or Preferred Stock, and securities of any type
whatsoever that are, or may
17.
<PAGE>
become, convertible into said Common Stock or Preferred Stock; provided,
however, that "New Securities" does not include (i) securities issuable upon
conversion of or with respect to the Series A Preferred Stock, Series A1
Preferred Stock, Series B Preferred Stock or Series B1 Preferred Stock or upon
the conversion of any other convertible securities or the exercise of any other
options, warrants, or similar rights the Company may have issued or may
hereafter issue in compliance with the provisions of this Section 4.5; (ii)
shares of Common Stock issuable upon exercise of the Series A and Series B
Warrants; (iii) securities offered to the public pursuant to a registration
statement filed under the Securities Act; (iv) securities issued pursuant to the
acquisition of another corporation, by the Company by merger, purchase of
substantially all of the assets, or other reorganization whereby the Company
owns not less than fifty-one percent (51%) of the voting power of such
corporation or securities issued by the Company in a merger transaction in which
the Company is effectively acquired by another entity; (v) shares of Common
Stock (or stock options) issued to employees, officers, directors or consultants
of the Corporation and approved by the Corporation's Board of Directors and
shares of Common Stock issued pursuant to the Corporation's 1992 Stock Option
Plan, as may be amended from time to time, or any replacement or successor plan;
provided that the total number of shares of Common Stock issuable to such
persons or pursuant to such plan shall not exceed 1,783,000; (vi) shares of
Common Stock issued pursuant to the Deferred Compensation Stock Purchase Plan,
as may be amended from time to time, or any replacement or successor plan;
provided that the total number of shares of Common Stock issuable pursuant to
such plan shall not exceed 131,000; (vii) shares of Common Stock issued pursuant
to the Corporation's Employee Stock Purchase Plan, as may be amended from time
to time, or any replacement or successor plan; provided that the total number of
shares of Common Stock issuable pursuant to such plan shall not exceed 450,000;
(viii) shares of the Company's Common Stock or Preferred Stock issued in
connection with any stock split, stock dividend, or recapitalization by the
Company; (ix) securities issued pursuant to the acquisition of licenses or other
rights, assets or technology from third parties, on the condition that such
issuance and acquisition is unanimously approved by the Board of Directors; (x)
securities issued in connection with equipment purchase or lease transactions to
the seller or lessor of such equipment, on the condition that such purchase or
lease is unanimously approved by the Board of Directors; (xi) the Comdisco
Warrant and the Second Comdisco Warrant, and the Preferred Stock issuable upon
exercise of the Comdisco Warrant and the Second Comdisco Warrant and the Common
Stock issuable on the conversion of such Preferred Stock; (xii) warrants issued
in connection with the guarantee of the Company's line of credit and the Common
Stock issuable upon exercise thereof and (xiii) the Debentures and the Common
Stock or other securities issuable upon conversion thereof.
(b) In the event that the Company proposes to undertake an issuance of
New Securities, it shall give each Investor written notice of its intention,
describing the type of New Securities, the price, and the general terms upon
which the Company proposes to issue the same. Each Investor shall have twenty
(20) days from the date of mailing of any such notice to agree to purchase his
pro rata share of such New Securities for the price and upon the general terms
specified in the notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased and delivering payment
for those shares to the Company within five (5) days thereafter. Each Investor
who purchases his full pro rata share of such New Securities ("Fully
Participating Investor") shall have a right of overallotment such that if any
other
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Investor fails to exercise his right hereunder to purchase his pro rata portion
of New Securities, the Company shall so notify all Fully Participating Investors
and they may purchase the non-purchasing Investor's portion on a pro rata basis
by delivering to the Company written notice of their determination to purchase
some or all such shares and delivering to the Company payment for those shares,
within ten (10) days from the date of such notice.
(c) In the event that the Investors fail to exercise in full the right
of first refusal within said twenty (20) day period (plus the ten (10) day
period, if applicable) the Company shall have ninety (90) days thereafter to
sell the New Securities respecting which the Investors' rights were not
exercised, at a price and upon general terms no more favorable to the
purchaser(s) thereof than specified in the Company's notice. In the event the
Company has not sold the New Securities within such ninety (90) day period, the
Company shall not thereafter issue or sell any New Securities, without first
offering a pro rata portion of such securities to the Investors in the manner
provided above.
