<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1996
REGISTRATION NO. 333-09357
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PEERLESS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <S> <C>
CALIFORNIA 5008 95-3732595
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------
2381 ROSECRANS AVENUE
EL SEGUNDO, CA 90245
(310) 536-0908
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
EDWARD A. GAVALDON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2381 ROSECRANS AVENUE
EL SEGUNDO, CA 90245
(310) 536-0908
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
GREGORY C. SMITH, ESQ. LAIRD H. SIMONS, III, ESQ.
BRETT D. WHITE, ESQ. EILEEN DUFFY ROBINETT, ESQ.
JEFFERY L. DONOVAN, ESQ.
COOLEY GODWARD LLP FENWICK & WEST LLP
FIVE PALO ALTO SQUARE TWO PALO ALTO SQUARE
3000 EL CAMINO REAL PALO ALTO, CA 94306
PALO ALTO, CA 94306-2155 (415) 494-0600
(415) 843-5000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the
same offering. [_] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1996
PROSPECTUS
3,750,000 SHARES
[LOGO OF PEERLESS]
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
Of the 3,750,000 shares of Common Stock offered hereby, 2,500,000 shares are
being sold by the Company, 1,073,125 shares are being sold by the Selling
Stockholders and 176,875 shares are being sold by the Underwriters upon the net
exercise of warrants purchased by them from certain of the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the shares or warrants by the Selling Stockholders. See "Principal and Selling
Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company's Common Stock has been approved for quotation on
the Nasdaq National Market under the symbol PRLS, subject to official notice of
issuance.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS (3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- --------------------------------------------------------------------------------
Total (4)................ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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....................................... 10,210,814 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 $26,219
Working capital (deficit)....................... (2,630) (2,630) 24,150
Total assets.................................... 3,960 3,960 29,985
Long-term obligations........................... 4,202 1,132 853
Redeemable Preferred Stock...................... 5,938 -- --
Total stockholders' equity (deficit)............ (11,579) (2,571) 24,488
</TABLE>
- --------------------
(1) Includes 176,875 shares of Common Stock issuable upon the net exercise of
warrants to be sold to the Underwriters by certain of the Selling
Stockholders.
(2) Based on shares outstanding on July 31, 1996. Excludes (i) 1,485,754 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 reserved as of July 31, 1996
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 15,869
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
995,668 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 15,869 shares of Common Stock at a weighted average
exercise price of $0.53 per share.
4
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before purchasing the Common
Stock offered hereby. Except for the historical information contained herein,
the discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below and
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Prospectus.
History of Operating Losses; Accumulated Deficit. The Company recognized net
losses of approximately $1.2 million, $639,000 and $48,000 for the fiscal
years ended December 31, 1994 and 1995 and the seven months ended July 31,
1996, respectively. The Company's historical losses have resulted in an
accumulated deficit of approximately $13.0 million as of July 31, 1996.
Although the Company reported net income of approximately $222,000 for the six
months ended July 31, 1996, there can be no assurance that the Company will
maintain profitability on a quarterly basis or achieve profitability on an
annual basis in the future. For these reasons, the Company believes that
deferred tax assets, including net operating losses and tax credit carry-
forwards, may not be utilized in the near term and has recorded a valuation
allowance for the full amount of the net deferred income tax asset. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Potential Fluctuations in Quarterly Results; Seasonality; Revenue
Reporting. The Company in the past has experienced, and in the future may
experience, significant fluctuations in quarterly operating results that have
been and may be caused by many factors including: initiation or termination of
arrangements between the Company and its existing and potential OEM customers;
the timing of introductions of new products or product enhancements by the
Company, its OEMs and their competitors; the phase-out or early termination of
OEM products incorporating the Company's technology; the size and timing of
engineering services contracts, one-time software licensing transactions and
recurring licensing fees; the size and timing of and fluctuations in end-user
demand for the OEM products incorporating the Company's technology;
inventories of digital document products carried by the OEMs' distributors
that exceed current or projected end-user demand; performance by the Company
and its OEM customers pursuant to their plans and agreements; seasonal trends;
the mix of services provided or products sold and the gross margins
attributable to such services or products; competition and pricing; customer
order deferrals in anticipation of new products or product enhancements;
industry and technology developments; changes in the Company's operating
expenses; software bugs, product delays or other product quality problems;
currency fluctuations; and general economic conditions. For example, in recent
quarters the Company's quarterly revenues have been significantly affected by
the timing of one-time licensing transactions and by decreases in recurring
product licensing revenues resulting from the phase-out by the Company's OEMs
of products incorporating the Company's technology. The Company expects that
its operating results will continue to fluctuate significantly in the future
as a result of these and other factors. A substantial portion of the Company's
costs and expenses is related to costs of engineering services and
maintenance, other personnel costs, product development, facilities and
marketing programs. The level of spending for such costs and expenses cannot
be adjusted quickly and is based, in significant part, on the Company's
expectations of future revenues and anticipated OEM commitments. If such
commitments do not materialize or are terminated or, in any event, if revenues
are below expectations, the Company's quarterly and annual operating results
will be adversely affected, which could have a material adverse effect on the
price of the Company's Common Stock. For these and other reasons, it is likely
that in future quarters the Company's operating results from time to time may
be below the expectations of public market analysts and investors, which also
could have a material adverse effect on the price of the Company's Common
Stock.
The Company believes that its business may be subject to seasonal trends. In
the digital document product industry, it is not unusual for vendors to
experience an increase in demand in the fourth calendar quarter followed by a
significant decrease in the following quarter. As a result, the Company's
product
5
<PAGE>
licensing revenues associated with unit shipments by its OEMs may be subject
to similar fluctuations, although no assurance can be given that the Company's
OEMs will experience such fluctuations or as to the effect of such
fluctuations, if any, on the Company's revenues. In addition, because one or
more key OEM transactions, milestones or OEM product shipments that are
scheduled to be realized by the Company or its OEMs at the end of a quarter
may be delayed until the beginning of the next quarter, quarterly revenues are
subject to significant fluctuations.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. The Company has received 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. The Company believes that the product
specifications and development schedules for the initial phase are nearly
complete. The Company does not anticipate incurring significant research and
development expenditures in connection with the completion of these product
specifications and development schedules. However, 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
6
<PAGE>
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, 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. Although the Company has not granted exclusive rights with
respect to its core technologies, the Company has granted exclusive rights in
unusual circumstances with respect to derivative software developed by the
Company in support of a specific OEM customer's proprietary products or
technologies. The Company believes that none of such exclusive arrangements
restricts the Company from freely conducting its business. No assurance can be
given, however, that the Company will not, in the future, grant broader
exclusive rights to its technology in order to enter into a licensing agreement
with an OEM customer, or that an unwillingness to grant such exclusive rights
will prevent the Company from entering into such a licensing agreement. 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
7
<PAGE>
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 products
and services, could result in a loss of competitiveness or revenues, which
could have a material adverse effect on the Company's operating results.
Risks Associated with Product Development; Product Delays. The Company in the
past has experienced delays in product development, and the Company may
experience similar delays in the future. Prior delays have resulted from
numerous factors such as changing OEM product specifications, difficulties in
hiring and retaining necessary personnel, difficulties in reallocating
engineering resources and other resource limitations, difficulties with
independent contractors, changing market or competitive product requirements
and unanticipated engineering complexity. In addition, the Company's software
and hardware have in the past and may in the future contain undetected errors
or failures that become evident upon product introduction or as product
production volumes increase. There can be no assurance, despite testing by the
Company and its OEMs, that errors will not be found, that the Company will not
experience development challenges resulting in unanticipated problems or delays
in the acceptance of products by the Company's OEMs or shipment of the OEMs'
products, or that the Company's new products and technology will meet
performance specifications under all conditions or for all anticipated
applications. Given the short product life cycles in the digital document
products market, any delay or unanticipated difficulty associated with new
product introductions or product enhancements could have a material adverse
effect on the Company's operating results.
Risks Associated with Developing Markets. A substantial portion of the
Company's recent development efforts has been directed at the development of
new embedded imaging technologies, particularly for MFP and color products. The
market for these products is new and rapidly evolving. The Company's OEMs
currently are selling monochrome network printers and MFPs incorporating the
Company's technology. Although certain of the Company's color technology is
currently available to OEM customers, once an agreement with an OEM is entered
into, the color technology must undergo further development, or customization,
before it can be incorporated into an OEM's specific digital document product.
The Company's OEMs have not yet shipped any color products incorporating the
Company's color technology. The Company's future success will be dependent to a
significant degree upon broad market acceptance of the technology under
development, particularly its MFP and color technology. This success will be
dependent in part on the ability of the Company's OEMs to develop new products
that provide the functionality, performance, speed and network connectivity
demanded by the market at acceptable prices, and to convince end users to adopt
MFP, color printing and other products for office and desktop use. There can be
no assurance that: the market for MFP, color printing and other products
proposed by the Company will develop; the Company will be able to offer in a
timely manner, if at all, its new technology; the Company's OEM customers will
choose the Company's technology for use in their MFPs, color printers or other
products; the Company's OEM customers will be successful in developing such
MFPs, color printers and other products; or such products will gain market
acceptance. The failure of any of these events to occur would have a material
adverse effect on the Company's operating results.
Competition. The market for embedded imaging systems for digital document
products is highly competitive and characterized by continuous pressure to
enhance performance, to introduce new features and to accelerate the release of
new products. The Company competes on the basis of technology expertise,
8
<PAGE>
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.
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
9
<PAGE>
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 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
10
<PAGE>
use the name nor can any assurance be given as to the ability of the Company to
acquire a license to or an assignment of the name from the corporation on
reasonable terms or at all. The inability of the Company to do so could have a
material adverse effect on the Company's operating results. In any event, the
prosecution of claims or other litigation relating to the dispute could result
in substantial costs to the Company, which also could have a material adverse
effect on the Company's operating results.
Dependence on Key Personnel. The Company is largely dependent upon the skills
and efforts of its senior management and other officers and key employees, some
of whom only recently have joined the Company. Two of the Company's co-founders
and senior management personnel recently resigned as executive officers of the
Company in connection with the transition process initiated in January 1995
when the current Chief Executive Officer was hired, and although the Company
believes such resignations will not materially impact the management of the
Company, no assurance can be given that the loss of such senior management will
not have a material adverse impact on the Company's operating results. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly skilled managerial, engineering, sales,
marketing and operations personnel, many of whom are in great demand.
Competition for such personnel recently has increased significantly. The
Company does not maintain any key person life insurance policies. The loss of
key personnel or the inability to hire or retain qualified personnel could have
a material adverse effect on the Company's operating results. See "Management."
International Activities. Revenues from sales to the Company's customers
outside the United States accounted for 26%, 41% and 41% of the Company's total
revenues for the fiscal years ended December 31, 1994 and December 31, 1995 and
the six months ended July 31, 1996, respectively. Therefore, the Company is
substantially dependent on its international business activities. Further, the
Company expects that sales to customers located outside the United States may
increase in absolute dollars in the future. The international market for
products incorporating the Company's technology is highly competitive, and the
Company expects to face substantial competition in this market from established
and emerging companies and technologies developed internally by its OEM
customers. Risks inherent in the Company's international business activities
also include currency fluctuations, the imposition of government controls,
tailoring of products to local requirements, trade restrictions, changes in
tariffs and taxes, and the burdens of complying with a wide variety of foreign
laws and regulations, any of which could have a material adverse effect on the
Company's operating results. Although all of the Company's contracts are, and
the Company expects that its future contracts will be, denominated in U.S.
dollars, there can be no assurance that its contracts with international OEM
customers in the future will be denominated in U.S. dollars. In the event that
one or more contracts are denominated in foreign currencies, the Company will
be subject to additional risks associated with currency fluctuations, which
could have a material adverse effect on the Company's operating results.
No Prior Public Market; Determination of Public Offering Price; Possible
Volatility of Stock Price. Prior to this offering, there was no public market
for the Common Stock, and there can be no assurance that an active trading
market will develop or be sustained upon completion of this offering. The
initial public offering price will be determined by negotiation among the
Company, the Selling Stockholders and the representatives of the Underwriters
based on a number of factors, including market valuations of other companies
engaged in activities similar to those of the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors
deemed relevant. The initial public offering price may not be indicative of the
market price of the Common Stock following completion of this offering. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products by the Company or its competitors, developments
or disputes with respect to proprietary rights, general trends in the industry,
overall market conditions and other factors. In addition, the stock market
historically has experienced extreme price and volume fluctuations, which have
particularly affected the market price of securities of many high technology
companies and which at times have been unrelated or disproportionate to the
operating performance of such companies. These market fluctuations may
adversely affect the market price of the Common Stock. See "Underwriting."
11
<PAGE>
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 10,210,814 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
995,668 shares of Common Stock, (ii) no exercise of the Underwriters' over-
allotment option and (iii) no exercise of options to purchase 1,485,754 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 6,460,814 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 5,425,035
Restricted Shares (plus approximately 642,079 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, except
for 177,089 shares that may not be so released until 90 days after the date of
this Prospectus. The Company intends to register all of the shares of Common
Stock issuable under its stock option plans. In addition, the holders of
approximately 5,858,256 shares of Common Stock will have certain rights to
registration of these shares under the Securities Act. See "Description of
Capital Stock--Registration Rights" and "Shares Eligible For Future Sale."
Unspecified Use of Proceeds. The Company expects to use approximately
$500,000 of the net proceeds from this offering for the repayment of
indebtedness under its revolving line of credit, and approximately $500,000 to
repay certain equipment lease lines. The Company plans to use the remaining
proceeds of this offering for working capital and other general corporate
purposes. The Company may also use a portion of the net proceeds from the
offering to acquire or invest in complementary businesses, products or
technologies, although the Company has no present plans or commitments and is
not currently engaged in any negotiations with respect to such transactions.
Consequently, the Company will have significant discretion as to the use of
virtually all of the net proceeds to the Company from this offering. Pending
such uses, the Company intends to invest the net proceeds to the Company from
this offering in interest-bearing deposit accounts, certificates of deposit or
similar short-term, investment-grade financial instruments. See "Use of
Proceeds."
Control by Existing Stockholders. Upon the completion of this offering, the
current officers, directors and their affiliates and five percent stockholders
will beneficially own approximately 37.8% of the outstanding shares of the
Common Stock of the Company. Accordingly, such persons, if they act together,
likely will have effective control over the Company through their ability to
control the election of directors and all other matters that require action by
the Company's stockholders, irrespective of how other stockholders may vote.
Such persons could prevent or delay a change in control of the Company, which
may be favored by a majority of the remaining stockholders. The ability to
prevent or delay a change in control of the Company also may have an adverse
effect on the market price of the Common Stock. See "Management--Executive
Officers and Directors," "Principal and Selling Stockholders" and "Description
of Capital Stock."
Effect of Anti-takeover Provisions. Certain provisions of the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws") and
certain provisions of Delaware law following the offering could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that investors might be willing to pay
in the future for the Company's Common Stock. These provisions will permit the
issuance of "blank check" preferred stock by the Board of Directors without
stockholder approval, require super-majority
12
<PAGE>
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."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $12.00 per share, after deducting the estimated underwriting
discount and offering expenses payable by the Company, are estimated to be
approximately $27.1 million ($29.2 million if the Underwriters' over-allotment
option is exercised in full). The Company will not receive any proceeds from
the sale of the shares being sold by the Selling Stockholders.
The Company expects to use approximately $500,000 of the net proceeds for
the repayment of indebtedness under its revolving line of credit, which bears
interest at the bank's prime interest rate plus 2% and is due in May 1997, and
approximately $500,000 to repay certain equipment lease lines with effective
interest rates ranging between 15% and 27% and with expiration dates through
1999. The Company plans to use the remaining net proceeds of this offering for
working capital and other general corporate purposes. The Company also may use
a portion of the net proceeds from the offering to acquire or invest in
complementary businesses, products or technologies, although the Company has
no present plans or commitments and is not currently engaged in any
negotiations with respect to such transactions. Pending such uses, the Company
intends to invest the net proceeds in interest-bearing deposit accounts,
certificates of deposit or similar short-term, investment grade financial
instruments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
during any period for which financial information is provided in this
Prospectus. Under the terms of the Company's revolving line of credit, the
Company currently is prohibited from paying dividends on its Common Stock. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future even after the
prohibition on paying dividends under the revolving line of credit is no
longer effective.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization assuming the
conversion of all outstanding Preferred Stock and Debentures into Common
Stock, the exercise of all outstanding warrants to purchase shares of Common
Stock on a cashless basis and a change in the par value of the Company's
capital stock and (iii) the pro forma capitalization as adjusted to give
effect to the sale of the 2,500,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $12.00 per share
(after deducting the estimated underwriting discount and offering expenses)
and application of the net proceeds therefrom and the exercise of options to
purchase 15,869 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; 7,694,945 shares issued and
outstanding pro forma; 10,210,814 shares
issued and outstanding pro forma as adjusted
(3)......................................... 1,005 8 10
Additional paid-in capital................... 889 10,894 37,951
Deferred Compensation........................ (425) (425) (425)
Accumulated deficit.......................... (13,048) (13,048) (13,048)
-------- -------- --------
Total stockholders' equity (deficit)....... (11,579) (2,571) 24,488
-------- -------- --------
Total capitalization..................... $ (2,571) $ (2,571) $ 24,488
======== ======== ========
</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, 1,485,754 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 $24,488,000 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)...... 7,710,814 75.5% $ 9,622,028 24.3% $ 1.25
New investors (1).............. 2,500,000 24.5 30,000,000 75.7 12.00
---------- ----- ----------- -----
Total...................... 10,210,814 100.0% $39,622,028 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by existing stockholders to 6,460,814 shares or
approximately 63.3% (6,093,026 shares or approximately 58.4% 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 41.6% 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 995,668 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 15,869 shares of Common Stock by the Selling
Stockholders at a weighted average exercise price of $0.53 per share (45,062
shares at a weighted average exercise price of $0.90 per share if the
Underwriter's over-allotment option is exercised in full) and (iv) other than
as specifically noted, no exercise of the Underwriters' over-allotment option.
The above computations assume no exercise of options to purchase 1,485,754
shares of Common Stock outstanding as of July 31, 1996 at a weighted average
exercise price of $2.26 per share, except as otherwise noted. To the extent
such options are exercised, there will be further dilution to investors.
15
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1993, 1994
and 1995 and the month ended January 31, 1996 and the balance sheet data at
December 31, 1994 and 1995 and January 31, 1996 are derived from, and should
be read in conjunction with, the audited Financial Statements and Notes
thereto included elsewhere in this Prospectus. The statement of operations
data for the years ended December 31, 1991 and 1992 and the balance sheet data
at December 31, 1991, 1992 and 1993 are derived from the audited financial
statements not included in this Prospectus. The statement of operations data
for the six months ended June 30, 1995 and July 31, 1996 and the balance sheet
data at July 31, 1996 are derived from unaudited financial statements that
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and operating results for such periods. Operating
results for interim periods are not necessarily indicative of results to be
expected for the full years. The Company changed its fiscal year end to
January 31 commencing February 1, 1996. No dividends were paid during the
periods indicated. The data set forth below are qualified in their entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------- MONTH ENDED ----------------
JANUARY 31, JUNE 30, JULY 31,
1991 1992 1993 1994 1995 1996 (1) 1995 (1) 1996 (1)
------- ------- ------- ------- ------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product licensing..... $ 1,969 $ 1,457 $ 1,586 $ 4,394 $ 4,774 $ 329 $2,420 $2,438
Engineering services
and maintenance...... 3,019 3,477 3,655 4,942 5,639 396 2,312 4,650
------- ------- ------- ------- ------- ----- ------ ------
Total revenues....... 4,988 4,934 5,241 9,336 10,413 725 4,732 7,088
------- ------- ------- ------- ------- ----- ------ ------
Cost of revenues:
Product licensing..... 4 122 341 218 143 5 74 65
Engineering services
and maintenance...... 2,171 3,229 5,095 5,457 5,111 564 2,358 3,296
------- ------- ------- ------- ------- ----- ------ ------
Total cost of
revenues............ 2,175 3,351 5,436 5,675 5,254 569 2,432 3,361
------- ------- ------- ------- ------- ----- ------ ------
Gross margin........ 2,813 1,583 (195) 3,661 5,159 156 2,300 3,727
------- ------- ------- ------- ------- ----- ------ ------
Operating expenses:
Research and
development.......... 1,699 2,388 1,766 1,767 2,088 127 1,077 1,038
Sales and marketing... 1,667 1,904 1,656 1,878 2,142 156 1,080 1,164
General and
administrative....... 572 1,035 1,048 1,000 1,293 119 613 1,086
------- ------- ------- ------- ------- ----- ------ ------
Total operating
expenses............ 3,938 5,327 4,470 4,645 5,523 402 2,770 3,288
------- ------- ------- ------- ------- ----- ------ ------
Income (loss) from
operations............ (1,125) (3,744) (4,665) (984) (364) (246) (470) 439
Interest expense, net.. 3 49 96 118 176 17 65 167
------- ------- ------- ------- ------- ----- ------ ------
Income (loss) before
provision for income
taxes................. (1,128) (3,793) (4,761) (1,102) (540) (263) (535) 272
Provision for income
taxes................. 35 58 63 124 99 7 62 50
------- ------- ------- ------- ------- ----- ------ ------
Net income (loss)...... $(1,163) $(3,851) $(4,824) $(1,226) $ (639) $(270) $ (597) $ 222
======= ======= ======= ======= ======= ===== ====== ======
Pro forma net income
(loss) per share (2).. $ (0.08) $ 0.04
======= ======
Shares used in pro
forma per share
calculation (2)....... 7,085 8,637
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- JANUARY 31, JULY 31,
1991 1992 1993 1994 1995 1996 1996
------- ------- -------- -------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 931 $ 540 $ 771 $ 393 $ 1,184 $ 722 $ 194
Working capital
(deficit)............. 790 (1,734) (2,447) (3,192) (2,307) (2,608) (2,630)
Total assets........... 2,812 2,404 3,221 3,541 4,185 4,041 3,960
Long-term obligations.. 156 1,628 2,296 2,594 4,299 4,286 4,202
Redeemable Preferred
Stock................. 2,589 2,789 6,422 6,645 5,931 5,932 5,938
Total stockholders'
equity (deficit)...... (1,435) (5,486) (10,528) (11,941) (11,596) (11,867) (11,579)
</TABLE>
- -------------
(1) The Company changed its fiscal year-end to January 31, beginning February
1, 1996.
(2) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net income (loss) per share and the number of
shares used in the pro forma per share calculation.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the discussions in
this Prospectus contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors" as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
The Company, founded in April 1982, is a leading provider of software-based
embedded imaging systems to original equipment manufacturers ("OEMs") of
digital document products. The Peerless family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively.
As of July 31, 1996, the Company had an accumulated deficit of approximately
$13.0 million. The Company changed its fiscal year-end from December 31 to
January 31, commencing February 1, 1996, in order to better align the timing
of the Company's financial reporting with the timing of receipt of royalty
information by the Company from its OEMs. No analysis is provided for the
month ended January 31, 1996. Information for the six months ended July 31,
1996 is compared with the information for the six months ended June 30, 1995
in accordance with the Company's historical accounting presentation. See "Risk
Factors--History of Operating Losses; Accumulated Deficit" and "--
International Activities."
The Company's revenues are comprised of product licensing fees and
engineering services and maintenance fees related to the Company's embedded
imaging software and supporting electronics technologies provided to OEMs
located primarily in the United States and Japan. The Company's major
customers currently include, among others, Adobe and OEM customers Canon, IBM
and Xerox. A significant portion of the Company's revenues in recent years has
been concentrated with a limited number of OEM customers, and the Company
anticipates that its revenues in the future will be similarly concentrated. In
1995 and the six months ended July 31, 1996, the Company's top four OEM
customers accounted for approximately 74% and 55% of total revenues,
respectively. See "Risk Factors--Concentration of OEM Customers."
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time licensing fees. Recurring licensing revenues
are derived from per unit fees paid quarterly by the Company's OEMs upon
shipment or manufacture of products incorporating the Company's technology.
Recurring licensing revenues are derived to a lesser extent from arrangements
in which the Company enables its products to be used with third-party
technology such as certain arrangements with Adobe. The Company's one-time
licensing fees are paid by OEMs for access to the Company's software, which in
turn generates recurring licensing revenues if the software is incorporated
into OEM products that are subsequently developed and shipped.
The Company's engineering services revenues are derived primarily from
adapting the Company's software and supporting electronics to specific OEM
requirements. The Company provides its engineering services to OEMs seeking an
embedded imaging solution for their digital document products. The Company's
maintenance revenues are derived from software maintenance agreements.
Maintenance revenues constitute a very small portion of engineering services
and maintenance revenues.
The Company recognizes its recurring product licensing revenues on a royalty
basis generally when the Company's OEM customers ship products that
incorporate the Company's technology. The Company recognizes its one-time
licensing revenues for software licenses upon shipment and acceptance by the
Company's OEMs. The Company recognizes engineering services revenues over the
course of the development work on a percentage-of-completion basis.
Maintenance revenues are recognized ratably over the term of the maintenance
contract, which generally is twelve months. Licensing revenues are recognized
in accordance with Statement of Position 91-1 "Software Revenue Recognition."
The recurring product
17
<PAGE>
licensing revenues reported by the Company are dependent on the timing and
accuracy of product sales reports received from the Company's OEM customers.
These reports are provided only on a calendar quarter basis and, in any event,
are subject to delay and potential revision by the OEM. Therefore, the Company
is required to estimate all of the recurring product licensing revenues for
the last month of each quarter and to further estimate all of its quarterly
revenues from an OEM when the report from such OEM is not received in a timely
manner. As a result, the Company may be unable to estimate such revenues
accurately prior to public announcement of the Company's quarterly results. In
such event, the Company subsequently may be required to restate its recognized
revenues or adjust revenues for subsequent periods, which could have a
material adverse effect on the Company's operating results and the price of
the Company's Common Stock. See "Risk Factors--Potential Fluctuations in
Quarterly Results; Seasonality; Revenue Reporting."
The Company frequently receives payments from its OEMs in advance of
recognition of the associated revenues, and, in many cases, the Company
receives guaranteed minimum payments in advance of per unit licensing
royalties. These amounts are recorded as deferred revenue. Deferred revenue
consists of prepayments of product licensing revenues and payments received in
advance for engineering services and maintenance to be performed.
Revenues from sales to the Company's customers outside the United States
accounted for 26%, 41% and 41% of the Company's revenue for the fiscal years
ended December 31, 1994 and December 31, 1995 and the six months ended July
31, 1996, respectively. Therefore, the Company is substantially dependent on
its international business activities. Although all of the Company's contracts
are, and the Company expects that its future contracts will be, denominated in
U.S. dollars, there can be no assurance that its contracts with international
OEM customers in the future will be denominated in U.S. dollars. In the event
that one or more contracts are denominated in foreign currencies, the Company
will be subject to additional risks associated with currency fluctuations,
which could have a material adverse effect on the Company's operating results.
See "Risk Factors--International Activities."
The Company has a history of operating losses, including a cumulative net
loss of $6.7 million for the three year period ending December 31, 1995 and a
net loss of $48,000 for the seven months ended July 31, 1996, which have
contributed to an accumulated deficit of approximately $13.0 million at July
31, 1996. Although the Company has reported net income for the fourth quarter
ended December 31, 1995 and for the six months ended July 31, 1996, there can
be no assurance that the Company will achieve taxable income in the future.
Therefore, the Company believes that deferred tax assets, including net
operating losses and tax credit carry-forwards, may not be utilized in the
near term and has recorded a valuation allowance for the full amount of the
net deferred income tax asset.
The Company anticipates that the sale of the Common Stock in this offering
will constitute a "change in ownership" as described in Section 382 of the
Internal Revenue Code, which will limit the utilization of net operating
losses and tax credit carry-forwards in future periods.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statements of operations to
total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------------------
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------------- ------------------
JUNE 30, JULY 31,
1993 1994 1995 1995 1996
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product licensing................. 30.3% 47.1% 45.8% 51.1% 34.4%
Engineering services and mainte-
nance............................ 69.7 52.9 54.2 48.9 65.6
----- ----- ----- ----- -----
Total revenues.................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Product licensing................. 6.5 2.3 1.4 1.6 0.9
Engineering services and
maintenance...................... 97.2 58.5 49.1 49.8 46.5
----- ----- ----- ----- -----
Total cost of revenues............ 103.7 60.8 50.5 51.4 47.4
----- ----- ----- ----- -----
Gross margin...................... (3.7) 39.2 49.5 48.6 52.6
----- ----- ----- ----- -----
Operating expenses:
Research and development.......... 33.7 18.9 20.0 22.8 14.6
Sales and marketing............... 31.6 20.1 20.5 22.8 16.5
General and administrative........ 20.0 10.7 12.4 13.0 15.3
----- ----- ----- ----- -----
Total operating expenses.......... 85.3 49.7 52.9 58.6 46.4
----- ----- ----- ----- -----
Income (loss) from operations...... (89.0) (10.5) (3.4) (10.0) 6.2
Interest expense, net.............. 1.8 1.3 1.7 1.4 2.4
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes...................... (90.8) (11.8) (5.1) (11.4) 3.8
Provision for income taxes......... 1.2 1.3 1.0 1.3 0.7
----- ----- ----- ----- -----
Net income (loss).................. (92.0)% (13.1)% (6.1)% (12.7)% 3.1%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1995 and July 31, 1996
The Company's total revenues were $7.1 million in the six months ended July
31, 1996 and $4.7 million in the six months ended June 30, 1995. The Company's
product licensing revenues for the six months ended July 31, 1996 and the six
months ended June 30, 1995 remained constant at $2.4 million, with an increase
in recurring licensing revenues being offset by a decrease in one-time
licensing revenues. Recurring licensing revenues increased as a result of an
increase in the number of products incorporating the Company's technology
being shipped by the Company's OEM customers. One-time licensing revenues
decreased on a period-to-period basis due to the unusually large amount of
revenues generated from one-time licensing transactions signed in the earlier
comparative period by the Company's Japanese OEM customers, which the Company
believes was attributable to the then favorable exchange rate. The Company's
engineering services and maintenance revenues for the six months ended July
31, 1996 increased 101% to $4.7 million from $2.3 million in the six months
ended June 30, 1995, primarily due to an increase in monochrome and color
design projects under development. This increased rate of growth in
engineering services and maintenance revenues accounted for the increase in
engineering services and maintenance revenues as a percentage of total
revenues between these comparison periods.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. During this initial phase, the
Company has received 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
19
<PAGE>
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. The Company believes that the
product specifications and development schedules for the initial phase are
nearly complete. The Company does not anticipate incurring significant research
and development expenditures in connection with the completion of these product
specifications and development schedules. However, 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. See "Business--Technology--Technology Partners."
The Company's cost of revenues includes product licensing costs as well as
engineering services and maintenance costs. Cost of engineering services and
maintenance is comprised primarily of salaries and benefits for engineering
personnel and materials, an allocation of corporate facilities overhead and an
allocation of engineering management and administrative staff expenses. Gross
margin as a percentage of total revenues increased to approximately 53% for the
six months ended July 31, 1996 from 49% for the six months ended June 30, 1995.
The gross margin percentage increased despite a change in the mix of revenues
to include a greater proportion of engineering services revenues (which have
lower gross margins than product licensing revenues), as the margins associated
with the engineering services revenues increased significantly between such
periods due to certain projects with unusually low cost of revenues during the
six months ended July 31, 1996. The Company expects that gross margins on
engineering services and maintenance revenues will decrease in future periods
from the level experienced in the six months ended July 31, 1996. Maintenance
costs constitute a very small portion of the engineering services and
maintenance costs.
The Company's research and development expenses are comprised primarily of
employee salaries and benefits, an allocation of engineering management and
administrative staff expenses and an allocation of the corporate facilities
overhead. Research and development expenses decreased slightly to $1.0 million
for the six months ended July 31, 1996 from $1.1 million for the six months
ended June 30, 1995. Research and development expenses decreased slightly in
spite of an increase in research and development headcount, principally
associated with the Company's color development efforts, as this increase was
offset by a decrease in quality assurance expenses relating to research and
development. The Company anticipates that its research and development expenses
may increase in absolute dollars as the Company devotes increased efforts to
its color products, MFP technology, PC-based driver software and new page
description languages.
The Company's sales and marketing expenses are comprised primarily of
employee salaries and benefits, commissions and bonuses, advertising and
promotional expenses, the cost of operating the Japan sales office and an
allocation of the corporate facilities overhead. Sales and marketing expenses
for the six months ended July 31, 1996 increased 8% to $1.2 million from $1.1
million in the six months ended June 30, 1995, primarily due to hiring of
additional sales and marketing personnel and added promotional activities. The
Company anticipates that its sales and marketing expenses may increase in
absolute dollars as additional sales and marketing personnel are hired to allow
the Company to address new market opportunities.
The Company's general and administrative expenses are comprised primarily of
salaries, benefits and bonuses paid to its executive and administrative staff,
fees paid to the Company's external auditors, counsel and other corporate
consultants, and an allocation of the corporate facilities overhead. General
and administrative expenses for the six months ended July 31, 1996 increased
77% to $1.1 million from $613,000 in the six months ended June 30, 1995,
primarily due to the hiring of additional management and administrative
personnel and the enhancement of information systems. The Company anticipates
that its general and administrative expenses may increase in absolute dollars
to the extent its business grows and as a result of becoming a public company.
20
<PAGE>
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.
Years Ended December 31, 1993, 1994 and 1995
The Company's total revenues were $10.4 million in 1995, $9.3 million in 1994
and $5.2 million in 1993. The Company's product licensing revenues increased to
$4.8 million in 1995 from $4.4 million in 1994 and $1.6 million in 1993. The
increase from 1993 to 1994 was primarily due to an increase in recurring
licensing fees as a result of a significant increase in the quantity of
products incorporating the Company's technology shipped by the Company's OEM
customers. The increase from 1994 to 1995 was primarily due to a number of one-
time software licenses that were entered into during the period. The Company's
engineering services and maintenance revenues increased to $5.6 million in 1995
from $4.9 million in 1994 and $3.7 million in 1993. The increase from 1993 to
1994 and from 1994 to 1995 was primarily due to additional custom design
projects.
The Company's gross margin as a percentage of total revenues increased to 50%
in 1995 from 39% in 1994, which had increased from (4)% in 1993. These
increases were due primarily to a greater percentage of the revenues being
derived from product licensing fees in 1994 as compared to 1993, as well as
increases in the gross margin associated with engineering services and
maintenance revenues in both 1994 and 1995. In addition, cost of revenues has
decreased as products on which the Company paid a per unit royalty were phased-
out, and as engineering services costs were leveraged over a larger number of
design projects. Maintenance costs constituted a very small portion of
engineering services and maintenance costs.
The Company's research and development expenses increased to $2.1 million in
1995 from $1.8 million in 1994 and $1.8 million in 1993. The increase from 1994
to 1995 was primarily due to the initiation of the color technology development
efforts.
The Company's sales and marketing expenses increased to $2.1 million in 1995
from $1.9 million in 1994 and $1.7 million in 1993. The increase from 1993 to
1994 was primarily due to the growth of the Japan sales activity as OEM
accounts in Japan were added. The increase from 1994 to 1995 was primarily due
to the hiring of additional sales staff and added trade show and promotional
activity as the Company's color technology development efforts were announced.
The Company's general and administrative expenses increased to $1.3 million
in 1995 from $1.0 million in 1994 and $1.0 million in 1993. The increase from
1994 to 1995 was primarily due to hiring of additional management personnel.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents the unaudited quarterly statements of
operations for the Company both in absolute dollars and as a percentage of
total revenues. These statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation of the information for the periods
presented. The operating results for any quarter should not be relied upon as
indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (1)
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, APRIL 30, JULY 31,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product licensing..... $1,224 $1,196 $ 804 $1,550 $1,013 $1,425
Engineering services
and maintenance...... 1,146 1,166 1,489 1,838 2,318 2,332
------ ------ ------ ------ ------ ------
Total revenues....... 2,370 2,362 2,293 3,388 3,331 3,757
------ ------ ------ ------ ------ ------
Cost of revenues:
Product licensing..... 43 31 29 41 33 32
Engineering services
and maintenance...... 1,147 1,211 1,341 1,411 1,615 1,681
------ ------ ------ ------ ------ ------
Total cost of
revenues............ 1,190 1,242 1,370 1,452 1,648 1,713
------ ------ ------ ------ ------ ------
Gross margin............ 1,180 1,120 923 1,936 1,683 2,044
------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development.......... 512 565 601 410 422 616
Sales and marketing... 483 597 516 546 597 567
General and
administrative....... 304 309 331 346 500 586
------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,299 1,471 1,448 1,302 1,519 1,769
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (119) (351) (525) 634 164 275
Interest expense, net... 35 30 47 66 71 96
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes.................. (154) (381) (572) 568 93 179
Provision for income
taxes.................. 14 48 21 16 18 32
------ ------ ------ ------ ------ ------
Net income (loss)....... $ (168) $ (429) $ (593) $ 552 $ 75 $ 147
====== ====== ====== ====== ====== ======
PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Product licensing..... 51.6% 50.6% 35.1% 45.7% 30.4% 37.9%
Engineering services
and maintenance...... 48.4 49.4 64.9 54.3 69.6 62.1
------ ------ ------ ------ ------ ------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------
Cost of revenues:
Product licensing..... 1.8 1.3 1.3 1.2 1.0 0.9
Engineering services
and maintenance...... 48.4 51.3 58.5 41.7 48.5 44.7
------ ------ ------ ------ ------ ------
Total cost of
revenues............ 50.2 52.6 59.8 42.9 49.5 45.6
------ ------ ------ ------ ------ ------
Gross margin............ 49.8 47.4 40.2 57.1 50.5 54.4
------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development.......... 21.6 23.9 26.2 12.1 12.7 16.4
Sales and marketing... 20.4 25.3 22.5 16.1 17.9 15.1
General and
administrative....... 12.8 13.1 14.4 10.2 15.0 15.6
------ ------ ------ ------ ------ ------
Total operating
expenses............ 54.8 62.3 63.1 38.4 45.6 47.1
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (5.0) (14.9) (22.9) 18.7 4.9 7.3
Interest expense, net... 1.5 1.3 2.1 1.9 2.1 2.5
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes.................. (6.5) (16.2) (25.0) 16.8 2.8 4.8
Provision for income
taxes.................. 0.6 2.0 0.9 0.5 0.5 0.9
------ ------ ------ ------ ------ ------
Net income (loss)....... (7.1)% (18.2)% (25.9)% 16.3% 2.3% 3.9%
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) The Company changed its fiscal year-end to January 31 commencing February
1, 1996. No information is included for the month ended January 31, 1996.
22
<PAGE>
Product licensing fees decreased in the quarters ended June 30, 1995 and
September 30, 1995 due to the phase-out of a product by one of the Company's
primary OEMs. The increase in the quarter ended December 31, 1995 included a
one-time license fee of approximately $400,000. The decrease in the quarter
ended April 30, 1996 reflects the non-recurrence of such license fees and a
phase-out of a product by one of the Company's OEMs. The increase in the
quarter ended July 31, 1996 reflects an increase in the number of products
incorporating the Company's technology being shipped by the Company's OEM
customers.
The Company's research and development expenses in the quarter ended July
31, 1996 increased due to increased research and development headcount,
principally due to the Company's color technology development efforts.
The Company's sales and marketing expenses increased in the quarter ended
June 30, 1995 due to heightened public relations activities and increased
travel expenses.
The Company in the past has experienced, and in the future may experience,
significant fluctuations in quarterly operating results that have been and may
be caused by many factors including: initiation or termination of arrangements
between the Company and its existing and potential OEM customers; the timing
of introductions of new products or product enhancements by the Company, its
OEMs, and their competitors; the phase-out or early termination of OEM
products incorporating the Company's technology; the size and timing of
engineering services orders, one-time software licensing transactions and
recurring licensing fees; the size and timing of and fluctuations in end-user
demand for the OEM products incorporating the Company's technology; inventory
of digital document products carried by the OEM customers' distributors that
exceeds current or projected end-user demand; performance by the Company and
its OEM customers pursuant to their plans and agreements; seasonal trends; the
mix of services provided or products sold and the gross margins attributable
to such services or products; competition and pricing; customer order
deferrals in anticipation of new products or product enhancements; industry
and technology developments; changes in the Company's operating expenses;
software bugs, product delays or other product quality problems; currency
fluctuations and general economic conditions. For example, in recent quarters
the Company's quarterly revenues have been significantly affected by the
timing of one-time licensing transactions and by decreases in recurring
product licensing revenues resulting from the phase-out by OEMs of products
incorporating the Company's technology. The Company expects that its operating
results will continue to fluctuate significantly in the future as a result of
these and other factors. A substantial portion of the Company's costs and
expenses is related to costs of engineering services and maintenance, other
personnel costs, product development, facilities and marketing programs. The
level of spending for such costs and expenses cannot be adjusted quickly and
is based, in significant part, on the Company's expectations of future
revenues and anticipated OEM commitments. If such commitments do not
materialize or are terminated or, in any event, if revenues are below
expectations, the Company's quarterly and annual operating results will be
adversely affected, which could have a material adverse effect on the price of
the Company's Common Stock. See "Risk Factors--Potential Fluctuations in
Quarterly Results; Seasonality; Revenue Reporting."
LIQUIDITY AND CAPITAL RESOURCES
Since 1990, the Company has funded its operations and investments in
equipment primarily through the private sale of Preferred Stock totaling
approximately $6.0 million, convertible debt financing totaling approximately
$3.1 million, deferred revenue, equipment leases of approximately
$2.2 million, cash advances from a development partner and bank borrowing.
Since inception, the Company has received approximately $2.0 million from the
development partner, and as of July 31, 1996, the Company had utilized,
through royalty and other arrangements, approximately $1.0 million of the $2.0
million advance. The Company has a revolving line of credit, collateralized by
all of the Company's assets other than those subject to lease financing and
other loan agreements. The maximum amount available under the line of credit
is the lesser of $1.5 million or a percentage of the Company's outstanding
accounts receivable and current royalty receivables. The interest rate on this
line of credit is the bank's prime rate (8.25% at July 31, 1996) plus 2%.
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In fiscal 1993, 1994, 1995 and the six months ended July 31, 1996, the
Company's net cash used by operating activities was $1.5 million, $571,000,
$1.3 million and $902,000, respectively. During the six months ended July 31,
1996, net cash used by operating activities consisted primarily of a decrease
in deferred revenues offset in part by an increase in accounts payable and by
net income.
In fiscal 1993, 1994, 1995 and the six months ended July 31, 1996, the
Company's investing activities have consisted primarily of purchases of
property and equipment. Property and equipment expenditures totaled $79,000,
$39,000, $47,000 and $50,000 for such periods, respectively. The Company's
principal commitments, as of July 31, 1996, were $2.9 million on the lease on
its premises in El Segundo, $500,000 of outstanding principal on its revolving
line of credit and $798,000 on its capital and operating leases.
Cash and cash equivalents decreased by $528,000 from January 31, 1996 to
July 31, 1996 due to increased cash used for operations and in preparation for
the initial public offering. Accounts receivable remained constant during this
period, despite an increase in revenues, due to a $1.2 million reduction in
deferred revenues between these periods as advance payments for engineering
services and license fees were recognized as revenues. Net property and
equipment increased by $205,000 primarily as a result of equipment acquired
under capital leases. Accounts payable increased by $224,000 reflecting
increased costs of operations and an extension of payments. During this
period, the Company borrowed approximately $500,000 against its line of credit
to cover cash requirements.