(d) The right of first refusal granted under this Agreement shall
expire upon the first closing of the first public offering of Common Stock of
the Company that is pursuant to a registration statement filed with, and
declared effective by, the Commission under the Securities Act, covering the
offer and sale of Common Stock to the public at a per share price (prior to
underwriter commissions and expenses) of at least Four Dollars and Fifty Cents
($4.50), as properly adjusted for any combinations, consolidations, stock
splits, stock distributions, stock dividends, or recapitalizations, and at with
gross proceeds to the Company (before deduction for underwriter commissions and
expenses) of not less than Ten Million Dollars ($10,000,000.00).
(e) This right of first refusal is assignable to any affiliate of a
Holder or in connection with a sale of Shares or the Series A or Series B
Warrants, provided that the transferee owns, at the time the New Securities are
issued at least one hundred thousand (100,000) Shares, or Underlying Shares (on
an as-converted-to Common Stock basis) (as adjusted for any combinations,
consolidations, stock splits, stock distributions, stock dividends, or
recapitalizations with respect to such shares).
4.6 Employee Agreements. Each employee of or consultant to the Company
-------------------
shall enter into the Company's customary Employee Proprietary Information
Agreements and Consultant Proprietary Information Agreements. Each employee of
or consultant to the Company who hereafter acquires stock in connection with his
or her services to the Company shall do so pursuant to (i) the Company's 1992
Stock Option Plan, Deferred Compensation Stock Purchase Plan, Employee Stock
Purchase Plan, as each may be amended from time to time, or (ii) an agreement
that provides for vesting of the stock over a period of at least four (4) years
with no vesting until the end of the first year or such other vesting provisions
as are approved by the Board of Directors of the Company. If such employee or
consultant is or will be the holder of more than five percent (5%) of the
Company's voting securities, such agreement shall also provide for a "market
stand off" agreement in the form of Section 3.8 of this Agreement.
4.7 Director Indemnification. The Company's Articles and Bylaws shall
------------------------
contain provisions indemnifying the Company's directors who are not employees to
the maximum extent
19.
<PAGE>
permitted by law. The Company shall, as soon as practical following appointment
or election of any director who is not an employee, enter into an
Indemnification Agreement with such director in a form reasonably satisfactory
to such director and his or her counsel.
4.8 Foreign Investment Real Property Tax Act. The Company covenants that
----------------------------------------
it will operate in a manner such that it will not become a "United States real
property holding corporation" as that term is defined in Section 897(c)(2) of
the Internal Revenue Code of 1986, as amended, and the Treasury Regulations
thereunder ("FIRPTA"), and that it will file with the Internal Revenue Service
all statements, if any, which are required under Treasury Regulations Section
1.897-2.
4.9 Restrictions. Except as set forth herein, so long as at least Five
------------
Hundred Thousand (500,000) Shares of Series A Preferred Stock, Series A1
Preferred Stock, Series B Preferred Stock, and Series B1 Preferred Stock are
outstanding, the Company shall not take any of the following actions without the
consent of both (i) the holders of a majority of the outstanding Series A
Preferred Stock, Series A1 Preferred Stock, Series B Preferred Stock, and Series
B1 Preferred Stock, voting together as a class, and (ii) holders of a majority
of the outstanding Common Stock (without the Preferred Stock on an as-converted
basis):
(a) enter into any transaction that would cause the Company to incur
indebtedness to any bank or banks in excess of Two Million Dollars ($2,000,000)
or indebtedness to any leasing company or companies in excess of Two Million
Five Hundred Thousand Dollars ($2,500,000). For purposes of this Section
4.9(b), the term "indebtedness" shall include any (a) indebtedness for borrowed
money, (b) lease of any interest in any kind of property or asset, that should
be accounted for as a "capital lease," (c) obligation evidenced by a promissory
note or other instrument representing an extension of credit, (d) obligation for
the deferred purchase price of property or services (other than trade or other
accounts payable in the ordinary course of business), (e) obligation secured by
a lien on assets or the granting of any type of security interest, mortgage,
deed of trust, pledge, hypothecation, assignment for security, encumbrance,
levy, lien or charge of any kind, (f) obligation arising under acceptance
facilities or under facilities for the discount of accounts receivable and (g)
obligation to reimburse the issuer of any letter of credit upon which a draw has
been made.