Cash and cash equivalents increased by $791,000 from December 31, 1994 to
December 31, 1995 resulting from the issuance of $3.1 million of convertible
debentures, repayment of the Company's line of credit, and cash used by
operations. Accounts receivable decreased over this period, despite an
increase in revenues, due to a $767,000 reduction in deferred revenues between
these periods as advance payments for engineering services and license fees
were recognized as revenues. Unbilled receivables increased by $200,000 during
this period due to timing differences between revenue recognition and
milestone billings on engineering services contracts. Net property and
equipment increased by $210,000 primarily as a result of equipment acquired
under capital leases. Accounts payable decreased by $117,000, despite
increased revenues, reflecting a paydown of payables due to an improved cash
position.
At July 31, 1996, the Company had $194,000 in cash and cash equivalents,
$751,000 available under its revolving line of credit and $431,000 available
under its equipment lease line. The Company's working capital deficit as of
July 31, 1996 was $2.6 million, principally due to the Company's $2.8 million
of deferred revenue. The Company intends to repay its line of credit and
certain equipment lease lines with a portion of the net proceeds from this
offering. The Company currently believes that the net proceeds from the sale
of the Common Stock offered by the Company hereby together with funds from
current and anticipated operations will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next 18
months.
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BUSINESS
OVERVIEW
The Company is a leading provider of software-based embedded imaging systems
to OEMs of digital document products. Digital document products include
printers, copiers, fax machines, scanners and emerging color products, as well
as MFPs that perform a combination of these imaging functions. In order to
process digital text and graphics, digital document products rely on a core
set of imaging software and supporting electronics, collectively known as an
embedded imaging system. The Peerless family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively. The Company markets its solutions directly to customers
such as Adobe, Canon, Digital Equipment Corporation, IBM and Xerox.
INDUSTRY BACKGROUND
Embedded Imaging Systems
Today's office environment is increasingly dependent on a variety of
electronic imaging products such as printers, copiers, fax machines and
scanners, collectively known as digital document products. These products also
are becoming common in the home environment. Historically, most electronic
imaging products in the office environment have been standalone, monochrome
(black-and-white) machines, based on analog technology and dedicated to a
single print, copy, fax or scan function. However, with the proliferation of
personal computers, desktop publishing software and network computing,
documents increasingly are being created, stored and transmitted digitally,
thereby creating the need for digital document production.
Digital documents are becoming increasingly complex and may include digital
text, line art or photographic images. In order to process and render these
documents, digital document products rely upon a core set of imaging software
and supporting electronics collectively known as an embedded imaging system.
With advances in digital imaging engines such as laser printing engines in the
mid-1980s, a common imaging technology foundation for multiple market sectors
is emerging. To date, a majority of embedded imaging systems have been
developed and produced internally by digital document product manufacturers
such as Hewlett-Packard ("HP"), Xerox and Canon. The market for embedded
imaging systems represents a small portion of the worldwide market for digital
document products which the Company estimates, based in part upon data and
projections provided by International Data Corporation ("IDC"), to have been
approximately $24 billion in 1995.
Developments in the Digital Document Products Market
Rapid changes in technology and end-user requirements have created increased
challenges for digital document product manufacturers, particularly in the
area of embedded imaging systems. These changes include increased technical
complexity, the increased role of networking, the emergence of MFPs and the
demand for color imaging. As a result, OEMs increasingly are relying on
outside embedded imaging systems suppliers to provide their embedded imaging
system solutions.
Increased Technical Complexity. Initially, the software written for embedded
imaging systems supported only monochrome, single-function, low-resolution
capabilities. This software was relatively simple and resided on a low-end 8-
bit microprocessor platform. However, as technology and end-user requirements
have evolved, the embedded imaging task has become significantly more complex.
Today, digital imaging engines operate at resolutions of 600 dots per inch or
more, require the support of a variety of document handling options, operate
at increased speeds and are beginning to offer high-quality color output. In
addition, computers and applications software create increasingly
sophisticated documents that incorporate complex graphical content. The data
files for these digital documents can be very large and, if left in raw form,
can overwhelm the memory and processing power of the digital document product.
In response, embedded imaging systems have
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evolved from 8-bit to 32-bit platforms that often must employ special
techniques to manage large data files and minimize memory costs. Most embedded
imaging systems use compression techniques to reduce the size of data files,
which can result in reduced image quality. The increased complexity of digital
document products, the rapid pace of technological change and the increased
memory requirements have created increased challenges for digital document
product manufacturers, particularly in the core areas of image processing and
operating system architecture.
Increased Role of Networking. Within the office environment, digital
document products increasingly are deployed in a networked configuration.
According to projections by IDC, 62% of laser printers sold in the United
States in 1995 were estimated to have been connected to enterprise networks,
and this percentage is expected to increase to 78% by 1999. Because multiple
local area network protocols and network operating systems are deployed in the
corporate network environment, networked digital document products must
support a broad array of networking technologies to maximize accessibility by
various user groups. The network environment is also changing rapidly and
becoming increasingly complex, with a growing requirement for remote network
management that extends across both local area networks and wide area
networks. In addition, because the majority of office digital document
products are networked, the image processing intelligence may be partitioned
and located anywhere within the network: at the site of document or image
origination; at a server; or, as is typically the case today, inside the
digital document product itself. In some instances, such as printing to a
remote location, it can be advantageous to perform image pre-processing and
compression at the document origination site, prior to transmission over
usage-sensitive facilities. In order to accommodate the emerging needs of the
networked office environment, an optimal embedded imaging system must employ a
modular architecture capable of serving and managing distributed corporate
resources.
Emergence of Multifunction Products. The advent of MFPs has eroded the
boundaries between the previously distinct printer, copier, fax and scanner
market sectors. MFPs, ranging from small home products to large office
devices, offer several of these functions for significantly less cost than
would otherwise be incurred by purchasing these products separately. Each of
the dominant vendors in the printer, copier and fax markets now has introduced
MFPs, which have required each of them to broaden its imaging expertise. At
the same time, the need for concurrent processing of multiple digital document
product functions has created the need for real-time, multitasking operating
system support.
Demand for Color Imaging. Although many office computers have color
displays, and the graphical content available to office users via the World
Wide Web makes heavy use of color, most digital document products found in
today's office environment generate monochrome output. In the 1990s, color
laser printers have been introduced into the office marketplace. Many of these
have been limited by unit costs in excess of $7,500, printing speeds measured
in minutes per page for complex images, and output that does not support
photoquality requirements. In the small office/home office market, most inkjet
printers now support color but are typically limited by output speeds of one
or less pages per minute. Although digital document engine manufacturers have
developed contone (photoquality) hardware technology that is now capable of
supporting high speed photoquality color printing, the output produced by
today's digital document products, in many cases, continues to be limited by
existing embedded imaging systems. Today's embedded imaging systems are
challenged by the transition from monochrome to contone color output because
the simultaneous implementation of four planes of color coupled with up to
eight bits per pixel increases the digital document data stream by a factor of
up to thirty-two. As a result, there is need for embedded imaging systems that
can support the accelerated performance requirements of color output.
Increased Reliance on Outsourcing. In addition to the engineering challenges
generated by changing technology, digital document product manufacturers
increasingly are subject to a variety of market pressures. Competition in the
marketplace, coupled with end-user demand for greater performance at reduced
cost and shortening product life cycles, has created a growing need to reduce
time-to-market and engineering costs. Digital document product manufacturers
increasingly are electing to outsource imaging software and supporting
electronics design to embedded imaging systems suppliers in order to include
new imaging technologies and minimize development time and cost. The increased
role of networking, the emergence of
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MFPs, the demand for color imaging and the increased technical complexity
associated with products meeting these market changes have accelerated this
trend towards outsourcing. As digital document product manufacturers move to
incorporate imaging technologies from outside suppliers, their internal
resources are freed to focus on their core competencies in product
differentiation, marketing and distribution. Additionally, there has been no
established comprehensive embedded imaging system standard for the digital
document product industry to date. However, as the digital document product
market sectors converge and as the complexity of imaging technology
intensifies, the Company believes digital document product manufacturers will
realize a significant competitive advantage by utilizing a single open
embedded imaging system standard across all digital document product market
sectors.
THE PEERLESS SOLUTION
Peerless is a leading provider of embedded imaging systems for the digital
document product market. The Company's family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively.
The Company's embedded imaging system solution is based on its proprietary
object-based image processing technology, which can reduce the size of digital
document product imaging files with virtually no noticeable loss of visual
quality. This proprietary technology enables the Company's OEM customers to
reduce memory cost and increase print quality and speed while eliminating or
reducing the need for the use of a compression technology. When optimized,
this component of the embedded imaging system can provide significant cost
savings and performance differentiation to digital document product
manufacturers.
The Company has designed its embedded imaging technology with a modular
architecture that addresses a broad spectrum of digital document product
technologies and that may be tailored to an individual OEM's requirements.
Peerless offers its OEMs the flexibility to add functionality, such as
networking support, languages or multifunction features and, in the future,
color, to their digital document products as their needs dictate. Peerless
also offers engineering services to allow OEMs to outsource the development of
the entire embedded imaging system for a digital document product. As a
result, the Company provides OEMs with the ability to offer a broadened array
of digital document products, further leveraging their core investment in the
Peerless imaging solution. The Company's imaging solutions include the
following technologies and services:
Real-time, Scalable, Multitasking and Distributed Operating System. The
Company has designed its real-time, 32-bit PeerlessPage Imaging Operating
System and supporting technology to accelerate image processing and to enhance
resolution. The scalable nature of the Company's technology enables it to
serve both the low-cost and high-performance sectors of the market. As a
result, the Company's solution has been licensed for a wide range of
applications, from personal printers to shared high speed digital document
products. The multitasking operating system employed in the Peerless imaging
solution also enables the Company to manage concurrent processing of digital
document product tasks for the MFP marketplace. Furthermore, the Peerless
imaging solution may be implemented to operate in a distributed fashion,
allowing for portions of the imaging processing task to take place in the
originating host computer, in the digital document product, or elsewhere in
the network. As a result, Peerless technology provides OEMs with the
flexibility to offer a range of performance and configuration options.
Standards-Based Language Offerings. The Company provides its OEMs with page
description languages ("PDLs") that conform to the most widely used standards
today, Adobe's PostScript Software and Hewlett-Packard's Printer Control
Language ("PCL"). The Company offers PeerlessPrint technology, which emulates
Hewlett-Packard's PCL. The Company also cooperates with Adobe to deliver
Adobe's PostScript Software. As a result, the Company's OEMs are able to
obtain a complete imaging solution, including PDLs, from a single source. In
addition, Peerless is developing a PC-based printing language, WinEXPRESS.
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ASIC Solutions. The Company designs application specific integrated circuit
("ASIC") solutions for the digital document product marketplace that provide a
silicon-based implementation of key components of its imaging software. The
Company has designed an integrated processor combining its basic digital
document product functionality with an industry-standard 32-bit
microprocessor. For the high-performance sector of the market, the Company
offers specialized co-processors that accelerate the Peerless imaging software
and incorporate controller functionality and imaging features to provide both
cost savings and performance enhancements.
Networking Solutions. The Company has designed a standardized networking
interface, the Peerless Standard Input/Output ("PSIO") interface, to enable
its digital document product OEMs to reduce custom development costs for their
networking solutions. In addition, Peerless supports a broad array of
networking protocols, allowing its OEM customers to address the majority of
end-user networking requirements. To accommodate the need for remote network
management of digital document products over LANs and across wide area
networks, including intranets, the Company supplies management information
block ("MIB") tables that may be utilized by open industry-standard network
management systems.
Engineering Services. For those OEMs that wish to outsource the development
of some or all of the embedded imaging system for a digital document product,
the Company offers engineering services to design a comprehensive solution.
This can include controller design and custom engineering for vendor-specific
features that complement the Company's standard imaging solutions.
PEERLESS STRATEGY
The Company's objective is to become the leading supplier of embedded
imaging systems technology for digital document products. Key elements of the
Company's strategy to accomplish this objective are as follows:
Maintain and Enhance Market Leadership Position. The Company's standardized
embedded imaging system has been adopted by major digital document product
vendors such as Canon, Digital Equipment Corporation, IBM and Xerox. The
Company believes that OEMs increasingly are demanding broad expertise and a
common embedded imaging systems foundation from embedded systems suppliers in
order to accelerate time-to-market and to allow them to focus on their core
competencies. The Company believes that its expertise and technology meet
these demands and intends to expand its customer base and assist its new and
existing OEMs in extending their product lines into new market sectors,
thereby achieving wider market penetration of the Company's family of imaging
solutions. The Company believes that its imaging technology can be extended to
additional markets other than digital document products and may pursue such
markets as they evolve.
Extend Technology Leadership. The Company's strategy is to continue to
introduce embedded imaging technology innovations designed to increase
performance, reduce cost and address a broader range of emerging digital
document product requirements, including MFP and color applications.
Furthermore, the Company's goal is to establish certain basic components of
its embedded imaging system solution, notably its imaging operating system and
its PSIO interface, as de facto standards for the digital document product
industry. The Company believes it can achieve reduced costs for its OEM
customers through multivendor acceptance of its standardized solutions.
Develop and Enhance Strategic Relationships. The Company intends to develop
and enhance its relationships with key participants in the digital document
product market. For example, the Company is a licensed third-party co-
developer of Adobe. The Company provides a high-performance, integrated Adobe
PostScript solution which permits its OEM customers to benefit from the entire
family of the Company's imaging products in a multiple language printing
environment. Adobe, as the sole limited partner of Adobe Ventures, L.P.,
currently has a significant equity position in the Company. See "Principal and
Selling Stockholders."
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Extend Product Line. The Company targets both the high-performance and the
low-cost sectors of the digital document product market. For the high-
performance sector, the Company focuses on direct OEM relationships with
digital document product vendors by offering its high-performance family of
imaging products complemented by semi-customized and/or turnkey solutions. The
Company is also extending its high-performance products into the MFP and, in
the future, color markets. For the low-cost sector, the Company has designed
ASICs that contain a standardized, basic set of document imaging software
coupled with a microprocessor core provided by a semiconductor manufacturer.
These ASICs are manufactured by companies such as Motorola, which market these
semiconductor solutions directly to OEMs addressing the low-cost sector of the
digital document product market.
Leverage Engineering Services. The Company provides engineering services to
its OEMs, when requested, to provide comprehensive solutions or to customize
the Company's technology in accordance with specific needs. In doing so, the
Company distinguishes itself from those third-party systems providers that do
not have the ability to provide comprehensive solutions and must limit their
sales to licensing of existing, generic technology. By providing engineering
services, the Company enhances its embedded imaging systems expertise which it
can then use to improve the technology for its standard products.
Implementation of the Company's strategy is subject to numerous risks and
uncertainties. See "Risk Factors--Dependence on Market Success of Third
Parties," "--Risks Associated with Technological Change; Dependence on the
Digital Document Product Market," "--Risks Associated with Product
Development; Product Delays," "--Risks Associated with Developing Markets" and
"--Competition."
TECHNOLOGY
The Company strives to develop for the embedded imaging systems marketplace
unique technologies that provide meaningful improvements in performance and
cost for Peerless' OEMs. The Company incorporates complementary technologies,
or makes its technologies compatible with third-party technologies, in order
to provide its customers with a more comprehensive imaging solution.
Object-Based Image Processing. Most embedded imaging systems utilize similar
methods of processing document imaging information. They convert a file that
represents a document page into a bitmap and then process all page elements as
a collection of pixels. Because bitmaps generate large files, the image
processing task can become time-consuming, requiring subsequent document pages
to be stored in memory while previous pages are being processed. To
accommodate memory limitations, file compression technologies are often
utilized. These compression technologies frequently result in a loss of
clarity and detail in the printed document and require significant processing
power.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a page image as a collection of pixels, the Peerless
object-based image processing technology recognizes basic imaging elements in
the document, differentiating between text, line art and photographs much as
the human eye does. Peerless' software then creates a display list of image
objects as an intermediate representation of the document to be printed. This
display list is a more concise means of representing the imaging information
of the document, enabling complex imaging data to be processed more quickly
and with less memory, typically without resorting to compression techniques
that degrade the image. For high-performance applications, the display list
can be processed in real-time with assistance from a Peerless-designed
graphics co-processor embedded in the digital document product. Because
Peerless technology can enable the page image to be processed in real-time,
concurrent with the transmission of the document print file, memory
requirements can be reduced and performance can be enhanced. Furthermore, the
image quality or resolution can be reduced to accommodate limitations in the
digital document product's memory, or progressively enhanced by installation
of additional digital document product memory. The Company's object-based
image processing technology provides more significant benefits as the image
processing workload increases, which occurs with increased resolution or a
transition from monochrome to color. The Company was recently issued two
patents covering certain aspects of its object-based imaging approach.
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Systems Architecture. Many embedded imaging systems in use today were custom
designed for a specific range of digital document product imaging requirements
in dedicated applications. In contrast, the Company's imaging solution
implements a general-purpose imaging architecture. The Company has developed
standardized interfaces for the Company's family of solutions that enable the
Peerless imaging solution to be ported to a variety of platforms, languages
and applications. For example, the standardized PeerlessPage interface
provides the ability to support multiple printing languages, and the
PeerlessPage Imaging Operating System is both platform- and device-independent
and able to accommodate a variety of print engines and controller
architectures. The Company has also developed an applications interface that
enables the support of features such as spooling, stored macros, stored forms,
electronic collation and stapling.
The Company's architecture employs a modular and layered structure to
accommodate segmentation of the Peerless imaging solution. The Company
believes that this modular architecture will become increasingly important to
its competitive position as the imaging industry evolves. For example, the
ability to partition portions of the Peerless embedded imaging solution into
separate modules that can reside in independent locations on the network
allows the Company to address emerging applications such as host-based
printing.
Technology Partners. As part of its technology strategy, the Company has
established relationships that permit it to offer to its customers
complementary technologies through technology partners. For example, Peerless
has licensed (for internal development purposes) the right to use Adobe's
PostScript Software to enable the Company's products to be used with Adobe's
PostScript Software, and the Company's relationship with Adobe permits the
Company to offer a convenient and optimized Adobe PostScript-enabled solution.
Furthermore, the Company has a relationship with Emulex which enables the
Company to support network printing under a wide range of networking
technologies. In addition, the Company incorporates font rasterizers into its
imaging solution to enable its OEMs to license font technology from providers
such as Agfa and Bitstream.
The Company recently entered into a preliminary agreement with a major
developer and manufacturer of specialized processor chips relating to the
possible licensing of Peerless technologies and engagement of Peerless
technical personnel for engineering development services. The immediate
objective of the agreement is to determine if the Company's technologies
associated with digital document processing can be incorporated into a
proposed new series of product offerings. During this initial phase, the
Company has received 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. The Company believes that the product specifications and
development schedules for the initial phase are nearly complete. The Company
does not anticipate incurring significant research and development
expenditures in connection with the completion of these product specifications
and development schedules.
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 and development schedules, 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.
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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."
CUSTOMERS AND MARKETS
Customers
Peerless markets its imaging products to OEMs manufacturing digital document
products for the high-performance sector of the office market and to
semiconductor OEMs in the low-cost sector of the office and personal use
market. With the exception of Adobe, the Company has derived substantially all
of its revenues in recent years from direct sales to digital document product
OEMs. OEM customers and their digital document products incorporating the
Company's technologies include:
<TABLE>
<CAPTION>
SELECTED PEERLESS OEM CUSTOMERS
- ---------------------------------------------------------------------------------
OEM
CUSTOMER OEM PRODUCTS DESCRIPTION PEERLESS PRODUCTS INCLUDED
- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
Canon GP-55F, GP-30F 30ppm MFP PeerlessPage,
Multi-PDL-A1 PeerlessPrint5E, Adobe
PostScript Integration
---------------------------------------------------------------------
LBP-1260 Plus 12ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration,
QuickPrint 1600, PSIO
---------------------------------------------------------------------
Laser Shot 8ppm Kanji Laser PeerlessPage, Adobe
LBP-730 Printer PostScript Integration,
QuickPrint 1700, PSIO
- ---------------------------------------------------------------------------------
Digital 5100 8ppm Laser Printer PeerlessPage,
Equipment PeerlessPrint5E, Adobe
PostScript Integration, PSIO
---------------------------------------------------------------------
Corporation LN17 17ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration, PSIO
- ---------------------------------------------------------------------------------
IBM Network Printer 12, 17, 24ppm Laser PeerlessPage,
12, 17, 24 Printers PeerlessPrint5E, Adobe
PostScript Integration,
QuickPrint 1700, PSIO,
Peerless Printer MIB
- ---------------------------------------------------------------------------------
Xerox 4505, 4510, 4520 5, 10, 20ppm Laser PeerlessPage,
Printers PeerlessPrint5E, Adobe
PostScript Integration, PSIO
---------------------------------------------------------------------
DocuPrint 4517 17ppm Laser Printer PeerlessPage,
PeerlessPrint5E, Adobe
PostScript Integration, PSIO
</TABLE>
For a discussion of certain risks relating to the Company's reliance on its
OEM customers, see "Risk Factors--Dependence on Market Success of Third
Parties" and "--Concentration of OEM Customers."
The Company's business primarily involves marketing its products and services
to a limited number of OEMs as opposed to numerous end-users or customers. The
Company views these arrangements as being in the ordinary course of business.
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Markets
High-Performance Digital Document Product Market. The high-performance
sector of the digital document product market is characterized by digital
document products ranging in price from approximately $1,000 to in excess of
$20,000 each. These products typically offer high performance differentiated
by customized features. In many cases, digital document product manufacturers
demand turnkey, customized embedded imaging solutions that include imaging
software, controller design and network interface card design. As a result of
these unique requirements, Peerless typically addresses the high-performance
sector of the digital document product market via direct OEM relationships
with individual digital document product manufacturers. The Company's major
digital document product manufacturer customers, based on percentage of total
revenues, in the calendar year 1995 and the six months ended July 31, 1996,
included: Xerox, with 25% and 13%, respectively; Canon, with 22% and 19%,
respectively; and IBM, with 15% and 14%, respectively. Many of the services
and licensing arrangements with the Company's OEMs are provided on a project-
by-project basis, are terminable with limited or no notice, and, in certain
instances, are not governed by long-term agreements.
Small Office/Home Office Market. The low-cost sector of the digital document
product market, sometimes called the Small Office/Home Office ("SOHO") market,
is characterized by digital document products with prices under $1,000 that
typically emphasize price/performance over customized features. In most
instances, it is not cost effective for digital document product manufacturers
to invest in a customized embedded imaging solution in addressing this market.
For the SOHO market, Peerless has designed a family of ASICs that embed basic
components of the Company's imaging software into semiconductor firmware.
Peerless has licensed these designs to semiconductor manufacturers, such as
Motorola, that have the rights to manufacture and sell these ASICs directly to
digital document product manufacturers. Motorola sells a Peerless-based
printing ASIC, the 68322, and pays Peerless a royalty on each ASIC sold. See
"Risk Factors--Dependence on Sole Source Providers."
For a discussion of certain risks relating to the Company's customers and
markets, see "Risk Factors--Dependence on Market Success of Third Parties" and
"--Concentration of OEM Customers."
PEERLESS PRODUCTS AND SOLUTIONS
Peerless provides comprehensive solutions for embedded imaging system
applications. The Company delivers its products to its OEM customers in two
ways: licensing of the Company's standard imaging products for the OEM
customer's internal product development; and turnkey product development
whereby the Company provides the additional engineering services necessary to
integrate the appropriate standard products into a complete embedded imaging
system solution optimized to the OEM's specific requirements.
32
<PAGE>
Products
The following table describes the Company's products and products under
development and their applicable solutions.
<TABLE>
<CAPTION>
PEERLESS PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
- ---------------------------------------------------------------------------------
APPLICABLE SOLUTIONS
- ---------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MONO-
PRODUCT DESCRIPTION CHROME MFP COLOR
Operating System
PeerlessPage Imaging Operating System X X
---------------------------------------------------------------
MFP Extensions *
---------------------------------------------------------------
Contone Color Extensions *
Page Description Languages
HP PCL 5E Compatible Language
PeerlessPrint5E Interpreter X X
- ---------------------------------------------------------------------------------
PeerlessPrint5C HP PCL 5C Compatible Color Language
Interpreter *
- ---------------------------------------------------------------------------------
HP PCL 6 Compatible Language
PeerlessPrint6 Interpreter * *
- ---------------------------------------------------------------------------------
Adobe PostScript High Performance Integration of
Integration Adobe PostScript into PeerlessPage X X *
- ---------------------------------------------------------------------------------
WinEXPRESS Windows-based Printer Language * *
- ---------------------------------------------------------------------------------
Color WinEXPRESS Windows-based Color Printer Language * *
PC Software
PeerlessPrint Windows 95 / Windows 3.1 Printer
Drivers Drivers * * *
ASICs and Integrated Processors
QuickPrint 1600 Imaging ASIC/Coprocessor X
- ---------------------------------------------------------------------------------
QuickPrint 1700 Enhanced Imaging ASIC/Coprocessor X * *
- ---------------------------------------------------------------------------------
QuickPrint Color
1800 Contone Imaging ASIC/Coprocessor * * *
- ---------------------------------------------------------------------------------
MC 68322 Integrated Printing Processor X X
Networking Technology
Peerless Standard
I/O Interface
(PSIO) Networking Card Interface X * *
- ---------------------------------------------------------------------------------
Peerless Printer Intranet Printer Management/Status
MIBs Reporting X * *
</TABLE>
X=Shipping
*=Under development
Development and commercialization of the Company's products and technology
is subject to numerous risks and uncertainties, including risks associated
with technological change, product development delays and difficulties,
developing markets and dependence on the Company's OEMs, strategic
relationships and the digital document product market. No assurance can be
given that such products incorporating the Company's technology will be
developed and shipped in a timely manner or at all. See "Risk Factors."
Operating System. PeerlessPage is a complete imaging operating system
including a high-performance real-time operating system kernel, printing
engine driver, object-based image processing model, graphics library, font
management, hard disk management, print job management and user control panel
interface. Color extensions to PeerlessPage are currently under development to
support the unique requirements of
33
<PAGE>
contone color printers, including contone image processing and industry
standard color matching support. Extensions to support MFPs are under
development to provide scanner management, electronic collation, and print,
copy and fax multitasking capability.
Page Description Languages. The Company provides a complete range of
printing language products including PeerlessPrint5E, which provides
compatibility with HP's PCL 5e language utilized in their LaserJet 4, 5P, 5L
and 5Si line of laser printer products, as well as enhancements to support
higher resolutions and added paper handling options. PeerlessPrint5C,
currently under development, is being designed to provide compatibility with
HP's PCL 5C utilized in their Color LaserJet color laser and high-end Inkjet
products. Also under development is PeerlessPrint6, which will provide
compatibility with HP's latest PCL 6 language utilized in their LaserJet 5
laser printer. As a third-party co-developer, the Company provides an
optimized, high-performance integration of Adobe PostScript language into the
PeerlessPage system for customers that separately license PostScript from
Adobe. The Company's WinEXPRESS and Color WinEXPRESS languages, also under
development, are being designed to provide an intelligent windows-based
printing solution for low-cost monochrome and color printers and MFPs. See
"Risk Factors--Dependence on Adobe Relationships."
PC Software. The Company is currently developing PeerlessPrint drivers that
are being designed to optimize the network printing process under Windows 95
and Windows 3.1 environments.
ASICs and Integrated Processors. The Company's QuickPrint line of imaging
ASIC co-processors integrates basic components of the Company's imaging system
into a silicon solution to reduce product costs and enhance performance. The
QuickPrint 1600 incorporates Peerless' object-based imaging technology for
monochrome printing solutions. The QuickPrint 1700 incorporates the latest
object-based imaging technology and supports non-contone color printing
solutions. The Company currently is developing the QuickPrint Color 1800,
which is being designed to incorporate the Company's contone imaging model to
significantly reduce the memory and processing power required for contone
color laser printers and enhance printing of grey scale images in monochrome
printers. The MC68322 integrated processor was developed in conjunction with
Motorola to provide a single silicon solution for low-cost laser printers and
MFPs.
Networking Technology. The Company's Peerless Standard I/O Interface
("PSIO") provides a high speed multi-protocol networking interface for printer
network interface cards. Peerless Printer MIB tables have been developed to
utilize the open Simple Network Management Protocol ("SNMP") industry standard
to enable management of printers over LANs and Intranets.
Solutions
The Company's products can be integrated to provide a wide range of scalable
solutions:
Monochrome Solution. The Company's monochrome solution targets low-cost
networkable office laser printers with printing speeds from 1 to 40 pages per
minute and printing resolutions from 600 to 1200 dots per inch. The Company's
contone imaging technology, currently under development, will be utilized to
provide photographic quality image printing on future monochrome products.
Multifunction Solution. The Company's MFP imaging solutions target OEM
requirements from lower cost networkable inkjet and laser-based MFP products,
currently under development, to high speed copier-based MFP products. These
solutions combine the Company's networkable imaging products with MFP-specific
extensions to facilitate printing, copying, faxing and scanning by the same
digital document product. The Company's solutions provide multifunction
capability, but the Company does not provide stand-alone fax or copier
solutions. Solutions support printing speeds from 1 to 40 pages per minute.
Color Solution. The Company's color imaging solutions, currently under
development, target OEM requirements for networkable color laser printers.
These solutions are being designed to support color printing speeds from 1 to
10 pages per minute, 600 to 1200 dots per inch resolution and photographic
contone color
34
<PAGE>
quality. The Company's proprietary object-based image processing technology is
expected to reduce memory requirements for printing contone pages while
simultaneously accelerating the document production process.
SALES AND MARKETING
The Company markets its products directly to the leading OEMs that sell
digital document products into the worldwide market. The Company directs most
of its sales efforts through a sales office in Japan and its headquarters in
California. Sales to European digital document products manufacturers are
conducted out of the Company's California headquarters.
The Company markets directly to OEMs and through focused public relations
and branding programs. Direct OEM marketing consists of development of sales
collateral, mailers, trade show attendance and sales support. The Company
focuses its public relations effort on media read by OEM customers. The
Company directs its branding programs at building the Company's brand
awareness. These programs consist of public relations and Peerless product
branding on its silicon and software products.
PRODUCT DEVELOPMENT AND ENGINEERING SERVICES
The Company's product development activities are located at the Company's
headquarters in El Segundo, California. As of July 31, 1996, the Company
employed approximately 60 software and hardware design engineers, project
managers and support staff. The primary activities of these employees are new
product development, enhancement of existing products, product testing and
technical documentation development. Accordingly, the Company's engineering
personnel are divided into two primary development areas: research and
development, which focuses on development and enhancement of the Company's
core technologies; and engineering services, which focuses on customized
design activities.
The Company's research and development efforts focus on ongoing development
of the Company's product family, including MFP and advanced color imaging
technologies. In addition, as applications evolve and become standardized, the
research and development efforts harness the expertise acquired from the
performance of engineering services to add standard application modules to the
Company's product family. See "Risk Factors--Risks Associated with Developing
Markets."
The Company believes that its engineering services efforts provide the
Company with a competitive advantage for its core product development by
defining needs for new products, guiding future enhancements and testing new
implementations. The engineering services personnel work closely with OEMs
that desire a turnkey solution, developing customized interfaces and
applications specific to individual OEMs. The Company typically receives a fee
for such engineering services. As part of its corporate strategy, the Company
leverages its engineering services capability to penetrate emerging market
sectors where applications and interfaces have not fully evolved. As market
sectors mature and applications become standardized, the engineering services
requirement typically diminishes.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
patent, copyright, trade secret and trademark laws, nondisclosure and other
contractual restrictions. The Company holds two patents issued in the United
States, one of which is also issued in France, Germany and Great Britain. The
issued patents relate to techniques developed by the Company for generating
output for continuous synchronous raster output devices such as laser printers
using a smaller amount of memory than would be required without using the
Company's technology. One of the two U.S. patents was issued on March 26, 1996
and the other patent was issued on April 16, 1996. The patent term of the U.S.
patents is 17 years from the issue date subject to the payment of required
maintenance fees. The patents granted in Great Britain, France and Germany
were issued on February 14, 1996. The term of the European patents is 20 years
from the filing date of August 2, 1991,
35
<PAGE>
subject to an opposition period that will expire November 14, 1996 and payment
of required renewal fees. The Company has one patent application pending in
Japan and six patent applications pending in the United States. There can be
no assurance that patents held by the Company will not be challenged or
invalidated, that patents will issue from any of the Company's pending
applications or that any claims allowed from existing or pending patents will
be of sufficient scope or strength (or issue in the countries where products
incorporating the Company's technology may be sold) to provide meaningful
protection or any commercial advantage to the Company. In any event, effective
protection of intellectual property rights may be unavailable or limited in
certain countries. The status of United States patent protection in the
software industry is not well defined and will evolve as the United States
Patent and Trademark Office grants additional patents. Patents have been
granted to fundamental technologies in software after the development of an
industry around such technologies, and patents may be issued, to third parties
that relate to fundamental technologies related to the Company's technology.
As part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, OEMs and strategic
partners and limits access to and distribution of its software and other
proprietary information. Despite these efforts, the Company may be unable to
effectively protect its proprietary rights and, in any event, enforcement of
the Company's proprietary rights may be expensive. The Company's source code
also is protected as a trade secret. However, the Company from time to time
licenses its source code to OEMs, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology increasingly may become the subject of infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, regardless of merit, could
be time consuming, result in costly litigation, cause product shipment delays
or require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse
affect on the Company's operating results. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In
addition, the Company may lack sufficient resources to initiate a meritorious
claim. In the event of an adverse ruling in any litigation regarding
intellectual property, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to
infringing or substituted technology. The failure of the Company to develop,
or license on acceptable terms, a substitute technology if required could have
a material adverse affect on the Company's operating results.
The Company is aware of an unrelated corporation that is using the name
"Peerless Systems Corporation," and the Company is in discussions with this
corporation regarding the rights of both entities to use the name. Although
the Company believes that it has prior right to the name, the other
corporation has disputed the Company's position. No assurance can be given as
to the ability of the Company to continue to use the name nor can any
assurance be given as to the ability of the Company to acquire a license to or
an assignment of the name from the corporation on reasonable terms or at all.
The inability of the Company to do so could have a material adverse effect on
the Company's operating results. In any event, the prosecution of claims or
other litigation relating to the dispute could result in substantial costs to
the Company, which also could have a material adverse effect on the Company's
operating results.
COMPETITION
The market for embedded imaging systems for digital document products is
highly competitive and characterized by continuous pressure to enhance
performance, to introduce new features and to accelerate
36
<PAGE>
the release of new products. The Company competes on the basis of technology
expertise, product functionality, development time and price. The Company's
technology and services primarily compete with solutions developed internally
by OEMs. Virtually all of the Company's OEMs have significant investments in
their existing solutions and have the substantial resources necessary to
enhance existing products and to develop future products. These OEMs have or
may develop competing embedded imaging systems technologies and may implement
these systems into their products, thereby replacing the Company's current or
proposed technologies, eliminating a need for the Company's services and
products and limiting future opportunities for the Company. The Company
therefore is required to persuade these OEMs to outsource the development of
their embedded imaging systems and to provide products and solutions to these
OEMs that cost-effectively compete favorably with their internally developed
products. The Company also competes with software and engineering services
provided in the digital document product marketplace by other systems
suppliers to OEMs. In this regard, the Company competes with, among others,
Xionics Document Technologies with respect to MFP embedded systems and
Electronics for Imaging with respect to color technologies.
As the industry continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance
or functionality. The Company anticipates increasing competition for its color
products under development, particularly as new competitors develop and enter
products in this market. Some of the Company's existing competitors, many of
its potential competitors and virtually all of the Company's OEMs have
substantially greater financial, technical, marketing and sales resources than
the Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the amount of royalties received
on new licenses and to reduce the cost of its engineering services in order to
maintain existing business and generate additional product licensing revenues,
which could reduce profit margins and result in losses and a decrease in
market share. No assurance can be given as to the ability of the Company to
compete favorably with the internal development capabilities of its current
and prospective OEM customers or with other third-party embedded imaging
system suppliers, and the inability to do so would have a material adverse
effect on the Company's operating results.
EMPLOYEES
As of July 31, 1996, the Company had a total of approximately 87 employees
and 11 independent contractors. Of the Company's employees, approximately 60
were in engineering, 15 were in finance and administration, and 12 were in
sales and marketing. None of the Company's employees is represented by a labor
union, and the Company has never experienced any work stoppage. The Company
considers its relations with its employees to be good. For a description of
certain risks associated with the Company's employees, see "Risk Factors--
Dependence on Key Personnel."
PROPERTIES
The Company leases its principal facilities, totalling approximately 30,000
square feet, in El Segundo, California. The lease expires in March 2001. The
Company also has office space in Japan. The Company believes that suitable
additional facilities or alternative space will be available in the future on
commercially reasonable terms as needed.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of July
31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Edward A. Gavaldon............. 51 President, Chief Executive Officer and
Chairman of the Board
Hoshi Printer.................. 54 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Vice President and Chief Technology
Reginald Cardin................ 49 Officer
Vice President, Sales and Field
David R. Fournier.............. 43 Operations
Thomas B. Ruffolo.............. 43 Vice President, Marketing
Stephen R. Butterfield......... 44 Vice President, Advanced Technology
Robert G. Barrett (1)(2)....... 51 Director
Paul D. Levy (1)............... 40 Director
Robert L. North (2)............ 60 Director
Lauren L. Shaw................. 52 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Edward A. Gavaldon has served the Company as President, Chief Executive
Officer and a director since January 1995 and as Chairman of the Board since
July 1996. Prior to joining the Company, Mr. Gavaldon worked at Xerox
Corporation for 23 years in various positions including: Manager, Strategy and
Programs for Printing Products; Chief Engineer, High Speed Laser Printers;
Vice President, Worldwide Marketing, Laser Printers; and most recently as Vice
President/General Manager in the Desktop Laser Printer Business Unit. Mr.
Gavaldon received an M.B.A. degree from the University of Southern California
and a B.A. degree in economics from the University of California at Los
Angeles.
Hoshi Printer has served the Company as Vice President, Finance and
Administration, Chief Financial Officer and Secretary since June 1996. Prior
to joining the Company, Mr. Printer was Chief Financial Officer of Neuron
Data, a software tools company, from July 1995 to May 1996; Soane
Technologies, a polymer technology company, from July 1994 to June 1995; and
Catalytica, an environmental technology company, from January 1990 to June
1994. Mr. Printer also worked at Xerox Corporation for over 17 years in
various positions including 6 years as Vice President of Finance. Mr. Printer
received an M.B.A. degree from Stanford University.
Reginald Cardin has served the Company as Vice President and Chief
Technology Officer since August 1995. Prior to joining the Company, Mr. Cardin
worked at IBM for over 20 years in various positions including Manager,
Presentation Integration and Programming Center Manager, Printing Systems. Mr.
Cardin received a B.A. degree in biology and English from Tufts University.
David R. Fournier has served the Company as Vice President, Sales and Field
Operations since January 1994 and served as Director of Sales from November
1991 to January 1994. Prior to joining the Company, Mr. Fournier held various
sales management positions at Hamilton/Avnet, a semiconductor and computer
systems distribution company, and Wyle Lab, a semiconductor and computer
systems distribution company.
Thomas B. Ruffolo has served the Company as Vice President, Marketing since
August 1994 and as Director of Marketing from August 1991 to August 1994.
Prior to joining the Company, Mr. Ruffolo was Director of Marketing at NewGen
Systems, a page printer manufacturer, which he co-founded in 1988. Mr. Ruffolo
received a B.S. degree in computer science from Colorado State University and
an M.B.A. degree from Pepperdine University.
38
<PAGE>
Stephen R. Butterfield, a co-founder of the Company, has served as the
Company's Vice President, Advanced Technology since April 1982 and as the
Company's Secretary from April 1982 until July 1996 and as a director until
1992. Prior to founding the Company, Mr. Butterfield held various technical
and management positions at AM Jacquard, an office automation and minicomputer
manufacturer, including Director of Engineering.
Robert G. Barrett has served the Company as a director since March 1991. He
is a founder and a Managing Partner of Battery Ventures, a venture capital
fund specializing in communication and software investment. Mr. Barrett serves
as a director of Brooktrout Technology, Inc., Marcam Corporation and several
privately held high technology companies. Mr. Barrett received a B.A. degree
in history and an M.B.A. degree from Harvard University.
Paul D. Levy has served the Company as a director since August 1996. Mr.
Levy has been President, Chief Executive Officer and a director of Rational
Software Corporation, a software tools company, since 1994 and was President
and co-founder of one of its predecessor corporations, Rational, from 1981.
Mr. Levy received a B.S. degree from the United States Air Force Academy and
received an M.S. degree in engineering-economic systems from Stanford
University.
Robert L. North has served the Company as a director since July 1996. Mr.
North has been Chief Executive Officer and a Director of HNC Software Inc., a
neural network technology company, since June 1987. For 21 years prior to that
time he was employed by TRW, Inc. Electronic Systems Group, most recently as
Vice President and General Manager. Prior to that time, he was a member of the
technical staff for the Satellite Central Office of Aerospace Corporation. Mr.
North received B.S. and M.S. degrees in electrical engineering from Stanford
University.
Lauren L. Shaw, a co-founder of the Company, has served as a director of the
Company since 1982 and as an executive officer and Chairman of the Board of
Directors from 1982 to August and July 1996, respectively. From the Company's
inception until 1995, Mr. Shaw also served as the Company's President and
Chief Executive Officer. Mr. Shaw also co-founded AM Jacquard, an office
automation and minicomputer manufacturer, where he served in various
capacities, including as Vice President of Software Development and Vice
President and Assistant General Manager. Mr. Shaw received a B.S. degree in
mathematics from Milliken University.
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected or until their earlier resignation or
removal. Officers are appointed to serve, subject to the discretion of the
Board of Directors, until their successors are appointed. There are no family
relationships among the current directors and officers of the Company.
Two of the Company's co-founders and senior management personnel recently
resigned as executive officers of the Company in connection with the
transition process initiated in January 1995 when the current Chief Executive
Officer was hired, and although the Company believes such resignations will
not materially impact the management of the Company, no assurance can be given
that the loss of such senior management will not have a material adverse
impact on the Company's operating results.
BOARD COMMITTEES
The Audit Committee of the Board of Directors was formed in 1991 to review
the internal accounting procedures of the Company and to consult with and
review the services provided by the Company's independent public accountants.
The Compensation Committee of the Board of Directors was formed in 1991 to
review and recommend to the Board of Directors the compensation and benefits
of employees of the Company. The Compensation Committee also administers the
issuance of stock options and other awards under the Company's stock plans.
39
<PAGE>
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their services as member of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board of
Directors and Committee meetings. The Board of Directors has adopted
resolutions providing for the automatic grant, under the 1996 Plan (as defined
below), of: (i) an option to purchase 26,666 shares of Common Stock to each
non-employee director who is first elected to the Board of Directors after
completion of this offering; and (ii) an option to purchase 6,666 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 and Shaw at a weighted average exercise price of $10.00 per
share, to Mr. North at a weighted average exercise price of $9.63 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 B. Renshaw (1).................. 1995 98,280 21,924 --
Former Vice President, Software
Development and Treasurer
</TABLE>
- ---------------------
(1) Mr. Shaw resigned as an executive officer and Chairman of the Board, and
Ms. Renshaw resigned as an executive officer, subsequent to December 31,
1995. See "Certain Transactions" for a discussion of certain arrangements
with Mr. Shaw.
(2) Includes sales commissions.