5. Purchase Right Respecting Shareholder Sales of Common Stock. Pursuant to,
-----------------------------------------------------------
and subject to the limitations set forth in, Article X of the Company's Bylaws,
the Company and its assignees have a right of first refusal to purchase from
holders of the Company's Common Stock all, but not less than all, shares of
Common Stock that such holders propose to transfer (the "Company Purchase
Right"). If the Company should decide not to exercise such Company Purchase
Right with regard to any Common Stock purchasable thereunder, each Investor
shall then have the right of first refusal to purchase his, her or its pro rata
share of such Common Stock (the "Investor Purchase Right"). Such Investor's pro
rata share, for purposes of the Investor Purchase Right, is the ratio, the
numerator of which is the number of shares of Common Stock issued or issuable to
the Investor pursuant to the conversion and/or exercise of all Shares and/or the
Series A or Series B Warrants held by the Investor, and the denominator of which
is the total number of shares of Common Stock issued or issuable upon exercise
and/or conversion of all outstanding
20.
<PAGE>
Shares and/or the Series A and Series B Warrants. This Investor Purchase Right
shall be subject to the following provisions:
(a) "Offered Stock" shall mean any shares of Common Stock of the
Company that the Company has the opportunity to purchase under the Company
Purchase Right.
(b) If, after receiving notice from a proposed transferor of Offered
Stock (the "Transferor"), the Company does not intend to exercise its Company
Purchase Right in full or the Company is not lawfully able to repurchase all
such Offered Stock, the Company shall send written notice thereof (the "Company
Expiration Notice") to the Transferor and to each Investor at least twenty (20)
days before the expiration of the period in which the Company may exercise its
Company Purchase Right with regard to such Offered Stock. The Company
Expiration Notice shall describe the terms of the proposed transfer of Offered
Stock and the amount thereof that the Company will not purchase, and shall
specify each Investor's pro rata share thereof. The Investors shall have the
right to purchase all, but not less than all, of the Offered Stock not purchased
by the Company (or by other Company shareholders) upon the same payment terms as
the Company.
(c) Each Investor desiring to purchase such Offered Stock shall have
ten (10) days (the "Investor Option Period") from the date of mailing of the
Company Expiration Notice to provide written notice (the "Investor Election") to
the Transferor and the Company of the number of shares of such Offered Stock
that such Investor desires to purchase (such number may be more than such
Investor's pro rata share). None of the Investors shall have the right to
purchase any of such Offered Shares unless the Investors in the aggregate agree
to purchase all of the Offered Stock not purchased by the Company or by other
Company shareholders.
(d) If the total number of shares specified in Investor Elections
exceeds the number of shares of Offered Stock not purchased by the Company or by
other shareholders on a pro rata basis no more favorable than the pro rata
rights of the Investors, then (unless the exercising Investors and/or other
shareholders agree otherwise) each exercising Investor shall have the right
to purchase that number of shares of Offered Stock that is obtained by
multiplying the number of shares of Offered Stock not being purchased by the
Company or other shareholders as described above by a fraction the numerator of
which is the number of shares of Common Stock issued or issuable to such
exercising Investor pursuant to the conversion and/or exercise of all Shares,
Debentures and/or the Series A and Series B Warrants held by such Investor, and
the denominator of which is the total number of shares of Common Stock issued or
issuable to all such exercising Investors pursuant to the conversion and/or
exercise of all Shares, Debentures and/or the Series A and Series B Warrants
held by all such exercising Investors. Any remaining shares of Offered Stock
may be purchased by Investors according to the same principle of proration until
all shares of Offered Stock not purchased by the Company or other shareholders
as described above are allocated to exercising Investors.
(e) Within ten (10) days after the expiration of the Investor Option
Period the Company shall give written notice to the Transferor and to each
Investor specifying either (i) that all of the Offered Stock was subscribed by
the Company exercising its Company Purchase Right
21.
<PAGE>
and/or one or more Investors exercising their Investor Purchase Right and/or
other Company shareholders or (ii) that neither the Company nor the Investors
have the right to purchase any of the Offered Stock because the Investors, in
the aggregate, did not timely exercise their Investor Purchase Right to purchase
all of the Offered Stock not purchased by the Company and/or other Company
shareholders.
(f) The Investor Purchase Right shall expire upon the first closing of
the first public offering of Common Stock of the Company that is pursuant to a
registration statement filed with, and declared effective by, the Commission
under the Securities Act, covering the offer and sale of Common Stock to the
public at a per share price (prior to underwriter commissions and expenses) of
at least Four Dollars and Fifty Cents ($4.50), as properly adjusted for any
stock split, stock dividend, or recapitalization, and with gross proceeds to the
Company (before deduction for underwriter commissions and expenses) of not less
than Ten Million Dollars ($10,000,000.00).