40
<PAGE>
EMPLOYEE BENEFIT PLANS AND NON-PLAN OPTION GRANTS
Non-Plan Option Grants. Prior to the adoption of the 1992 Stock Option Plan
and 1996 Equity Incentive Plan, the Company granted, outside any employee
benefit plan, nonstatutory options to purchase 221,661 shares of Common Stock
of the Company. Of these options, options to purchase 39,129 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 99,201 shares had
been exercised as of July 31, 1996.
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (the "1992
Plan") was adopted by the Board of Directors in September 1992, and was
subsequently amended in June 1993, October 1994 and April 1995. The Board has
authorized and reserved an aggregate of 1,055,000 shares of Common Stock for
issuance under the 1992 Plan.
The 1992 Plan provides for the grant of incentive stock options under the
Internal Revenue Code of 1986, as amended (the "Code"), to employees and
nonstatutory stock options to employees, directors and consultants of the
Company and its affiliates. The 1992 Plan provides that it will be
administered by the Board of Directors, or a committee appointed by the Board,
which determines recipients and types of options to be granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof. Currently, the 1992 Plan is administered by the Compensation
Committee of the Board of Directors.
The terms of stock options granted under the 1992 Plan generally may not
exceed ten years. The exercise price of options granted under the 1992 Plan is
determined by the Board of Directors, provided that (i) the exercise price for
a nonstatutory stock option cannot be less than 85% of the fair market value
of the Common Stock on the date of the option grant and (ii) the exercise
price for an incentive stock option cannot be less than 100% of the fair
market value of the Common Stock on the date of the option grant.
Options granted under the 1992 Plan vest at the rate specified in each
optionee's option agreement. No stock option may be transferred by the
optionee other than by will or the laws of descent or distribution or, for a
nonstatutory stock option, pursuant to a qualified domestic relations order.
An optionee whose relationship with the Company or any affiliate ceases for
any reason (other than by death or permanent and total disability) may
exercise options in the period following such cessation as may be determined
by the Board of Directors (not to exceed three months for an incentive stock
option). Options may be exercised for up to twelve months after an optionee's
relationship with the Company and any affiliate ceases due to death or
disability.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
Shares subject to stock options that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
options under the 1992 Plan.
Upon certain changes in control of the Company, all outstanding options
under the 1992 Plan shall either be assumed or substituted by the surviving
entity or shall continue in full force and effect. If the surviving entity
determines not to assume, continue or substitute such options, the options
shall terminate if not exercised prior to such change in control. Options
shall terminate if not exercised prior to a dissolution or liquidation of the
Company.
41
<PAGE>
As of July 31, 1996, the Company had granted options to purchase 1,094,136
shares of Common Stock under the 1992 Plan and an additional 126,266 shares
remained available for future grant. Of the options granted, options to
purchase 886,882 shares of Common Stock were outstanding, options to purchase
165,402 shares had been canceled or had lapsed without being exercised and
options to purchase 41,852 shares had been exercised. The 1992 Plan will
terminate in September 2002 unless sooner terminated by the Board of
Directors.
1996 Equity Incentive Plan. In May 1996, the Board adopted the Company's
1996 Stock Option Plan (the "1996 Plan"). The Company's 1996 Equity Incentive
Plan (the "Incentive Plan") was adopted by the Board of Directors in July 1996
as an amendment and restatement of the Company's 1996 Plan. The Board has
authorized and reserved an aggregate of 1,266,666 shares of Common Stock for
issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options, restricted stock purchase awards and
stock bonuses to employees, directors and consultants. The Incentive Plan
provides that it will be administered by the Board of Directors, or a
committee appointed by the Board, which determines recipients and types of
awards to be granted, including the exercise price, number of shares subject
to the award and the exercisability thereof.
The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors, provided that the exercise price
for an incentive stock option cannot be less than 100% of the fair market
value of the Common Stock on the date of the option grant and the exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the Common Stock on the date of the option grant. Options
granted under the Incentive Plan vest at the rate specified in each optionee's
option agreement.
No stock option may be transferred by the optionee other than by will or the
laws of descent or distribution, provided that the Board of Directors may
grant a nonstatutory stock option that is transferable and an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose relationship with the Company or any affiliate ceases
for any reason (other than by death or permanent and total disability) may
exercise options in the three-month period following such cessation (unless
such options terminate or expire sooner or later by their terms). Options may
be exercised for up to twelve months after an optionee's relationship with the
Company and its affiliates ceases due to death or disability (unless such
options expire sooner by their terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full (or vested in the case of restricted
stock awards) shall again become available for future grant of awards under
the Incentive Plan. The Board of Directors has the authority to reprice
outstanding options and to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares.
Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded
in consideration of past services without a
42
<PAGE>
purchase payment. Rights under a stock bonus or restricted stock bonus
agreement may not be transferred other than by will, the laws of descent and
distribution or a domestic relations order while the stock awarded pursuant to
such an agreement remains subject to the agreement.
Upon certain changes in control of the Company, all outstanding awards under
the Incentive Plan shall either be assumed or substituted by the surviving
entity or shall continue in full force and effect. If the surviving entity
determines not to assume, continue or substitute such awards, with respect to
person then performing services as employees, directors or consultants, the
time during which such awards may be exercised shall be accelerated and the
awards terminated if not exercised prior to such change in control.
As of July 31, 1996, the Company had granted options to purchase 561,909
shares of Common Stock under the Incentive Plan and an additional 726,923
shares remained available for future grant. Of the options granted, options to
purchase 559,743 shares of Common Stock were outstanding, options to purchase
2,166 shares had been canceled or had lapsed without being exercised and no
options had been exercised. The Incentive Plan will terminate in July 2006
unless sooner terminated by the Board of Directors. As of July 31, 1996, no
stock bonuses or restricted stock had been granted under the Incentive Plan.
The Board of Directors has adopted resolutions providing for the automatic
grant, under the 1996 Plan, of: (i) an option to purchase 26,666 shares of
Common Stock to each non-employee director who is first elected to the Board
of Directors after completion of this offering; and (ii) an option to purchase
6,666 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 and Shaw at a weighted average exercise price
of $10.00 per share, to Mr. North at a weighted average exercise price of
$9.63 per share and to Mr. Levy at an exercise price of $11.00 per share,
subject in each case to similar vesting terms as those described above.
Employee Stock Purchase Plan. In July 1996, the Company's Board of Directors
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 300,000 shares of Common Stock. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the adoption of the Purchase Plan. The offering period for any
offering will be no more than 27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors and meet
eligibility standards established by the Board of Directors in accordance with
Code section 423. Employees who participate in an offering can have up to 15%
of their earnings withheld pursuant to the Purchase Plan and applied, on
specified dates determined by the Board of Directors, to the purchase of
shares of Common Stock. The price of Common Stock purchased under the Purchase
Plan will be equal to 85% of the lower of the fair market value of the Common
Stock on the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment with the Company and its affiliates.
In the event of certain changes of control, the Company and the Board of
Directors has discretion to provide that each right to purchase Common Stock
will be assumed or continue in full force and effect or a similar right
substituted by the successor corporation, or the Board may shorten the
offering period and provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to the change in control. The
Purchase Plan will terminate at the Board of Directors' discretion.
43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1995 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES OF TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EMPLOYEES EXERCISE FOR OPTION TERM(4)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------------
NAME GRANTED(1) 1995 (%)(2) ($/SH)(3) DATE 5% 10%
---- ---------- -------------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward A. Gavaldon...... 354,293 71.3% $1.43 01/04/05 $ 317,508 $ 804,629
</TABLE>
- ---------------------
(1) The options are incentive stock options with vesting based either on time
or on performance. Time-based vesting generally occurs over 60 months,
with 20% of the shares vesting annually. These options provide for
accelerated vesting of 60% of the shares upon the completion of an initial
public offering with the remaining shares to vest at a rate of 50%
annually over the next two years.
(2) Based on an aggregate of 496,749 options granted to employees of the
Company in 1995, including the indicated Named Executive Officer.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant, as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming that
the stock price on the date of grant as determined by the Board of
Directors appreciates at the indicated annual rate compounded annually for
the entire term of the option and the option is exercised and sold on the
last day of its term for the appreciated stock price. The 5% and 10%
assumed rates of appreciation are derived from the rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of the future Common Stock price.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the
Named Executive Officers at December 31, 1995. No Named Executive Officer
exercised stock options during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Edward A. Gavaldon...... 0/354,293 $0/$79,716
Lauren L. Shaw.......... 60/0 $65/$0
David R. Fournier....... 26,939/34,043 $21,707/$17,499
Stephen R. Butterfield.. 60/0 $65/$0
Barbara B. Renshaw...... 60/0 $65/$0
</TABLE>
- ---------------------
(1) Value realized and value of unexercised in-the-money options is based on
the fair market value of $1.65 per share of the Company's Common Stock,
minus the exercise price on December 31, 1995, multiplied by the number of
shares underlying the option.
44
<PAGE>
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Edward A.
Gavaldon. The agreement provides that Mr. Gavaldon will serve as Chief
Executive Officer and President. The agreement provides for payment of a base
salary of $175,000 with a bonus of up to $75,000 annually and participation in
the Company's benefit plans. The agreement also provides that all of Mr.
Gavaldon's outstanding options will be accelerated in the event of the
acquisition or change in control of the Company or a sale of all or
substantially all of the Company's assets. In the event that the Company
terminates Mr. Gavaldon without cause, the Company will be required to pay Mr.
Gavaldon his base salary and certain benefits for an additional one year
period and will accelerate the vesting of his options for at least an
additional six months. See "Certain Transactions" for a discussion of certain
arrangements between the Company and Lauren L. Shaw.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for
any breach of the directors' duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemptions, or (iv) for any
transaction from which the director derives any improper personal benefit. In
addition, the Company's Bylaws provide that any director or officer who was or
is a party or is threatened to be made a party to any action or proceeding by
reason of his or her services to the Company will be indemnified to the
fullest extent permitted by the Delaware Law.
The Company has entered into indemnification agreements with each of its
directors and executive officers pursuant to which the Company has agreed to
indemnify each of them against expenses and losses incurred for claims brought
against them by reason of their being a director or executive officer of the
Company. In addition, the Company maintains directors' and officers' liability
insurance.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or executive officer.
45
<PAGE>
CERTAIN TRANSACTIONS
In June, July and October 1993, the Company issued an aggregate of 1,501,177
shares of Series B Preferred Stock, and warrants to purchase an aggregate of
490,476 shares of Common Stock, to a group of accredited investors, including
Lauren L. Shaw, a director and principal stockholder of the Company, and his
wife, Barbara Renshaw, a principal stockholder and former director and
executive officer of the Company, who purchased 27,097 shares of Series B
Preferred Stock and warrants to purchase 11,200 shares of Common Stock,
Battery Ventures II, L.P. ("Battery Ventures"), a principal stockholder of the
Company, which purchased 263,070 shares of Series B Preferred Stock and
warrants to purchase 53,333 shares of Common Stock, and Adobe, a principal
stockholder of the Company, which purchased 430,108 shares of Series B
Preferred Stock and warrants to purchase 177,777 shares of Common Stock, for
cash and the cancellation of indebtedness in the aggregate amount of
$3,490,264. Robert G. Barrett, a director of the Company, is a Managing
Partner of ABF Partners II, L.P., the general partner of Battery Ventures, and
Adobe from time to time has designated a representative to serve on the
Company's Board of Directors. Adobe currently holds its equity position in the
Company as the sole limited partner of Adobe Ventures L.P., a principal
stockholder of the Company.
In September 1992 and June 1993, the Company entered into a Third Party
Development and License Agreement (the "Third Party Agreement") and a PCL
Development and License Agreement (the "PCL Agreement"), respectively, each of
which has been subsequently amended, with Adobe, a principal stockholder of
the Company. Under the Third Party Agreement, the Company licenses (for
internal development purposes) Adobe's PostScript Software from Adobe so that
the Company can port and support versions of the Company's products that may
be used in conjunction with Adobe's PostScript Software by Adobe's OEMs. The
Company has paid Adobe a fee for this license and may pay Adobe additional
fees for additional rights that Adobe may grant to the Company. In addition,
Adobe pays royalties to the Company in connection with the distribution by
Adobe's OEMs of products that the Company has enabled to be used with Adobe's
PostScript Software. The Third Party Agreement has a term of five years and is
renewable biannually thereafter. Under the PCL Agreement, the Company develops
versions of the Company's PCL products that can be used with Adobe's
PostScript Software, and Adobe licenses these products for sublicense to its
OEMs. In return for this license, Adobe pays royalties to the Company for each
such product that it causes to be shipped or delivered to end-users. The PCL
Agreement has a term of 20 years and is renewable annually thereafter. During
1993, 1994 and 1995 and the six months ended July 31, 1996, the Company
recognized revenues of $229,000, $623,000, $707,000 and $1,163,000,
respectively, arising from these license agreements and engineering services
arrangements with Adobe.
In October 1995, the Company issued $3,070,000 in aggregate principal amount
of its convertible debentures (the "Debentures") to private investors
including entities affiliated with Morgan Keegan & Company, Inc., a principal
stockholder of the Company, which purchased $2,000,000 principal amount of
Debentures, and Battery Ventures, which purchased $500,000 principal amount of
Debentures. The Debentures bear interest at 7% annually, mature in 2001 and
will convert into Common Stock at the rate of $2.63 per share upon the closing
of this offering.
In January 1995, the Company entered into an employment agreement with
Lauren L. Shaw, a director and principal stockholder of the Company, and the
Company amended this agreement in August 1996 in connection with Mr. Shaw's
resignation as an executive officer. In consideration for, among other things,
an agreement not to compete through 1998, the employment agreement, as
amended, provides, among other things, (i) that the Company will pay Mr. Shaw
$9,080 every two weeks through the earlier of the end of 1998 or 15 full
months after this offering (which would be extended if the shares to be sold
in this offering are cut back below certain minimum numbers), plus accrued and
unpaid vacation and other items, (ii) that the Company will pay Mr. Shaw $150
per hour for consulting services actually rendered to the Company and (iii)
that Mr. Shaw will have certain registration rights with respect to the shares
of the Company's Common Stock that he owns.
46
<PAGE>
In July 1996, the Company and Battery Ventures agreed to amend a warrant to
purchase 66,666 shares of Common Stock. The amendment increased the exercise
price, extended the term and included a limited release in favor of the
Company related to the exercise of the warrant.
The Company has also entered into an employment agreement with Edward A.
Gavaldon. See "Management--Employment Agreement."
The Company has entered into indemnification agreements with its directors
and executive officers. The Company has also entered into an indemnity
agreement with the Selling Stockholders pursuant to which the Company will
indemnify the Selling Stockholders for certain liabilities and costs incurred
in connection with this offering, and the Selling Stockholders will indemnify
the Company and its officers and directors for certain liabilities incurred in
connection with this offering.
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1996 and as adjusted to
give effect to the sale of the shares of Common Stock offered hereby, by (i)
each person (or group of affiliated persons) known to the Company to be the
beneficial owner of more than five percent of the Company's Common Stock, (ii)
each of the Company's directors, (iii) each Named Executive Officer, (iv) each
Selling Stockholder and (v) all of the Company's directors and executive
officers as a group. Unless otherwise specified, the address of all five
percent stockholders is the address of the Company set forth herein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO THE OFFERING (1) TO BE THE OFFERING(1)(2)
----------------------- SOLD IN -----------------------
NUMBER PERCENT THE OFFERING NUMBER PERCENT
------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
NAME AND ADDRESS
- ----------------
Battery Ventures II, L.P. (3).......... 1,617,048 21.0% -- 1,617,048 15.8%
Robert G. Barrett
Battery Ventures
200 Portland Street
Boston, MA 02114
Lauren L. Shaw and
Barbara B. Renshaw (4)(5).............. 1,518,274 19.7 874,708 643,566 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)...................... 3,880,717 48.4 919,630 2,961,087 28.2
OTHER SELLING
STOCKHOLDERS
- -------------
Steven K. Nelson (17).................. 230,100 3.0 23,010 207,090 2.0
Robert F. Hossley (18)................. 198,005 2.6 19,801 178,204 1.7
William Bailey (19).................... 165,480 2.1 16,548 148,932 1.5
Comdisco, Inc. (20).................... 116,513 1.5 58,257 58,256 *
Silicon Valley Bank (21)............... 34,665 * 17,333 17,332 *
William S. Wood (22)................... 32,502 * 10,666 21,836 *
Bayview Investors, Ltd. (23)........... 27,509 * 27,509 -- --
Larry Feldman (24)..................... 9,699 * 969 8,730 *
Cary Kimmel (25)....................... 6,366 * 636 5,730 *
First Portland Corporation (26) ....... 3,260 * 3,260 -- --
</TABLE>
- ---------------------
* Represents beneficial ownership of less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in
48
<PAGE>
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. Percentage of
beneficial ownership is based on 7,710,814 shares of Common Stock
outstanding as of July 31, 1996 and 10,210,814 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 194,892 additional shares, and the following Selling
Stockholders will sell the following additional numbers of shares: Lauren
L. Shaw 1996 Trust (16,259); Barbara B. Renshaw 1996 Trust (16,259);
Renshaw/Shaw Charitable Remainder Trust (26,778); 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.
Nelson (7,667); Mr. Bailey (2,333); Comdisco, Inc. (58,256); Silicon
Valley Bank (17,332); and Mr. Wood (10,666).
(3) Includes beneficial ownership of 259,164 shares of Common Stock issuable
pursuant to the net exercise of warrants. Robert G. Barrett, a director
of the Company, is a Managing Partner of ABF Partners II, L.P., the
general partner of Battery Ventures. Mr. Barrett may be deemed to have
voting and investment power over the shares held by Battery Ventures. He
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(4) Represents (i) 65,000 shares held by Mr. Shaw, a director and former
executive officer and Chairman of the Board of the Company, individually;
(ii) 91,666 shares held by Barbara B. Renshaw, an employee and former
executive officer and director of the Company, individually; (iii)
118,274 shares held by Mr. Shaw and Ms. Renshaw, jointly (including
beneficial ownership of 90,703 shares of Common Stock issuable pursuant
to the net exercise of warrants); (iv) 308,334 shares held in the Lauren
L. Shaw 1996 Trust; (v) 308,334 shares held in the Barbara B. Renshaw
1996 Trust; and (vi) 626,666 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; 91,666 shares are being sold by Ms.
Renshaw, individually; 118,154 shares are being sold by Mr. Shaw and Ms.
Renshaw, jointly; and 599,888 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 4,797 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Ruffolo is Vice President, Marketing of the
Company.
49
<PAGE>
(12) Includes 16,666 shares issuable upon completion of this offering. Mr.
Printer is Vice President, Finance and Administration, Chief Financial
Officer and Secretary of the Company.
(13) Includes 15,333 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Cardin is Vice President and Chief Technology
Officer of the Company.
(14) Mr. Levy is a director of the Company.
(15) Mr. North is a director of the Company.
(16) Includes 132,209 shares issuable pursuant to options exercisable within
60 days of July 31, 1996, an additional 175,049 shares issuable pursuant
to options exercisable upon completion of this offering and 349,869
shares of Common Stock issuable upon the net exercise of warrants.
(17) Includes 260 shares issuable pursuant to options exercisable within 60
days of July 31, 1996 and 8,054 shares of Common Stock issuable pursuant
to the net exercise of warrants. Mr. Nelson is an employee of the
Company.
(18) Includes 200 shares issuable pursuant to options exercisable within 60
days of July 31, 1996 and 12,888 shares of Common Stock issuable pursuant
to the net exercise of warrants. Mr. Hossley is an employee of the
Company.
(19) Includes 260 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Bailey is an employee of the Company.
(20) Represents beneficial ownership of shares issuable pursuant to the net
exercise of warrants acquired in connection with equipment lease
transactions between the Company and Comdisco.
(21) Represents beneficial ownership of shares issuable pursuant to the net
exercise of warrants acquired in connection with bank line of credit
transactions extended by Silicon Valley Bank to the Company.
(22) Includes 21,836 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Wood was the former Chief Financial Officer of
the Company.
(23) Includes 7,322 shares of Common Stock issuable pursuant to the net
exercise of warrants.
(24) Includes 6,666 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Feldman is an employee of the Company.
(25) Includes 3,333 shares issuable pursuant to options exercisable within 60
days of July 31, 1996. Mr. Kimmel is an employee of the Company.
(26) Represents beneficial ownership of shares issuable pursuant to the net
exercise of warrants acquired in connection with equipment lease
transactions between the Company and First Portland Corporation.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value.
COMMON STOCK
As of July 31, 1996, there were 7,710,814 shares of Common Stock outstanding
held of record by approximately 104 stockholders. The holders of Common Stock
are entitled to one vote per share on all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the event of
the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive,
conversion, subscription or other rights. There are no redemption or sinking
funds provisions applicable to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable, and the shares of Common Stock
to be outstanding upon completion of this offering will be fully paid and non-
assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon such Preferred Stock,
including dividend rights, conversion rights, terms of redemption, liquidation
preference sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Upon completion of this offering, the holders (or their permitted
transferees) of approximately 5,858,256 shares of Common Stock ("Holders") are
entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933, as amended (the "Securities Act"). If the
Company proposes to register its Common Stock, subject to certain exceptions,
under the Securities Act, the Holders are entitled to notice of the
registration and are entitled to include, at the Company's expense, such
shares therein, provided that the managing underwriter has the right to limit
the number of such shares included in the registration. These rights will not
apply to this offering. In addition, certain of the Holders may require the
Company at its expense on no more than four occasions to file a registration
statement under the Securities Act with respect to their shares of Common
Stock. Such rights may not be exercised until 180 days after the completion of
this offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in control of the Company.
51
<PAGE>
The Company's Certificate of Incorporation and Bylaws also require that,
effective upon the closing of this offering, any action required or permitted
to be taken by stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer of the Company or by any person or persons
holding shares representing at least 10% of the outstanding capital stock. The
Company's Certificate of Incorporation also specifies that the authorized
number of directors may be changed only by resolution of the Board of
Directors. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management of the Company.