(g) This Investor Purchase Right is assignable to any affiliate of an
Investor or in connection with a sale of Shares, Debentures and/or the Series A
and Series B Warrants, provided that the transferee owns, as the case may be, at
the time the Offered Stock is offered, at least one hundred thousand (100,000)
Shares, or Underlying Shares (on an as-converted-to Common Stock basis) (as
adjusted for any combinations, consolidations, stock splits, stock distributions
or stock dividends with respect to such shares) or at least five hundred
thousand dollars ($500,000) in aggregate principal amount of the Debentures.
6. Right of Co-Sale Respecting Shares.
----------------------------------
6.1 Right of Co-Sale.
----------------
(a) In the event that any shareholder subject to this right of co-sale
pursuant to Section 6.6 below proposes to sell or otherwise transfer any shares
of Common Stock of the Company, or any interest in such shares, now held by or
hereafter acquired by such shareholder to any person or entity, and such shares
are not purchased by the Company or the Investors pursuant to their respective
rights of first refusal, each of the Investors shall have a right of co-sale on
the terms described below to sell not more than such Investor's "Pro Rata Share"
of the shares that such shareholder proposes to transfer. At least twenty (20)
days before the purchase date of a sale or transfer of such shares, the
shareholder shall give a written notice (the "Co-Sale Notice") simultaneously to
the Company and to each of the Investors at such Investor's address as shown on
the Company's records. The Co-Sale Notice shall describe in detail the proposed
transfer, including the number of shares proposed to be transferred, the
proposed transfer price or consideration to be paid, the address of the
shareholder proposing to transfer shares, and the name and address of the
proposed transferee (the "Transferee").
(b) Each Investor shall have the right to sell to the Transferee (or,
upon the unwillingness of any Transferee to purchase directly from such
Investor, to the selling shareholder) not more than its Pro Rata Share of the
shares subject to the Co-Sale Notice on the terms set forth in the Co-Sale
Notice (contingent upon the completion by the selling shareholder
22.
<PAGE>
of the sale to the Transferee). If the consideration to be paid by the
Transferee is of a nature that cannot be given to Investors, then each Investor
shall have the right to sell its Pro Rata Share of the shareholder's shares
subject to the Co-Sale Notice to the selling shareholder at the fair market
value per share of such consideration. To the extent that any prospective
Transferee or Transferees prevents the operation of these provisions relating to
co-sale (by, for example, refusing to purchase shares or other securities from
an Investor exercising its right of co-sale hereunder), the selling shareholder
shall not sell such prospective Transferee or Transferees any securities unless
and until, simultaneously with such sale, the selling shareholder shall purchase
such shares or other securities from such Investor for the same consideration
and on the same terms and conditions as the proposed transfer described in the
Co-Sale Notice.
(c) Each Investor's "Pro Rata Share" for purposes of this co-sale right
is eighty percent (80%) of the ratio of (i) the total number of Shares and
shares issuable upon conversion of Debentures held by such Investor as of the
date of the Co-Sale Notice (calculated on a common equivalent basis assuming
exercise of the Series A and Series B Warrants) to (ii) the total aggregate
number of Shares and shares issuable upon conversion of the Debentures held by
all Investors as of such date (calculated on a common equivalent basis assuming
exercise of the Series A and Series B Warrants).
(d) An Investor shall exercise his right of co-sale by delivering a
notice of exercise (the "Election Notice") to the shareholder (with a copy to
the Company) within five (5) business days after the date the Co-Sale Notice has
been delivered from the shareholder to each of the Investors. The Investor
shall specify in the Election Notice the number of shares (up to its Pro Rata
Share) such Investor desires to sell.
6.2 Transfer of Shares. Subject to the rights of Investors who have
------------------
elected to co-sell, the shareholders may, not later than ninety (90) days
following delivery to the Company and each of the Investors of the Co-Sale
Notice, conclude a transfer of any or all of their shares covered by the Co-Sale
Notice on terms and conditions not materially more favorable to the transferor
than those described in the Co-Sale Notice. Any proposed transfer on terms and
conditions materially more favorable to the transferor than those described in
the Co-Sale Notice, as well as any subsequent proposed transfer of any of
shares, shall again be subject to the right of co-sale and shall require
compliance by the shareholders with the procedures described in this Section 6.
6.3 Binding Effect of Right of Co-Sale. The right of co-sale shall be
----------------------------------
binding upon any transferee of shares other than a transferee acquiring shares
in a transaction which complies with this Section 6.