CALIFORNIA FOREIGN CORPORATION LAW
Pursuant to section 2115 ("Section 2115") of the California General
Corporation Law (the "California GCL"), under certain circumstance certain
provisions of the California GCL may be applied to foreign corporations
qualified to do business in California notwithstanding the law of the
jurisdiction where the corporation is incorporated. Such corporations are
referred to herein as "quasi-California" corporations. Section 2115 is
applicable to foreign corporations which have more than half of their voting
stock held by stockholders residing in California and more than half of their
business deriving from California, measured at the end of the Company's fiscal
year. If the Company were determined to be a quasi-California corporation, it
would have to comply with California law with respect to, among other things,
elections of directors and distributions to stockholders. Under the California
GCL, a corporation is prohibited from paying dividends unless (i) the retained
earnings of the corporation immediately prior to the distribution equals or
exceeds the amount of the proposed distribution; or (ii) (a) the assets of the
corporation (exclusive of certain non-tangible assets) equal or exceed 1 1/4
times its liabilities (exclusive of certain liabilities), and (b) the current
assets of the corporation at least equal its current liabilities, but if the
average pre-tax net earnings of the corporation before interest expense for
the two years preceding the distribution was less than the average interest
expense of the corporation for those years, the current assets of the
corporation must exceed 1 1/4 times its current liabilities. Following this
offering, the Company may become exempt from the application of Section 2115
in the event that more than half of the voting stock is held by stockholders
with residences outside of California.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Norwest
Shareholder Services.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate 10,210,814 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 995,668 shares of Common Stock, (ii) no exercise
of the Underwriters' over-allotment option and (iii) no exercise of options to
purchase 1,485,754 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 5,425,035 Restricted Shares (plus
approximately 642,079 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 6,364,119 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, except for
177,089 shares that may not be so released until 90 days after the date of
this Prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least two years will be entitled to sell in any three-month
period a number of shares that does not exceed greater of (i) one percent of
the then outstanding shares of the Company's Common Stock or (ii) the average
weekly trading volume of the Company's Common Stock in the Nasdaq National
Market during the four calendar weeks immediately preceding the date on which
notice of the sale is filed
53
<PAGE>
with the Securities and Exchange Commission. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice, and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least three
years is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 and Rule 144(k) to become eligible for resale in the
public market. This proposal, if adopted, would substantially increase the
number of shares of Common Stock eligible for immediate resale following the
expiration of the lock-up agreements described above. No assurance can be
given concerning whether or when the proposal will be adopted by the
Commission.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Stock Plans and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at July 31, 1996, such registration
statement would cover approximately 2,618,943 shares. Such registration
statement is expected to be filed and to become effective as soon as
practicable after the date hereof. Shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock up agreements
described above. See "Management."
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below through their representatives, Hambrecht & Quist LLC,
Prudential Securities Incorporated and Wessels, Arnold & Henderson, L.L.C.,
have severally agreed to purchase from the Company and the Selling
Stockholders the following respective numbers of shares of Common Stock (which
include shares issuable by the Company pursuant to the net exercise of
warrants which the Underwriters have agreed to purchase from certain of the
Selling Stockholders):
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.........................................
Prudential Securities Incorporated............................
Wessels, Arnold & Henderson, L.L.C. ..........................
---------
Total......................................................... 3,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary
authority. After the initial public offering of the shares, the offering price
and other selling terms may be changed by the Representatives of the
Underwriters.
In connection with this offering, the Underwriters have agreed to purchase
from certain of the Selling Stockholders warrants to purchase shares of the
Company's capital stock which, when exercised on a net exercise basis at the
assumed initial public offering price of $12.00 per share, will result in the
issuance to the Underwriters of 176,875 shares of Common Stock, at a price
equal to the initial public offering price less the underwriting discount for
each share of Common Stock issuable pursuant to the net exercise thereof.
The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable no later than 30 days after the date of
this Prospectus, to purchase up to 562,500 additional shares of Common Stock
at the initial public offering price, less the underwriting discount, set
forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares of Common Stock offered hereby. The
Company and such Selling Stockholders will be obligated, pursuant to the
option,
55
<PAGE>
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company's officers and directors and certain stockholders have agreed
that they will not, without the prior written consent of Hambrecht & Quist
LLC, directly or indirectly, offer, sell or otherwise dispose of 6,364,119
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,
except for 177,089 shares that may not be so released until 90 days after the
date of this Prospectus.
H&Q Peerless Investors, L.P., a fund associated with Hambrecht & Quist LLC,
will own 177,089 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 LLP, Palo Alto, California ("Cooley Godward").
Certain legal matters related to the offering will be passed upon for the
Underwriters by Fenwick & West LLP, Palo Alto, California. As of the date of
this Prospectus, certain members of Cooley Godward beneficially owned 14,919
shares of Common Stock of the Company.
EXPERTS
The statements of operations for the years ended December 31, 1993, 1994 and
1995 and for the one month period ended January 31, 1996 and the balance
sheets at December 31, 1994 and 1995 and January 31, 1996 included in this
Prospectus and in the Registration Statement of which this Prospectus is a
part have been included herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of such firm as
experts in accounting and auditing.
56
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. Statements contained in this Prospectus concerning the
contents of any contract or any other document are necessarily summaries of
such contracts or documents, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement
and the exhibits filed as a part thereof. A copy of the Registration
Statement, including exhibits thereto, may be inspected without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. In addition, the Commission maintains a World
Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Web site is: http://www.sec.gov.
57
<PAGE>
PEERLESS SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent Accountants................. F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Deficit......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Peerless Systems Corporation
We have audited the accompanying balance sheets of Peerless Systems
Corporation as of December 31, 1994 and 1995 and January 31, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1995 and the one
month period ended January 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peerless Systems Corporation
at December 31, 1994 and 1995 and January 31, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and the one month period ended January 31, 1996, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
July 25, 1996
F-2
<PAGE>
PEERLESS SYSTEMS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JANUARY 31, JULY 31, JULY 31,
1994 1995 1996 1996 1996
-------- -------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 393 $ 1,184 $ 722 $ 194
Trade accounts
receivable............. 2,481 1,746 2,013 2,008
Unbilled receivables.... 11 211 245 384
Prepaid expenses and
other current assets... 166 103 102 183
-------- -------- -------- --------
Total current assets.. 3,051 3,244 3,082 2,769
Property and equipment,
net...................... 299 509 532 737
Other assets.............. 191 432 427 454
-------- -------- -------- --------
Total assets.......... $ 3,541 $ 4,185 $ 4,041 $ 3,960
======== ======== ======== ========
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit.......... $ 1,095 $ 500 $ 500
Accounts payable........ 512 $ 395 $ 431 655 655
Accrued wages........... 570 594 623 557 557
Accrued compensated
absences............... 315 352 310 390 390
Other current
liabilities............ 305 74 209 122 122
Obligations under
capital leases, current
portion................ 154 154 255 255
Deferred rent, current
portion................ 180 76 76 76 76
Deferred revenue,
current portion........ 3,266 3,906 3,887 2,844 2,844
-------- -------- -------- -------- --------
Total current
liabilities.......... 6,243 5,551 5,690 5,399 5,399
Convertible notes payable. 3,070 3,070 3,070
Obligations under capital
leases................... 141 141 279 279
Deferred rent............. 398 299 291 252 252
Deferred revenue.......... 2,196 789 784 601 601
-------- -------- -------- -------- --------
8,837 9,850 9,976 9,601 6,531
-------- -------- -------- -------- --------
Commitments and
contingencies (Note 6)...
Series A convertible,
redeemable Preferred
Stock, 3,472 shares
authorized, 1,111 shares
issued and outstanding at
December 31, 1994, 1995,
January 31, 1996 and July
31, 1996 (aggregate
liquidation value of
$2,167, $1,667, $1,667
and $1,667 at
December 31, 1994, 1995,
January 31, 1996 and July
31, 1996, respectively),
no shares pro forma...... 3,214 2,482 2,482 2,484
-------- -------- -------- --------
Series B convertible,
redeemable Preferred
Stock, 6,400 shares
authorized, 1,501 shares
issued and outstanding at
December 31, 1994, 1995,
January 31, 1996 and July
31, 1996 (aggregate
liquidation value of
$2,327 at December 31,
1994, 1995, January 31,
1996 and July 31, 1996),
no shares pro forma...... 3,431 3,449 3,450 3,454
-------- -------- -------- --------
Stockholders' deficit:
Preferred Stock, $.001
par value, 5,000 shares
authorized, no shares
issued or outstanding,
pro forma..............
Common Stock, no par
value ($.001 par value
pro forma), 15,000
shares authorized
(30,000 shares pro
forma), 2,635, 2,837,
2,837 and 2,883 shares
issued and outstanding
at December 31, 1994,
1995, January 31, 1996
and July 31, 1996,
respectively, 6,699
shares pro forma....... 238 508 508 1,005 7
Additional paid-in
capital................ 889 889 889 10,895
Deferred compensation... (425) (425)
Accumulated deficit..... (12,179) (12,993) (13,264) (13,048) (13,048)
-------- -------- -------- -------- --------
Total stockholders'
deficit.............. (11,941) (11,596) (11,867) (11,579) (2,571)
-------- -------- -------- -------- --------
Total liabilities and
stockholders'
deficit.............. $ 3,541 $ 4,185 $ 4,041 $ 3,960 $ 3,960
======== ======== ======== ======== ========
</TABLE>
The following notes are an integral part of these financial statements.
F-3
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------ MONTH ENDED -----------------
JANUARY 31, JUNE 30, JULY 31,
1993 1994 1995 1996 1995 1996
------- ------- ------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product licensing...... $ 1,586 $ 4,394 $4,774 $ 329 $2,420 $2,438
Engineering services
and maintenance....... 3,655 4,942 5,639 396 2,312 4,650
------- ------- ------ ----- ------ ------
Total revenues........ 5,241 9,336 10,413 725 4,732 7,088
------- ------- ------ ----- ------ ------
Cost of revenues:
Product licensing...... 341 218 143 5 74 65
Engineering services
and maintenance....... 5,095 5,457 5,111 564 2,358 3,296
------- ------- ------ ----- ------ ------
Total cost of
revenues............. 5,436 5,675 5,254 569 2,432 3,361
------- ------- ------ ----- ------ ------
Gross margin.......... (195) 3,661 5,159 156 2,300 3,727
------- ------- ------ ----- ------ ------
Operating expenses:
Research and
development........... 1,766 1,767 2,088 127 1,077 1,038
Sales and marketing.... 1,656 1,878 2,142 156 1,080 1,164
General and
administrative........ 1,048 1,000 1,293 119 613 1,086
------- ------- ------ ----- ------ ------
Total operating
expenses............. 4,470 4,645 5,523 402 2,770 3,288
------- ------- ------ ----- ------ ------
Income (loss) from
operations............. (4,665) (984) (364) (246) (470) 439
Interest expense, net... 96 118 176 17 65 167
------- ------- ------ ----- ------ ------
Income (loss) before
provision for income
taxes.................. (4,761) (1,102) (540) (263) (535) 272
Provision for income
taxes.................. 63 124 99 7 62 50
------- ------- ------ ----- ------ ------
Net income (loss)..... $(4,824) $(1,226) $ (639) $(270) $ (597) $ 222
======= ======= ====== ===== ====== ======
Pro forma information
(unaudited):
Pro forma net income
(loss) per share...... $(0.08) $ 0.04
====== ======
Pro forma weighted
average number of
common and common
equivalent shares
outstanding........... 7,085 8,637
====== ======
</TABLE>
The following notes are an integral part of the these financial statements.
F-4
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
ADDITIONAL TOTAL
NUMBER OF PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1992................... 2,555 $ 192 $ (5,678) $ (5,486)
Issuance of common
stock for cash....... 62 13 13
Repurchase of common
stock for cash....... (17) (3) (3)
Net loss.............. (4,824) (4,824)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (228) (228)
----- ----- -------- --------
Balances, December 31,
1993................... 2,600 202 (10,730) (10,528)
Issuance of common
stock for cash....... 35 36 36
Net loss.............. (1,226) (1,226)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (223) (223)
----- ----- -------- --------
Balances, December 31,
1994................... 2,635 238 (12,179) (11,941)
Issuance of common
stock for cash....... 202 270 270
Net loss.............. (639) (639)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (175) (175)
Decrease in redemption
value of Series A
Preferred Stock...... $889 889
----- ----- ---- -------- --------
Balances, December 31,
1995................... 2,837 508 889 (12,993) (11,596)
Net loss.............. (270) (270)
Increase in redemption
value of Series A and
Series B Preferred
Stock................ (1) (1)
----- ----- ---- -------- --------
Balances, January 31,
1996................... 2,837 508 889 (13,264) (11,867)
Exercise of stock
options for cash
(unaudited).......... 46 45 45
Deferred compensation
related to grant of
stock options
(unaudited).......... 452 (452)
Amortization of
deferred compensation
(unaudited).......... 27 27
Net income
(unaudited).......... 222 222
Increase in redemption
value of Series A and
Series B Preferred
Stock (unaudited).... (6) (6)
----- ----- ---- ----- -------- --------
Balances, July 31, 1996
(unaudited)............ 2,883 1,005 889 ($425) ($13,048) $(11,579)
===== ===== ==== ===== ======== ========
</TABLE>
The following notes are an integral part of these financial statements.
F-5
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- -----------------
MONTH ENDED
JANUARY 31, JUNE 30, JULY 31,
1993 1994 1995 1996 1995 1996
-------- -------- -------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ (4,824) $ (1,226) $ (639) $ (270) $(597) $ 222
Adjustments to
reconcile net income
(loss) to net cash
provided (used) by
operating activities:
Depreciation and
amortization......... 147 156 203 15 71 205
Amortization of
deferred
compensation......... 27
Loss on sale of
property and
equipment............ 18
Changes in operating
assets and
liabilities:
Trade accounts
receivable.......... (760) (917) 735 (267) 703 5
Unbilled receivables. 152 26 (200) (34) (145) (139)
Prepaid expenses and
other current
assets.............. (6) 46 63 1 27 (81)
Other assets......... (63) 30 (241) 5 (92) (27)
Accounts payable..... (216) 119 (117) 36 (277) 224
Accrued wages........ 134 88 24 29 110 (66)
Accrued compensated
absences............ 150 121 37 (42) 13 80
Other current
liabilities......... 168 192 (231) 135 (187) (87)
Deferred rent........ 473 (200) (203) (8) (90) (39)
Deferred revenue..... 3,088 994 (767) (24) 404 (1,226)
-------- -------- -------- ------ ----- -------
Net cash provided
(used) by operating
activities......... (1,539) (571) (1,336) (424) (60) (902)
-------- -------- -------- ------ ----- -------
Cash flows from
investing activities:
Purchases of property
and equipment......... (79) (39) (47) (38) (27) (50)
Proceeds from sale of
property and
equipment............. 5
-------- -------- -------- ------ ----- -------
Net cash used by
investing
activities......... (74) (39) (47) (38) (27) (50)
-------- -------- -------- ------ ----- -------
Cash flows from
financing activities:
Principal payments of
long-term debt........ (61) (74)
Proceeds from issuance
of common stock....... 13 36 270 38 45
Repurchase of common
stock................. (3)
Proceeds from issuance
of convertible notes
payable............... 3,070
Net proceeds from
issuance of Series B
Preferred Stock....... 1,970
Net (payments)
borrowings on line of
credit................ (75) 270 (1,095) (156) 500
Payments on obligations
under capital leases.. (71) (8) (121)
-------- -------- -------- ------ ----- -------
Net cash provided by
financing
activities......... 1,844 232 2,174 (126) 424
-------- -------- -------- ------ ----- -------
Net increase
(decrease) in cash
and cash
equivalents........ 231 (378) 791 (462) (213) (528)
Cash and cash equiva-
lents, beginning of pe-
riod................... 540 771 393 1,184 393 722
-------- -------- -------- ------ ----- -------
Cash and cash equiva-
lents, end of period... $ 771 $ 393 $ 1,184 $ 722 $ 180 $ 194
======== ======== ======== ====== ===== =======
</TABLE>
(Continued)
The following notes are an integral part of these financial statements.
F-6
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
---------------- MONTH ENDED -----------------
JANUARY 31, JUNE 30, JULY 31,
1993 1994 1995 1996 1995 1996
------ ---- ---- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Income taxes.................. $ 63 $124 $111 $-- $ 46 $ 63
====== ==== ==== === ==== ====
Interest...................... $ 103 $119 $175 $-- $ 65 $174
====== ==== ==== === ==== ====
Supplemental schedule of noncash
investing and financing
activities:
Increase in redemption value of
Series A and Series B
Preferred Stock............... $ 228 $223 $175 $ 1 $113 $ 6
====== ==== ==== === ==== ====
Conversion of accrued interest
on convertible notes to shares
of Series B Preferred Stock... $ 27
======
Conversion of convertible notes
to shares of Series B
Preferred Stock............... $1,408
======
Decrease in redemption value of
Series A Preferred Stock...... $889
====
Software and equipment acquired
under capital lease
obligations................... $366 $267 $360
==== ==== ====
Deferred compensation related to
grant of stock options......... $452
====
</TABLE>
The following notes are an integral part of these financial statements.
F-7
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
Peerless Systems Corporation ("Peerless" or the "Company") was incorporated
in the State of California in April 1982. Peerless develops and licenses
embedded imaging software and supporting hardware technologies and provides
custom engineering services to Original Equipment Manufacturers ("OEMs"),
located primarily in the United States and Japan. These OEMs sell monochrome
printers, as well as multifunction products which combine printer, fax and
scanner capabilities.
History of Operating Losses; Accumulated Deficit:
The Company recognized net losses of $1,226 and $639 for the fiscal years
ended December 31, 1994 and 1995, respectively, and recognized net income of
$222 for the six months ended July 31, 1996. Losses have resulted in an
accumulated deficit of $13,048 as of July 31, 1996. Management plans to
enhance the Company's cash flows from operations by obtaining license fees
upon the signing of new contracts, and obtaining add-on and new product
contracts with existing and new customers, supplemented with additional
external funding, if necessary. In May 1996, management successfully
renegotiated its line of credit which resulted in covenants that management
believes are achievable.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment:
Property and equipment, including any assets under capital leases, are
stated at cost, less accumulated depreciation and amortization. Depreciation
on property and equipment is calculated using the straight-line method over
estimated useful lives of 5-10 years, and over the lesser of the term of the
lease or the estimated useful life of the leasehold improvements and assets
under capital leases. Maintenance and repairs are expensed as incurred, while
renewals and betterments are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation or amortization, and any resulting gain or loss is
included in operations.
Capitalization of Software Development Costs:
The Company follows the working model approach to determine technological
feasibility of its products. Costs that are incurred subsequent to
establishing technological feasibility are immaterial and, therefore, the
Company expenses all costs associated with the development of its products as
such costs are incurred.
Revenue Recognition:
Revenue from the licensing of source code of the Company's standard products
to customers is recognized upon shipment and customer acceptance. Recurring
licensing revenue is recognized on a royalty basis generally when the
Company's OEM customers ship their products incorporating Peerless' technology
to their end-user customers.
The Company also enters into engineering services contracts with OEMs to
provide research and development work to adapt the Company's standard products
to the OEM's specific hardware and software
F-8
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
requirements. Revenue on such contracts is recognized over the course of the
development work on a percentage-of-completion basis. The Company provides for
any anticipated losses on such contracts in the period in which such losses
are first determinable.
Deferred revenue consists of prepayments of recurring licensing royalties,
and payments billed to customers in advance of revenue recognized on
engineering services contracts. Unbilled receivables arise when the revenue
recognized on a contract exceeds invoices to customers under those contracts.
Research and Development Costs:
Research and development costs are expensed as incurred.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes." Under
this method, deferred income taxes are recognized for the tax consequences in
future years resulting from differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory rates applicable to the periods in which the
differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred income tax assets to the amount expected to
be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred income tax assets and liabilities.
2-for-3 Reverse Stock Split: (Unaudited)
On July 25,1996 the Board of Directors approved a 2-for-3 reverse split of
all outstanding common stock, Series A and Series B Preferred Stock, stock
options and warrants. All share and per share amounts have been adjusted to
give retroactive effect to this reverse split for all periods presented.
Net Loss Per Common Share:
Net loss per common share is based on reported net loss, with such reported
net loss adjusted for accretion of the Series A and B Preferred Stock and
interest on convertible notes payable. The resulting amount is presented in
the table below as loss applicable to common stock.
Net loss per share is computed based upon the weighted average number of
common shares outstanding adjusted for certain shares issuable under other
equity securities computed in accordance with Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") Topic 4-D. The SAB requires that
common stock issued by the Company, at prices less than the per share initial
public offering price, in the twelve months immediately preceding a proposed
public offering plus the number of common equivalent shares that become
issuable during the same period pursuant to the issuance of warrants or grant
of stock options (using the treasury stock method), convertible notes payable
or other potentially dilutive instruments with per share exercise prices below
the per share initial public offering price be included in the calculation of
common stock and common stock equivalent shares as if they were outstanding
for all periods presented.
F-9
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------ ----------------------------
JULY 31,
1993 1994 1995 JUNE 30, 1995 1996
--------------- --------------- -------------- -------------- ------------
(UNAUDITED) (UNAUDITED)
PER PER PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ------ ------- ------ ------ ------ ------ ------ ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income
(loss)................. $(4,824) $(1,226) $ (639) $ (597) $ 222
Adjustment for accretion
of Series A and B
Preferred Stock and
interest on convertible
notes.................. (228) (223) (130) (87) 101
------- ------- ------ ------ ------
Net income (loss)
applicable to common
stock and net income
(loss) per common share
and common equivalent
share.................. (5,052) $(1.17) (1,449) $(0.33) (769) $(0.17) (684) $(0.15) 323 $0.05
======= ====== ======= ====== ====== ====== ====== ====== ====== =====
Weighted average number
of:
Common shares.......... 2,556 2,599 2,664 2,661 2,835
Common equivalent
shares................ 1,774 1,774 1,774 1,774 3,155
------- ------- ------ ------ ------
Weighted average common
shares and common
equivalent shares
outstanding............ 4,330 4,373 4,438 4,435 5,990
======= ======= ====== ====== ======
</TABLE>
Primary and fully diluted earnings per share do not differ.