6.4 Termination of Right of Co-Sale. Notwithstanding anything in this
-------------------------------
Section 6 to the contrary, the right of co-sale shall terminate on the earlier
of (i) the closing date of the Company's first public offering of the Company's
Common Stock which is registered under the Securities Act at a per share price
of at least Four Dollars and Fifty Cents ($4.50), as properly adjusted for any
combinations, consolidations, stock splits, stock distributions, stock
dividends, or recapitalizations, and with gross proceeds to the Company (before
deduction for underwriter commissions and expenses) of not less than Ten Million
Dollars ($10,000,000.00); or (ii) the first
23.
<PAGE>
date on which none of the Investors hold Shares or Series A and Series B
Warrants or Debentures convertible into at least 100,000 shares of Common Stock
(as adjusted for any combinations, consolidations, stock splits, stock
distributions or dividends with respect to such securities).
6.5 Exceptions.
----------
(a) Without regard and not subject to the provisions of this Section 6
any shareholder may sell or otherwise transfer an aggregate of ten thousand
(10,000) shares (as adjusted for any combinations, consolidations, stock splits,
stock distributions or stock dividends with respect to such shares) in any
calendar year. Any shareholder also may transfer all or part of his or her
shares, without regard and not subject to the provisions of this Section 6, to
any or all of the executor or administrator of his or her estate, his or her
ancestors, descendants, spouse, or other family members, or to a custodian,
trustee (including a trustee of a voting trust), executor, or other fiduciary
primarily for the account of such shareholder or his or her ancestors,
descendants, spouse or other family members (collectively, an "Exempted
Transferee"), provided, however, that this Agreement shall be binding upon each
such Exempted Transferee and, prior to the completion of such transfer, each
Exempted Transferee or his or her legal representative shall have executed and
delivered to the Company and to a majority in interest of the Investors
documents assuming the obligations of the shareholder under this Agreement with
respect to the transferred shares.
(b) This Section 6 shall not be applicable to purchases of Common Stock
by the Company or its assignee(s) from consultants, employees or directors
pursuant to its repurchase rights and first refusal rights set forth in
applicable stock purchase agreements or the Company's Bylaws.
6.6 Parties to Agreement.
--------------------
Lauren L. Shaw, Barbara R. Renshaw, Stephen R. Butterfield, Steve
Nelson, Robert Hossley and William Bailey (collectively, the "Founders") are
parties to this Agreement for purposes of this Section 6 and shall be subject to
the right of co-sale set forth Section 6.1(a) hereof. The Company agrees that
it will impose as a condition precedent to the issuance of equity securities of
the Company (including securities convertible into or exercisable for the
purchase of equity securities of the Company) to any employee or consultant of
the Company who after such issuance would hold five percent (5%) or more of the
fully diluted equity of the Company that such person become a party to this
Section 6.
6.7 Legends. All certificates or instruments representing shares whether
-------
now outstanding or subsequently issued held by a party to this agreement
pursuant to Section 6.6 above, shall be surrendered to the Company for
endorsement or be endorsed by the Company prior to their issuance with the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO,
AND MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH, AN AGREEMENT,
DATED AS OF OCTOBER 6, 1995,
24.
<PAGE>
AS AMENDED, AMONG THE HOLDER OF THESE SECURITIES AND
CERTAIN OTHER HOLDERS OF THE COMPANY'S STOCK, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER."
The Company shall not transfer any shares on its books without first
ascertaining compliance with all of the applicable provisions of this Agreement
with respect to such transfer.
6.8 Conditions to Exercise of Investor's Rights. Exercise of the
-------------------------------------------
Investor's rights under Section 6 hereof shall be subject to and conditioned
upon, and the other shareholders and the Company shall use their best efforts to
assist the Investors, in, compliance with applicable laws. The right of co-sale
provided in this Section shall not apply in favor of any Investor or direct or
indirect transferee of the rights of an Investor as to whom the operation of
this Section 6 would contravene any provision of applicable law.
6.9 Transferability. The co-sale rights granted to Investors pursuant to
---------------
this Section 6 shall be transferable only to a transferee of at least one
hundred thousand (100,000) Shares or Series A and Series B Warrants (subject to
adjustment for any combinations, consolidations, stock splits, stock
distributions, stock dividends, or recapitalizations).
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California.
7.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, permitted assigns, heirs, executors and administrators of the
parties hereto.
7.3 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement among the parties with regard to the subjects
hereof.
7.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be effective five (5) days
after deposited by first-class mail, postage prepaid, with the United States
mail or upon delivery by hand, by fax or by messenger or air courier, if
addressed (a) to an Investor, at such Investor's address on the books or records
of the Company, or at such other address as such Investor shall have furnished
to the Company in writing, or (b) to any other holder of Registrable Securities,
at such address as such holder shall have furnished the Company in writing, or,
until any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Registrable Securities who has so furnished
an address to the Company, or (c) to the Company, at 2381 Rosecrans Avenue, El
Segundo, California 90245, Attn: Edward A. Gavaldon, President, or at such other
address as the Company shall have last furnished in writing for this purpose to
the person giving notice to
25.
<PAGE>
the Company, with a copy to Cooley Godward Castro Huddleson & Tatum, Five Palo
Alto Square, 3000 El Camino Real, Palo Alto, California, 94306, Attn: Gregory C.
Smith.
7.5 Delays or Omissions. No delay or omission to exercise any right, power
-------------------
or remedy accruing to any party, upon any breach or default of any other party
under this Agreement, shall impair any such right, power or remedy of such party
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereunder
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement, or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
7.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Investors or
by the Company or one or more Investors only, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one instrument.
7.7 Severability. In the case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby;
provided, however, that in the event of any such term no longer being legal,
valid, or enforceable, the parties shall adjust this agreement to provide for an
equitable offset for the loss of the rights thereby provided.
7.8 Amendments. The provisions of this Agreement may be amended at any
----------
time and from time to time, and particular provisions of this Agreement may be
waived, with and only with an agreement or consent in writing signed by the
Company, by the holders of a majority of the number of shares of Registrable
Securities (or securities convertible into Registrable Securities) outstanding
as of the date of such amendment or waiver; provided, however, that (i) Sections
4.4(a), 4.4(b) and 4.9 hereof may only be amended with an agreement or consent
in writing signed by the Company, by holders of a majority of the shares of
Common Stock held by Lauren Shaw, Barbara Renshaw, and Stephen Butterfield, and
by the holders of a majority of the number of shares of Series A Preferred Stock
and the holders of eighty (80%) of the Series B Preferred Stock outstanding as
of the date of such amendment or waiver, (ii) Section 4.4(e) hereof may only be
amended with an agreement or consent in writing signed by the Company and by
holders of a majority in aggregate principal amount of the then outstanding
Debentures, (iii) Section 6 hereof may only be amended with an agreement or
consent in writing signed by the Company, by the holders of a majority of the
number or shares of Registrable Securities (or securities convertible into
Registrable Securities) outstanding as of the date of such amendment
26.
<PAGE>
or waiver and by each of the individuals (or their assigns) made party to this
Agreement pursuant to Section 6.6 hereof and (iv) Section 7.8 hereof may only be
amended with an agreement or consent in writing signed by the Company, by the
holders of a majority of the number or shares of Registrable Securities (or
securities convertible into Registrable Securities) outstanding as of the date
of such amendment or waiver, by the holders of a majority of the number of
shares of Series A Preferred Stock and Series B Preferred Stock and Debentures
(on an as-converted basis) outstanding as of the date of such amendment or
waiver and by each of the individuals (or their assigns) made party to this
Agreement pursuant to Section 6.6 hereof. Each of the parties hereto
acknowledges that by the operation of this Section the holders of a majority of
the outstanding Registrable Securities may have the right and power to diminish
or eliminate all rights of such party under this Agreement with the exception of
rights pursuant to Sections 4.4, 4.9 and 7.8 hereof that are held by such party
by virtue of being a holder of Series A Preferred Stock and Series B Preferred
Stock (the "Series A and B Rights"). Each Equity Investor holding Series A
Preferred Stock and Series B Preferred Stock acknowledges that by the operation
of this Section the holders of a majority of Series A Preferred Stock and Series
B Preferred Stock may have the right and power to diminish or eliminate all
Series A and B Rights of such Equity Investor. Notwithstanding anything to the
contrary contained herein, the Company, each of the parties listed in Section
6.6 hereof, and each of the parties hereto agrees that this Agreement may also
be amended with no further action on the part of the Investor to include as
parties hereunder any purchaser of the Debentures at a subsequent Closing, if
any, under the Debenture Purchase Agreement.
[The remainder of this page is intentionally blank]
27.
<PAGE>
The foregoing Amended and Restated Investors' Rights Agreement is hereby
executed as of the date first above written.
PEERLESS SYSTEMS CORPORATION
By: ___________________________________
Edward A. Gavaldon, President
Solely for purposes of agreeing to Sections 1, 3, 4.1, 4.2 and 7 and, if
applicable, 4.4 hereof:
COMDISCO, INC.