Pro Forma Net Income (Loss) Per Share and Unaudited Pro Forma Stockholders'
Deficit:
Pro forma net income (loss) per share has been computed as described above
and also gives effect, even if antidilutive, to common equivalent shares from
convertible Series A and B Preferred Stock that will automatically convert
upon the closing of the Company's initial public offering (using the if-
converted method). If the offering contemplated by this Prospectus is
consummated, all of the convertible Series A and B Preferred Stock and
convertible notes payable outstanding as of the closing date will
automatically be converted into an aggregate of 2,647 and 1,170 shares of
common stock, respectively.
Unaudited pro forma stockholders' deficit at July 31, 1996, as adjusted for
the assumed conversion of the Series A and Series B Preferred Stock and
convertible notes payable, is disclosed on the balance sheet.
Common Stock Options:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair
value based method of accounting for an employee stock option. Fair value of
the stock option is determined by considering factors such as the exercise
price, the expected life of the option, the current price of the underlying
stock and its volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option. Under the fair value based
method, compensation cost is measured as of the grant date based on the fair
value of the award and is recognized over the service period. A company may
elect to adopt SFAS No. 123 or elect to continue accounting for its stock
option or similar equity awards using the intrinsic method, where compensation
cost is measured at the date of grant based on the excess of the market value
of the underlying stock over the exercise price. If a company elects not to
adopt SFAS No. 123, then it must provide pro forma disclosure of net income
and net income per share, as if the fair value based method had been applied.
The Company does not intend to adopt SFAS No. 123 and will provide the
required pro forma disclosure.
F-10
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Interim Financial Information:
The financial information at July 31, 1996 and for the six-month periods
ended June 30, 1995 and July 31, 1996 is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position
at such date and the operating results and cash flows for those periods.
Results of the July 31, 1996 period are not necessarily indicative of the
results for the entire year.
Change in Fiscal Year-End:
The Company changed its fiscal year-end from December 31 to January 31,
effective in the year beginning February 1, 1996. The results of operations
for the one month transition period ended January 31, 1996 is presented
herein.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JULY 31,
1994 1995 1996
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and other equipment..................... $ 789 $ 798 $ 869
Furniture......................................... 111 118 121
Leasehold improvements............................ 23 23 36
Software under capital lease obligations.......... 115 156
Equipment under capital lease obligations......... 251 570
----- ------ -------
923 1,305 1,752
Less, accumulated depreciation and amortization. (624) (796) (1,015)
----- ------ -------
$ 299 $ 509 $ 737
===== ====== =======
</TABLE>
3. LINE OF CREDIT:
The Company has a revolving line of credit with a bank, collateralized by
all of the Company's assets, other than those subject to lease financing
agreements. The maximum amount available under the line of credit is the
lesser of $1,500 or a percentage of the Company's outstanding accounts
receivable and current royalty receivables, which amount was $726 at December
31, 1995 (unaudited: $1,251 at July 31, 1996). The interest rate on this line
of credit is the bank's prime interest rate plus 2% (an effective rate of
10.5% at December 31, 1995 [unaudited: 10.25% at July 31, 1996]). Under the
terms of this agreement, which expires in May 1997, the Company is required to
maintain compliance with certain financial ratios, the most restrictive of
which is a current ratio (as defined in the agreement) of 1:1, and to
recognize net income each fiscal quarter beginning July 31, 1996.
F-11
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. OBLIGATIONS UNDER CAPITAL LEASES:
Obligations under capital leases consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Obligations under capital leases with terms of
eighteen months, bearing an effective interest
rate of 26.97%, payable in monthly payments of
principal and interest ranging from $3 to $5,
expiring on various dates through 1997, and
collateralized by the software under lease........ $ 83 $ 72
Obligations under capital leases with terms of
three years, bearing effective interest rates
ranging from 14.70% to 17.87%, payable in monthly
payments of principal and interest ranging from $1
to $4, expiring on various dates through 1999, and
collateralized by the equipment under lease....... 212 462
----- -----
295 534
Less, current portion.............................. (154) (255)
----- -----
$ 141 $ 279
===== =====
</TABLE>
Total required minimum lease payments under capital leases in the calendar
years subsequent to December 31, 1995 and in the aggregate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C>
1996................................................................... $198
1997................................................................... 120
1998................................................................... 42
----
Total minimum lease payments......................................... 360
Less, amount representing interest................................. (65)
----
Net minimum lease payments under capital lease................... $295
====
</TABLE>
5. CONVERTIBLE NOTES PAYABLE:
In December 1992, the Company issued $1,408 of convertible notes payable in
exchange for cash. The notes carried an annual interest rate of 4%. The notes
and related accrued interest were converted into shares of the Company's
Series B Preferred Stock in June 1993 at $2.33 per share.
In October 1995, the Company issued 7.00% Senior Convertible Subordinated
Debentures ("Debentures"), to holders of the Company's Preferred Stock, with
an aggregate principal amount of $3,070 and a maturity date of June 1, 2001.
The Debentures bear interest at a rate of 7% per annum with interest due June
1 and December 1 of each year. The Debentures are convertible, at the option
of the holder, to shares of common stock at a specified conversion price of
$2.63 per common share, subject to dilution adjustments. The Debentures are
subordinate to all bank indebtedness. The Debentures will automatically
convert upon the effective date of a registration statement relating to a
public offering of at least $10,000 of the Company's common stock under the
Securities Act of 1933.
F-12
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. CONVERTIBLE NOTES PAYABLE--(CONTINUED)
If the Company receives requests for redemption on or prior to May 1, 1999
from the holders of a majority in aggregate principal amount of the Debentures
and obtains the appropriate consents from the preferred stockholders, all
Debentures will be redeemed at the rate of one-third of the then outstanding
principal plus accrued and unpaid interest on each of the following three
redemption dates: June 1, 1999, 2000 and 2001. The Company is not required to
set up a sinking fund for the redemption.
As of December 31, 1995 and January 31, 1996, total outstanding principal
was $3,070 and the Company had not received redemption requests from the
holders.
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company leases its offices and certain operating equipment under
operating leases that expire through 2001.
Future minimum rental payments under long-term operating leases are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C>
1996............................................................... $ 886
1997............................................................... 701
1998............................................................... 620
1999............................................................... 620
2000............................................................... 620
Thereafter......................................................... 155
------
Total........................................................... $3,602
======
</TABLE>
Total rental expense was $1,160, $916 and $1,059 for the years ended
December 31, 1993, 1994 and 1995, respectively. Unaudited: Rental expense was
$400 for the six months ended July 31, 1996.
Concentration of Credit Risk:
At December 31, 1994 and 1995, the Company had cash on deposit at a bank
that was in excess of federally-insured limits. The aggregate excess amount
was $300 and $1,164, respectively. Unaudited: The aggregate excess amount at
July 31, 1996 was $565.
The Company's credit risk in accounts receivable, which are generally not
collateralized, is concentrated with customers which are OEMs of laser
printers and printer peripheral technologies. The accounting loss, should a
customer be unable to meet its obligation to the Company, would be equal to
the recorded accounts receivable. At December 31, 1994 and 1995, two customers
represented 79% and 50% of total receivables, respectively. For the years
ended December 31, 1993, 1994 and 1995, two customers represented 40%, 45% and
41%, respectively, of product licensing revenues, and four customers
represented 64%, 81% and 94%, respectively, of engineering services revenues.
Unaudited: At July 31, 1996, five customers represented 70% of total
receivables. For the six months ended July 31, 1996, four customers
represented 78% of product licensing revenues and six customers represented
83% of engineering services revenues.
F-13
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES:
The income tax provision consists of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $-- $ -- $--
State....................................................... -- -- --
Foreign..................................................... 63 124 99
--- ---- ---
63 124 99
--- ---- ---
Deferred:
Federal..................................................... -- -- --
State....................................................... -- -- --
Foreign..................................................... -- -- --
--- ---- ---
-- -- --
--- ---- ---
$63 $124 $99
=== ==== ===
</TABLE>
The foreign tax provision is comprised of foreign withholding taxes on
license fees and royalty payments.
Temporary differences that give rise to the deferred tax provision consist
of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -----
<S> <C> <C> <C>
Property and equipment.............................. $ 9 $ 11 $ 19
Accrued liabilities................................. 61 40 42
Deferred revenue.................................... 1,337 431 (332)
Deferred expenses................................... 33 87 43
Tax credit carryforwards............................ 1,401 253
Net operating loss carryforwards.................... 447 (92) 317
Other............................................... (2) (36) (3)
------- ------- -----
1,885 1,842 339
Valuation allowance................................. (1,885) (1,842) (339)
------- ------- -----
Net deferred income taxes......................... $ -- $ -- $ --
======= ======= =====
</TABLE>
F-14
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
Temporary differences which give rise to deferred income tax assets and
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities...................................... $ 108 $ 150
Deferred revenue......................................... 2,365 2,033
Deferred expenses........................................ 120 163
Tax credit carryforwards................................. 1,401 1,654
Net operating loss carryforwards......................... 1,757 2,074
Other.................................................... 3
------- -------
Total deferred tax assets.............................. 5,754 6,074
Deferred tax liability:
Property and equipment................................... (49) (30)
------- -------
Subtotal............................................... 5,705 6,044
Valuation allowance........................................ (5,705) (6,044)
------- -------
Net deferred income taxes.............................. $ -- $ --
======= =======
</TABLE>
The Company periodically evaluates the sufficiency of its deferred tax asset
valuation allowance, which is adjusted as deemed appropriate based on
operating results.
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory regular federal income tax rate........... (34.0)% (34.0)% (34.0)%
Foreign provision................................... 1.3 11.2 18.3
Nondeductible expenses.............................. 1.2 1.1 3.2
Foreign tax and research and experimentation
credits............................................ (3.7) (74.4) (23.4)
Change in federal valuation allowance............... 39.6 108.4 55.7
Other............................................... (3.1) (1.1) (1.5)
----- ----- -----
1.3% 11.2% 18.3%
===== ===== =====
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards
for federal and state purposes of approximately $5,299 and $2,932,
respectively. The net operating loss carryforwards begin expiring in 2005 and
1997, respectively. The Company has research and experimentation credit
carryforwards for federal and state purposes of approximately $840 and $460,
respectively. The research and experimentation credits begin to expire in 2000
for federal purposes. The Company also has foreign tax credits of
approximately $355 for federal purposes, which begin to expire in 1996.
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK:
The Company has authorized 15,000 shares of Preferred Stock, of which 1,736
are designated as Series A Preferred Stock, 1,736 are designated as Series A1
Preferred Stock, 3,200 are designated as Series B Preferred Stock, 3,200 are
designated as Series B1 Preferred Stock, and 5,128 are undesignated.
F-15
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK--(CONTINUED)
During 1991, the Company issued 1,111 shares of Series A Preferred Stock at
a price of $2.25 per share in exchange for $2,500 of cash, less $51 of
offering expenses.
Shares of Series A Preferred Stock are convertible into the Company's common
stock at a rate of $2.22 per share of common stock, subject to anti-dilution
adjustments. Conversion into the Company's common stock may occur at any time
at the holder's option, but will automatically occur upon the effective date
of a registration statement relating to a public offering of at least $10,000
of the Company's common stock under the Securities Act of 1933.
Holders of Series A Preferred Stock are entitled to a noncumulative annual
dividend of $0.18 per share, payable only when and as declared by the Board of
Directors out of legally available funds.
Until October 1995, the Company was required to redeem all shares of Series
A Preferred Stock in three equal installments on June 1, 1997, 1998 and 1999
upon the request of a majority of the holders of the outstanding Series A
Preferred Stock received prior to May 1, 1997. The redemption amount was based
on $2.25 per share of Common Stock plus a redemption premium equal to $0.045
per share times the number of calendar quarters that elapsed between March 31,
1991 and the date of redemption. As a result of this provision for a
redemption premium, the Company recorded the incremental increases in Series A
Preferred Stock and charged the like amount to Accumulated Deficit.
As a result of an amendment of the Company's Articles of Incorporation in
1995, the Series A Preferred Stock redemption dates were changed to June 1,
1999, 2000 and 2001, redeemable upon the request of a majority of the holders
of the outstanding Series A Preferred Stock received prior to April 1, 1999
and consent of the holders of a majority of the then outstanding principal
amount of the Debentures (Note 5). All redemption premiums relating to Series
A Preferred Stock were retroactively eliminated. As a result of this
amendment, $889 of accumulated incremental increases to Series A Preferred
Stock relating to redemption premiums, including $200, $200 and $150
recognized in 1993, 1994 and 1995, respectively, was added to Additional Paid-
In Capital and charged to Series A Preferred Stock in 1995. The Company is
continuing to accrete for the difference between the carrying values and the
redemption values of its Series A and B Preferred Stock.
During 1993, the Company issued 1,501 shares of Series B Preferred Stock at
a per share price of $2.33 in exchange for $1,435 of convertible notes
payable, including $27 of accrued interest, and $2,055 of cash, less $85 of
offering expenses.
The Company's Series B Preferred Stock has substantially the same rights,
privileges and restrictions as those of Series A Preferred Stock. Shares of
Series B Preferred Stock are convertible into the Company's common stock at a
rate of $2.30 per share of common stock, subject to anti-dilution adjustments,
and also automatically convert into common stock upon the effective date of a
registration statement relating to a public offering of at least $10,000 of
the Company's common stock under the Securities Act of 1933.
In the event of a liquidation, holders of Series A Preferred Stock, and
Series B Preferred Stock would be entitled to receive a distribution equal to
$2.25 per share and $2.33 per share, respectively, plus all declared but
unpaid dividends. Holders of common stock would then participate in the
distribution to the extent of $1,250 on a pro rata basis. Thereafter, proceeds
would be allocated among the holders of common stock and Series A and Series B
Preferred Stock, with the Preferred Stock being treated on an as-converted
basis.
F-16
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK--(CONTINUED)
Holders of Series A Preferred Stock and Series B Preferred Stock vote as
separate classes from common stock with respect to elections of the Board of
Directors, and participate in other voting rights of the Company with
Preferred Stock being treated on an as-converted basis. Preferred Stock is
transferable in certain circumstances, subject to a right of first refusal by
the other holders of Preferred Stock.
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS:
Common Stock:
The Company has reserved shares of common stock at December 31, 1995 as
follows:
<TABLE>
<S> <C>
Series A and A1 Preferred Stock..................................... 1,736
Series B and B1 Preferred Stock..................................... 2,779
Conversion of warrants.............................................. 1,538
Stock option plans.................................................. 1,783
Conversion of notes payable......................................... 1,771
-----
Total............................................................. 9,607
=====
</TABLE>
In 1994, the Company adopted an Employee Stock Purchase Plan, under which
employees were offered the opportunity to purchase shares of common stock at a
price of $1.43 per share. Pursuant to this plan which terminated in December
1995, 159 shares of common stock were issued. In addition, not related to this
plan, during 1994 and 1995, the Company issued 33 and 27 shares, respectively,
of common stock at a price of $1.43 per share to certain employees.
Unaudited:
On July 25, 1996 the Board of Directors approved a 2-for-3 reverse split of
all outstanding common stock, Series A and Series B Preferred Stock, stock
options and warrants. All share and per share amounts have been adjusted to
give retroactive effect to this reverse split for all periods presented.
Warrants:
The Company has issued warrants to purchase common and preferred stock in
connection with various financing transactions, as follows:
<TABLE>
<CAPTION>
PER
SHARE
NUMBER OF EXERCISE EXPIRATION
STOCK CLASS SHARES PRICE DATE(1)
----------- --------- -------- ----------
<S> <C> <C> <C>
Common(2)................................ 67 $4.50 December 1996
Common(3)................................ 517 $1.13 July 1997
Common(4)................................ 27 $1.13 December 1997
Common(4)................................ 13 $2.55 December 1997
Common(5)................................ 365 $1.13 December 1998
Common(6)................................ 31 $1.13 February 2003
Common(7)................................ 5 $2.97 December 1998
Series A Preferred(8).................... 32 $2.25 July 2001
Series B Preferred(6).................... 75 $2.33 February 2003
</TABLE>
F-17
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS--(CONTINUED)
- ---------------------
(1) All warrants expire on the earlier of the above dates or the closing date
of an initial public offering of the Company's common stock.
(2) During 1991, the Company issued warrants to purchase these shares in
connection with the Series A Preferred Stock transaction.
(3) During 1993, the Company issued warrants to purchase 125 shares in
connection with a convertible note payable transaction. The Company had
previously issued warrants to purchase 125 shares in connection with the
same transaction and warrants to purchase 267 shares in connection with a
loan guarantee transaction.
(4) During 1993 and 1994, the Company issued warrants to purchase 27 and 13
shares, respectively, in connection with bank line of credit transactions.
(5) During 1993, the Company issued warrants to purchase these shares in
connection with the Series B Preferred Stock transaction.
(6) During 1993, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
(7) During 1995, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
(8) During 1991, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
At December 31, 1994, 1995 and (unaudited) at July 31, 1996, no warrants had
been exercised, and there was no imputed value associated with any of the
outstanding warrants due to deemed immateriality as such warrants were issued
at exercise prices not less than the deemed fair market value of the
applicable class of stock at the date of grant.
Stock Option Plans:
During 1992, the Board of Directors authorized a nonstatutory stock option
program for the purpose of granting options to purchase a total of 222 shares
of the Company's common stock to employees. The Board of Directors reduced the
number of shares authorized to 133 during 1994. Options vest annually, pro
rata over a five-year period, retroactive to the date of hire for each
recipient.
The following represents option activity under the nonstatutory option plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------- SIX MONTHS ENDED
1993 1994 1995 JULY 31, 1996
------------------- ------------------- ------------------- -------------------
NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE
OF EXERCISE OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE
------- ----------- ------- ----------- ------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 222 $0.21-$0.53 94 $0.21-$0.53 88 $0.21-$0.53 65 $0.21-$0.53
Options exercised....... (61) $0.21-$0.53 (13) $0.21 (10) $0.53
Options forfeited....... (67) $0.21-$0.53 (6) $0.21-$0.53 (10) $0.21-$0.53
--- --- --- ---
Options outstanding at
end of period.......... 94 $0.21-$0.53 88 $0.21-$0.53 65 $0.21-$0.53 55 $0.21-$0.53
=== === === ===
</TABLE>
F-18
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1995, unexercised stock options to purchase 49 and
46 shares, respectively, were vested and no shares were available for
granting. There was no stock option activity under this plan during the month
of January 1996.
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS--(CONTINUED)
During 1992, the Board of Directors authorized the 1992 Stock Option Plan
for the purpose of granting options to purchase the Company's common stock to
employees, directors and consultants. The Board of Directors determines the
form, term, option price and conditions under which each option becomes
exercisable. Options to purchase a total of 1,055 shares of common stock have
been authorized by the Board under this plan.
The following represents option activity under the 1992 Stock Option Plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------- SIX MONTHS ENDED
1993 1994 1995 JULY 31, 1996
----------------- ------------------- ------------------- -------------------
PER SHARE PER SHARE
NUMBER EXERCISE NUMBER PER SHARE NUMBER PER SHARE NUMBER EXERCISE
OF PRICE OF EXERCISE OF EXERCISE OF PRICE
OPTIONS RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS RANGE
------- --------- ------- ----------- ------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 147 $0.53 188 $0.53 309 $0.53-$1.43 774 $0.53-$1.65
Options granted......... 115 $0.53 137 $0.53-$1.43 503 $1.43-$1.86 186 $1.65
Options exercised....... (1) $0.53 (2) $0.53 (3) $0.53-$1.43 (36) $0.53
Options forfeited....... (73) $0.53 (14) $0.53-$1.43 (35) $0.53-$1.65 (37) $0.53-$1.65
--- --- --- ---
Options outstanding at
end of period.......... 188 $0.53 309 $0.53-$1.43 774 $0.53-$1.65 887 $0.53-$1.65
=== === === ===
</TABLE>
There was no stock option activity under this plan during the month of
January 1996. At December 31, 1994 and 1995, unexercised stock options to
purchase 79 and 162 shares, respectively, were vested and 411 and 277 shares
were available for granting, respectively.
During the years ended December 31, 1993, 1994 and 1995 and (unaudited) the
three months ended April 30, 1996, no compensation had been recorded on the
granting of any options, as such option prices equaled or exceeded the then
per share fair market value of the Company's common stock.
1996 Equity Incentive Plan (Unaudited). In May 1996, the Board adopted the
Company's 1996 Stock Option Plan (the "1996 Plan"). The Company's 1996 Equity
Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors in
July 1996 as an amendment and restatement of the Company's 1996 Plan. The
Board has authorized and reserved an aggregate of 1,267 shares of Common Stock
for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options, restricted stock purchase awards and
stock bonuses to employees, directors and consultants. The terms of stock
options granted under the Incentive Plan generally may not exceed 10 years.
The exercise price of options granted under the Incentive Plan is determined
by the Board of Directors, provided that the exercise price for an incentive
stock option cannot be less than 100% of the fair market value of the Common
Stock on the date of the option grant and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Incentive Plan vest at the rate specified in each optionee's option agreement.
F-19
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS--(CONTINUED)
The following represents option activity under the Incentive Plan:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31, 1996
---------------------
PER SHARE
NUMBER OF EXERCISE
OPTIONS PRICE RANGE
--------- -----------
(UNAUDITED)
<S> <C> <C>
Options outstanding at February 1, 1996.............