By: ___________________________________
Title: ________________________________
Solely for purposes of agreeing to Sections 1, 3, 6 and 7 hereof:
_______________________________ _________________________________
Lauren L. Shaw Robert Hossley
_______________________________ _________________________________
Barbara R. Renshaw William Bailey
_______________________________
Stephen R. Butterfield
_______________________________
Steve Nelson
28.
<PAGE>
EXHIBIT 10.19
INDEMNITY AGREEMENT
This Indemnity Agreement (the "Agreement") is made and entered into as of
September __, 1996, by and among Peerless Systems Corporation (the "Company")
and the Selling Securityholders set forth on the signature page hereof.
Capitalized terms used herein but not otherwise defined shall have the meanings
assigned thereto in that certain Underwriting Agreement, to be executed
subsequently, by and among the Company, the Selling Securityholders and
Hambrecht & Quist LLC, Prudential Securities Incorporated, Wessels, Arnold &
Henderson, L.L.C, as representatives of the several underwriters named therein
(the "Underwriting Agreement").
RECITALS
WHEREAS, the Company and the Selling Securityholders desire to enter into
the Underwriting Agreement, and the Company and the Selling Securityholders
desire to provide for indemnification by the Company and the Selling
Securityholders as contemplated in Section 7 thereof.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties agree, effective as of the date of this Agreement,
as follows:
1. Indemnification.
(a) (i) The Company agrees to indemnify and hold harmless each
Selling Securityholder and each person (including each partner or officer
thereof) who controls any Selling Securityholder within the meaning of Section
15 of the Securities Act of 1933, as amended (the "Securities Act"), from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the common law or otherwise, and the Company agrees to reimburse each
such Selling Securityholder and controlling person for any reasonable legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed
1
<PAGE>
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading or (iii) any breach or alleged breach of the
representations and warranties set forth in Section 2(b)(iii) or (v) of the
Underwriting Agreement or any breach or alleged breach of the covenants set
forth in Sections 6(i) and 6(j) of the Underwriting Agreement; provided,
however, that the indemnity agreements of the Company contained in this
paragraph (a)(i) shall not apply to any such losses, claims, damages,
liabilities or expenses if such statement or omission was made in reliance upon
and in conformity with information furnished in writing to the Company by or on
behalf of any Selling Securityholder for use in any Preliminary Prospectus or
the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto.
(ii) The indemnity agreement of the Company contained in the
preceding paragraph shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the Stock.
(b) Each Selling Securityholder severally and not jointly agrees to
indemnify and hold harmless the Company, each of its officers who signs the
Registration Statement on his own behalf or pursuant to a power of attorney,
each of its directors, each other Selling Securityholder, each person (including
each partner or officer thereof) who controls the Company or any such other
Selling Securityholder within the meaning of Section 15 of the Securities Act,
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, the common law or otherwise and to
reimburse each of them for any reasonable legal or other expenses (including,
except as otherwise hereinafter provided, reasonable fees and disbursements of
counsel) incurred by the respective indemnified parties in connection with
defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding which may
be brought against, the respective indemnified parties, in each case arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any post-
effective amendment thereto (including any Rule 462(b) registration statement)
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission described in
(i) or (ii) above was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of such indemnifying Selling
Securityholder for use in the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto. The indemnity agreement of each
Selling Securityholder contained in this paragraph (b) shall remain operative
and in full force and effect regardless of
2
<PAGE>
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (the "Notice") of such service or notification
to the party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (the "Notice of Defense") to the indemnified party, to assume (alone or
in conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section for any legal or other
expenses subsequently incurred by the indemnified party of parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties.
3
<PAGE>
If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnified party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a)(i) of this Section or under paragraph (b) of this Section, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in paragraph (a)(i) of
this Section or in paragraph (b) of this Section (i) in such proportion as is
appropriate to reflect the relative benefits received by each indemnifying party
from the offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of each indemnifying party in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Selling Securityholders on the other shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the Stock received by the Company and Selling Securityholders, respectively,
bear to the aggregate public offering proceeds from the sale of the Stock.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
each indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Selling Securityholder shall be required to contribute
any amount in excess of the net proceeds applicable to the Stock sold by such
Selling Securityholder. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Selling Securityholders' obligations in this paragraph
(d) to contribute are several and not joint in proportion to the amount of the
respective proceeds received by each Selling Securityholder from the sale to the
Underwriters of the Stock in the initial public offering.
Each party entitled to contribution agrees that upon the service
of a summons or other initial legal process upon it in any action instituted
against it in respect of
4
<PAGE>
which contribution may be sought, it will promptly give written notice of such
service to the party or parties from whom contribution may be sought, but the
omission so to notify such party or parties of any such service shall not
relieve the party from whom contribution may be sought from any obligation it
may have hereunder or otherwise (except as specifically provided in paragraph
(c) of this Section).
(e) No Selling Securityholder without the prior written consent of
the Company will, and the Company shall not without the prior written consent of
a Selling Securityholder, settle or compromise or consent to the entry of any
judgement in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not the
Company or any person who controls the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of the Company or such Selling Securityholder
and each such controlling person, as the case may be, from all liability arising
out of such claim, action, suit or proceeding.
(f) This Agreement will be in addition to any liability which the
Company may otherwise have to the Selling Securityholders.
2. Entire Agreement. Except as set forth in the Underwriting Agreement,
this Agreement sets forth the entire agreement and understandings between the
Company and the Selling Securityholders relating to the subject matter herein.
This Agreement shall amend and supersede all other agreements, writings or
otherwise, with respect to the initial public offering of the Common Stock of
the Company only, including, without limitation, Section 3.5 of that certain
Amended and Restated Investors' Rights Agreement, dated October 6, 1995, by and
among the Company and the parties referenced therein.
3. Counterparts. This Agreement may be executed in two or more
counterparts and by different parties in separate counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
4. Termination. This Agreement and the covenants and promises set forth
herein shall terminate and be of no further force or effect in the event that
the offering contemplated by the Underwriting Agreement has not been executed
and become effective by December 31, 1996.
5. Amendment. This Agreement may be amended only by a writing executed by
the Company and by each of the Selling Securityholders named herein; provided,
however, this Agreement may be amended without the consent of any Selling
Securityholder to include additional Selling Securityholders hereunder. This
Agreement will be automatically amended to eliminate from the provisions
hereunder and as a party hereto any Selling Securityholder that does not execute
the Underwriting Agreement (directly, or by power of attorney).
5
<PAGE>
6. Governing Law. This Agreement will be governed by the laws of the
State of California.
IN WITNESS WHEREOF, the parties set forth below have executed this
Agreement as of the date set forth above.
PEERLESS SYSTEMS CORPORATION
BY:
------------------------
EDWARD GAVALDON
------------------------
LAUREN L. SHAW
------------------------
BARBARA B. RENSHAW
RENSHAW/SHAW CHARITABLE
REMAINDER TRUST
BY:
------------------------
TRUSTEE
MORGAN KEEGAN MERCHANT
BANKING FUND L.P.
BY:
------------------------
6
<PAGE>
MORGAN KEEGAN MERCHANT
BANKING FUND II, L.P.
BY:
------------------------
------------------------
STEPHEN R. BUTTERFIELD
------------------------
DAVID R. FOURNIER
------------------------
THOMAS B. RUFFOLO
------------------------
REGINALD CARDIN
------------------------
STEVEN K. NELSON
------------------------
ROBERT F. HOSSLEY
------------------------
WILLIAM BAILEY
------------------------
EDWARD A. GAVALDON
COMDISCO, INC.
BY:
------------------------
7
<PAGE>
SILICON VALLEY BANK
BY:
------------------------
------------------------
WILLIAM S. WOOD
BAYVIEW INVESTORS
BY:
------------------------
------------------------
LARRY FELDMAN
------------------------
CARY KIMMEL
FIRST PORTLAND CORPORATION
BY:
------------------------
8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to registration
statement on Form S-1 (File No. 333-09357) of our report dated July 25, 1996,
on our audits of the financial statements of Peerless Systems Corporation. We
also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Newport Beach, California
August 23, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 194
<SECURITIES> 0
<RECEIVABLES> 2,008
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,769
<PP&E> 1,752
<DEPRECIATION> 1,015
<TOTAL-ASSETS> 3,960
<CURRENT-LIABILITIES> 5,399
<BONDS> 3,070
5,938
0
<COMMON> 1,005
<OTHER-SE> (12,584)
<TOTAL-LIABILITY-AND-EQUITY> 3,960
<SALES> 0
<TOTAL-REVENUES> 7,088
<CGS> 0
<TOTAL-COSTS> 3,361
<OTHER-EXPENSES> 3,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167
<INCOME-PRETAX> 272
<INCOME-TAX> 50
<INCOME-CONTINUING> 222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
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