Options granted..................................... 562 $3.30-$9.00
Options exercised................................... -- --
Options forfeited................................... (2) $3.30
---
Options outstanding at July 31, 1996................ 560 $3.30-$9.00
===
</TABLE>
Unaudited:
The Company recognized deferred compensation expense of $452 for the
difference between the exercise price and the deemed fair value of the
Company's common stock at the date of grant for options issued under the
Incentive Plan. Of the total deferred expense, the Company recognized $27 as a
compensation expense during the three months ended July 31, 1996. The
remaining deferred compensation expense will be amortized over the vesting
periods of the options, which range from 2 to 60 months.
As of July 31, 1996, no restricted stock purchase awards or stock bonuses
were issued under the Incentive Plan.
Employee Stock Purchase Plan (Unaudited). In July 1996, the Company's Board
of Directors approved the Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 300 shares of the Company's Common Stock. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than
27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors and meet
eligibility standards established by the Board of Directors. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by
the Board of Directors, to the purchase of shares of Common Stock. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company
and its affiliates. The Purchase Plan will terminate at the Board of
Directors' discretion.
10. PROFIT-SHARING PLAN:
The Company has a profit-sharing plan which is available for all employees
age 21 or over. Employer contributions are at the discretion of the Company.
No employer contributions were made during the years ended December 31, 1993,
1994 and 1995. Unaudited: No employer contribution was made during the six
months ended July 31, 1996.
F-20
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTIES:
During 1993, 1994 and 1995, the Company recognized revenues of $229, $623
and $707, respectively, from transactions with a holder of Series B Preferred
Stock. Unaudited: Such revenues for the six-month period ended July 31, 1996
were $1,163. At December 31, 1994 and 1995, the Company owed this related
party $25 and $0, respectively, which was included in accounts payable. At
December 31, 1994 and 1995, the Company had $1,465 and $1,689, respectively,
of deferred revenue relating to license fees prepaid by this related party.
Unaudited: The amount of deferred revenue relating to license fees prepaid by
this related party at July 31, 1996 was $1,000.
12. INTERNATIONAL OPERATIONS:
The Company's revenues, which are transacted in U.S. dollars, are derived
from the following geographic regions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------------- -----------------
JUNE 30, JULY 31,
1993 1994 1995 1995 1996
------ ------ ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States........................... $3,680 $6,940 $ 6,139 $2,529 $4,214
Japan................................... 1,193 2,253 4,221 2,159 2,796
Other................................... 368 143 53 44 78
------ ------ ------- ------ ------
$5,241 $9,336 $10,413 $4,732 $7,088
====== ====== ======= ====== ======
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED):
Prior to the closing of the public offering pursuant to the Company's
registration statement filed with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public, the
Company plans to reincorporate in the state of Delaware, change the par value
of its common stock to $0.001 per share and increase its authorized number of
shares of common stock to 30,000 and decrease its authorized number of shares
of Preferred Stock to 5,000. The pro forma balance sheet at July 31, 1996
includes the effect of this change.
F-21
<PAGE>
[Description: The image will depict the networked monochrome, multifunction
and color markets targeted by the Company.]
TARGET MARKETS
Peerless markets complete solutions for networked monochrome, multifunction
and, in the future, color printer products. The Company has designed its
embedded imaging solution with a modular architecture that addresses a broad
spectrum of digital document product technologies and that can be tailored to
individual OEM requirements. Peerless offers its OEMs the flexibility to add
to their products a robust set of functionalities such as networking support,
languages, multifunction features and, in the future, color. Peerless
customers, such as Adobe, Canon, Digital, IBM and Xerox, can offer a broad
family of digital document products or related software, further leveraging
their core investment in the Company's imaging solutions.
<TABLE>
<CAPTION>
NETWORKED MULTIFUNCTION
MONOCHROME MARKET MARKET COLOR MARKET
----------------- ------------- ------------
<S> <C> <C>
. Low cost networkable . Low cost networkable . Networkable color laser
office laser printers inkjet and laser-based printers
MFPs to high speed
copier-based MFPs
. 1 to 40 pages per . 1 to 40 pages per . 1 to 10 color pages
minute minute per minute
. 600 to 1200 dots . 600 to 1200 dots . 600 to 1200 dots
per inch per inch per inch
. Gray scale support . Multitasking support for . Contone color quality
print, copy, fax and
scan features
. Multiprotocol network . Multiprotocol network . Multiprotocol network
support support support
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 13
Dividend Policy......................................................... 13
Capitalization.......................................................... 14
Dilution................................................................ 15
Selected Financial Data................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
Business................................................................ 25
Management.............................................................. 38
Certain Transactions.................................................... 46
Principal and Selling Stockholders...................................... 48
Description of Capital Stock............................................ 51
Shares Eligible for Future Sale......................................... 53
Underwriting............................................................ 55
Legal Matters........................................................... 56
Experts................................................................. 56
Additional Information.................................................. 57
Index to Financial Statements........................................... F-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,750,000 SHARES
[LOGO OF PEERLESS]
PEERLESS SYSTEMS CORPORATION
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee, the NASD filing fee and the Nasdaq National
Market application fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 19,333
NASD filing fee................................................. 6,106
Nasdaq National Market application fee.......................... 43,000
Blue sky qualification fee and expenses......................... 15,000
Printing and engraving expenses................................. 110,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 175,000
Transfer agent and registrar fees............................... 10,000
Miscellaneous................................................... 221,561
--------
Total........................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and executive
officers and may indemnify its other officers, employees and other agents to
the fullest extent not prohibited by Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its stockholders. These provisions do not
eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise. In addition, the Indemnity Agreement filed as
Exhibit 10.19 to this Registration Statement provides for indemnification by
Selling Stockholders of the Registrant and its officers and directors for
certain liabilities arising under the Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1993, except as otherwise noted, the Registrant has sold and
issued the following unregistered securities:
(1) In June, July and October 1993, the Registrant issued an aggregate of
1,501,177 shares of Series B Preferred Stock convertible into 1,520,792
shares of Common Stock, and warrants to purchase an aggregate of 490,476
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 1,485,754 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 141,053 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.
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 LLP.
10.1+ Form of Indemnity Agreement.
10.2+ 1992 Stock Option Plan, as amended.
10.3+ 1996 Equity Incentive Plan.
10.4+ Form of Incentive Stock Option.
10.5+ Form of Nonstatutory Stock Option.
10.6+ 1996 Employee Stock Purchase Plan.
10.7+ Third Party Development and License Agreement (the "Adobe Third
Party License") dated September 18, 1992 between the Registrant and
Adobe Systems Incorporated ("Adobe").
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 Registrant and the Selling
Stockholders.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27+ Financial Data Schedule.
</TABLE>
- ---------------------
+ Previously filed.
* To be filed by amendment.
# Confidential treatment requested as to portions of this document, and such
omitted information has been separately filed with the Securities and Exchange
Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements
or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described in Item 14 or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to
be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of El Segundo,
County of Los Angeles, State of California, on the 19th day of September,
1996.
PEERLESS SYSTEMS CORPORATION
By: /s/ Edward A. Gavaldon
----------------------------------
Edward A. Gavaldon
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Edward A.
Gavaldon and Lauren L. Shaw his or her true and lawful attorney-in-fact and
agent, each acting alone, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to the Registration Statement on Form S-1, and to any registration
statement filed under Securities and Exchange Commission Rule 462, and to file
the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Edward A. Gavaldon President, Chief September 19, 1996
- ------------------------------------- Executive Officer
Edward A. Gavaldon and Director (Principal
Executive Officer)
/s/ Hoshi Printer Vice President, September 19, 1996
- ------------------------------------- Finance and Administration,
Hoshi Printer Chief Financial Officer and
Secretary (Principal
Financial and
Accounting Officer)
/s/ Robert G. Barrett Director September 19, 1996
- -------------------------------------
Robert G. Barrett
/s/ Paul D. Levy Director September 19, 1996
- -------------------------------------
Paul D. Levy
/s/ Robert L. North Director September 19, 1996
- -------------------------------------
Robert L. North
/s/ Lauren L. Shaw Director September 19, 1996
- -------------------------------------
Lauren L. Shaw
</TABLE>
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 LLP.
10.1+ Form of Indemnity Agreement.
10.2+ 1992 Stock Option Plan, as amended.
10.3+ 1996 Equity Incentive Plan.
10.4+ Form of Incentive Stock Option.
10.5+ Form of Nonstatutory Stock Option.
10.6+ 1996 Employee Stock Purchase Plan.
10.7+ Third Party Development and License Agreement (the "Adobe Third
Party License") dated September 18, 1992 between the Registrant and
Adobe Systems Incorporated ("Adobe").
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 LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-5.
27+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
# Confidential treatment requested as to portions of this document, and such
omitted information has been separately filed with the Securities and Exchange
Commission.
<PAGE>
EXHIBIT 1.1
PEERLESS SYSTEMS CORPORATION
3,750,000 SHARES/1/
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_________ __, 1996
HAMBRECHT & QUIST LLC
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the Several
Underwriters Named on Schedule I hereto
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Peerless Systems Corporation, a Delaware corporation (together with its
California predecessor herein called the Company), proposes to issue and sell
2,500,000 shares of its authorized but unissued Common Stock, $0.001 par value
(herein called the Common Stock) (the "Company Stock"), and certain stockholders
and warrant holders of the Company named in Schedule II hereto propose to sell
1,073,125 shares of Common Stock (the "Outstanding Stock" and, together with the
Company Stock, the "Principal Stock") and warrants (the "Warrants") to purchase
on a net exercise basis 176,875 shares of Common Stock (the "Warrant Stock")
(said Principal Stock and Warrant Stock being herein called the Underwritten
Stock). The Company and certain stockholders of the Company named in Schedule
II hereto (said stockholders, together with the stockholders and warrant holders
named in Schedule II selling the Outstanding Stock and Warrants, herein
collectively called the Selling Securityholders) propose to grant to the
Underwriters (as hereinafter defined) an option to purchase up to 562,500
additional shares of Common Stock (herein called the Option Stock and with the
Underwritten Stock herein collectively called the Stock). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and each of the Selling Securityholders each for itself
severally and not jointly hereby confirm the agreements made with respect to the
purchase of the Stock and the Warrants by the several underwriters, for whom you
are acting, named in Schedule I hereto (herein collectively called the
Underwriters, which term shall also include any underwriter
- -------------------
/1/ Plus an option to purchase from the Company and certain of the Selling
Securityholders of up to 562,500 additional shares to cover over-allotments.
<PAGE>
purchasing Stock and Warrants pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-09357), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act), of the Stock. Copies of such registration statement and of
each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES
(a) The Company hereby represents and warrants as follows:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary
(except where the failure to be so qualified would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company). The execution
and delivery of the Agreement and Plan of Merger, to be dated as of
_______, 1996 (herein
-2-
<PAGE>
called the Merger Agreement) between Peerless Systems Corporation, a
California corporation (herein called the California Corporation), and the
Company, which will effect the reincorporation of the California
Corporation under the laws of the State of Delaware on the Closing Date (as
defined in Section 5(a)), was duly authorized by all necessary corporate
action on the part of each of the California Corporation and the Company.
Each of the California Corporation and the Company has all corporate power
and authority to execute and deliver the Merger Agreement, to file the
Merger Agreement with the Secretary of State of California and the
Secretary of State of Delaware and to consummate the reincorporation
contemplated by the Merger Agreement, and the Merger Agreement at the time
of execution and filing constitute a valid and binding obligation of each
of the California Corporation and the Company, enforceable in accordance
with its terms. The Company does not own or control, directly or
indirectly, any corporation, association or other entity.
(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
any materially adverse change in the business, properties, financial
condition or results of operations of the Company, whether or not arising
from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, the Company has not
entered into any material transaction not referred to in the Registration
Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply,
and on the Closing Date (as hereinafter defined) and any later date on
which Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder. On the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock, are accurate, complete and
fair in all material respects. The Company's outstanding capital stock and
the Warrants have been validly authorized, are fully paid and
nonassessable, were issued in compliance with the registration and
qualification provisions of applicable federal and state securities laws
and were issued free of any preemptive right, right of first refusal or
similar right. The Stock and the Warrants are duly and validly authorized,
are (or, in the case of shares of the Stock to be sold by the Company, will
be, when issued and sold to the Underwriters as provided
-3-
<PAGE>
herein and in the case of the Warrant Stock, will be, when issued upon the
net exercise of the Warrants by the Underwriters as provided herein) duly
and validly issued, fully paid and nonassessable and conform to the
descriptions thereof in the Prospectus. No further approval or authority of
the stockholders or the Board of Directors of the Company will be required
for the transfer and sale of the Stock and the Warrants to be sold by the
Selling Securityholders, the issuance of the Warrant Stock upon the net
exercise of the Warrants by the Underwriters as contemplated herein or the
issuance and sale of the Stock by the Company as contemplated herein. No
preemptive right, or right of first refusal in favor of stockholders,
exists with respect to the Stock, or the Warrants, pursuant to the
Certificate of Incorporation or Bylaws of the Company, and there is no
contractual preemptive right, right of first refusal, right of co-sale or
similar right which exists and has not been waived with respect to the
Stock or Warrants being sold by the Selling Securityholders or the issue
and sale of the Stock by the Company.
(v) The Registration Statement has become effective under
the Securities Act and no stop order suspending the effectiveness of the
Registration Statement or suspending or preventing the use of the
Prospectus is in effect and, to the Company's knowledge after inquiry, no
proceeding for that purpose has been instituted or is contemplated by the
Commission.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and
delivery by the Representatives, constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms, except as rights
to indemnity or contribution may be limited by federal or state securities
laws and except as enforcement (A) may be limited by the effect of
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
conveyance and other similar laws relating to or affecting the rights of
creditors generally, (B) is subject to general principles of equity and
similar principles, including, without limitation, concepts of materiality,
reasonableness, unconscionability, good faith and fair dealing and the
possible unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (C) is subject to the effect of public policy.
(vii) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement, and
the issue and sale by the Company of the shares of Stock to be sold by the
Company as provided herein will not conflict with, or result in a breach
of, the Certificate of Incorporation or Bylaws of the Company or any
material agreement or instrument to which the Company is a party or any
applicable law or regulation, or any judgment, order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality.
(viii) All holders of securities of the Company having rights
to the registration of shares of Common Stock, or other securities, because
of the filing of the Registration Statement by the Company have waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement.
(ix) The Company has (A) notified each holder of a currently
outstanding option issued under the Company's 1992 Stock Option Plan
(herein called the
-4-
<PAGE>
1992 Option Plan) and 1996 Equity Incentive Plan (herein called the 1996
Equity Plan) and each person who has acquired shares of Common Stock
pursuant to the exercise of any option granted under the 1992 Option Plan
or 1996 Equity Plan that, pursuant to the terms of the 1992 Option Plan and
1996 Equity Plan, none of such options or shares may be sold or otherwise
disposed of for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters; and (B) imposed a stop-
transfer instruction with the Company's transfer agent in order to enforce
the foregoing "lock-up" provisions. Each of the foregoing "lock-up"
provisions shall be in full force and effect on the Closing Date.
(x) No consent, approval, authorization or order of any
court or governmental agency is required for the consummation of the
transactions contemplated herein, except such as have been (or will before
the Closing Date have been) obtained under the Securities Act and such as
may be required under state securities or blue sky laws in connection with
the purchase and distribution of the Stock by the Underwriters.
(xi) The Company has timely filed all necessary federal,
state and foreign income and franchise tax returns and has paid all taxes
shown thereon as due, and there is no tax deficiency that has been or, to
the Company's knowledge, might be asserted against the Company that could
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company; and
all tax liabilities are adequately provided for on the books of the
Company.
(xii) To the Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any
of its principal value added resellers, subcontractors, original equipment
manufacturers, authorized dealers or international distributors that might
be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company. No collective bargaining agreement exists with
any of the Company's employees and, to the Company's knowledge, no such
agreement is imminent.
(xiii) The financial statements, including the notes thereto,
and supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
dates indicated and the results of its operations for the periods
specified; except as otherwise expressly stated in the Registration
Statement, said financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis; and
the supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. Except as otherwise
expressly specified in the Registration Statement, such financial
statements are in accordance with the books and records of the Company in
all material respects. No other financial statements are required by Form
S-1 or otherwise to be included in the Registration Statement or
Prospectus.
(xiv) The Company has good and marketable title to all the
properties and assets reflected as owned in the financial statements (or
elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge
or encumbrance of any kind except (A) those, if any, reflected in the
financial statements (or elsewhere in the Prospectus), or (B) those
-5-
<PAGE>
which are not material in amount and do not materially adversely affect the
use made and proposed to be made of such property by the Company. The
Company holds its leased properties under valid and binding leases, with
such exceptions as are not materially significant in relation to the
business of the Company. Except as disclosed in the Prospectus, the Company
owns or leases all such properties as are necessary to its operations as
now conducted or as proposed to be conducted.
(xv) Neither the Company nor, to the Company's knowledge, any
other party is in violation or breach of, or in default with respect to,
complying with any material provision of any contract, agreement,
instrument, lease, license, arrangement or understanding which is material
to the Company, and each such contract, agreement, instrument, lease,
license, arrangement and understanding is in full force and is the legal,
valid and binding obligation of the Company and, to the Company's
knowledge, the other parties thereto and is enforceable against the
Company, except as enforcement (i) may be limited by the effect of
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
conveyance and other similar laws relating to or affecting the rights of
creditors generally, (ii) is subject to general principles of equity and
similar principles, including, without limitation, concepts of materiality,
reasonableness, unconscionability, good faith and fair dealing and the
possible unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (iii) is subject to the effect of public policy and, to
the Company's knowledge, against the other parties thereto in accordance
with its terms. The Company enjoys peaceful and undisturbed possession
under all leases and licenses under which it is operating. The Company is
not in violation or breach of, or in default with respect to, any term of
its Certificate of Incorporation or Bylaws.
(xvi) To the Company's knowledge, except as otherwise
expressly specified in the Registration Statement, the Company is not
infringing or otherwise violating any patent, copyright, trade secret,
trademark, service mark, trade name, technology, know-how or other
proprietary information or material of others. Except as otherwise
expressly specified in the Registration Statement, the Company has not
received any notice of infringement or conflict with (and the Company knows
of no conflict or infringement with) asserted rights of others with respect
to any patents, copyrights, trademarks, service marks, trade names,
technology or know-how, which could have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(xvii) Except as otherwise expressly specified in the
Registration Statement, the Company owns or possesses sufficient licenses
or other rights to use all patents, copyrights, trade secrets, trademarks,
service marks, trade names, technology, know-how or other proprietary
information or materials necessary to conduct the business now being
conducted or proposed to be conducted by the Company as described in the
Prospectus.
(xviii) The Company (A) is in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants (herein called
Environmental Laws), (B) has received all permits,
-6-
<PAGE>
licenses or other approvals required of it under applicable Environmental
Laws to conduct its business and (C) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company.
(xix) There is no legal or governmental proceeding pending or
threatened to which the Company is a party or to which any of the
properties of the Company is subject that is required to be described in
the Registration Statement or the Prospectus and is not so described, nor
is there any statute, regulation, contract or other document that is
required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that is not
described or filed.
(xx) The Company has all necessary consents, authorizations,
approvals, orders, certificates and permits of and from, and has made all
declarations and filings with, all governmental authorities, to own, lease,
license and use its properties and assets and to conduct its business in
the manner described in the Prospectus, except to the extent that the
failure to obtain or file such would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(xxi) The Common Stock has been approved for listing on the
Nasdaq National Market, subject to official notice of issuance.
(xxii) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the
offering and sale of the Stock other than the Preliminary Prospectus, the
Prospectus, the Registration Statement and the other materials permitted by
the Securities Act.
(xxiii) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not
limited to, insurance covering real and personal property owned or leased
by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is in
full force and effect. The Company has not been refused any insurance
coverage sought or applied for; and the Company has no reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not materially and adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(xxiv) The Company has not at any time during the last five (5)
years in any jurisdiction (A) made any unlawful contribution to any
candidate for office, or failed to disclose fully any contribution in
violation of law, or (B) made any payment to any governmental officer or
official, or other person charged with similar public or quasi-public
duties other than payments required or permitted by the laws of the United
States.
-7-
<PAGE>
(xxv) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of
the officers or directors of the Company or any of the members of the
families of any of them required to be disclosed in the Registration
Statement and Prospectus, except as disclosed in the Registration Statement
and the Prospectus.
(xxvi) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba.
(xxvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions
are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (C) access
to its assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to differences.
(xxviii) The Company is not now, and upon the Closing Date, and
after application of the net proceeds from the offering as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(b) Each of the Selling Securityholders, severally and not
jointly, hereby represents and warrants as follows:
(i) Such Selling Securityholder has good and marketable
title to all the shares of Stock and Warrants to be sold by such Selling
Securityholder hereunder, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever, with full right and
authority to deliver the same hereunder, subject, in the case of each
Selling Securityholder other than Lauren L. Shaw, Barbara B. Renshaw,
Lauren L. Shaw and Barbara B. Renshaw, Renshaw/Shaw Charitable Remainder
Trust, Lauren L. Shaw 1996 Trust and Barbara B. Renshaw 1996 Trust (the
"Shaw/Renshaw Group"), to the rights of Norwest Bank Minnesota, N.A., as
Custodian (herein called the Custodian), and that upon the delivery of and
payment for such shares of the Stock and Warrants hereunder, the several
Underwriters will receive good and marketable title thereto, free and clear
of all liens, encumbrances, equities, security interests and claims
whatsoever.
(ii) With the exception of the Shaw/Renshaw Group,
certificates in negotiable form for the shares of the Stock and Warrants to
be sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock and Warrants represented by the certificates so held in custody for
such Selling Securityholder are, as therein provided, subject to the
interests of the several Underwriters and the Company, that the
arrangements made by such Selling Securityholder for such custody,
including the Power of Attorney provided for in such Custody Agreement, are
to that extent irrevocable, and that the obligations of such Selling
Securityholder shall not be terminated by any act of such Selling
Securityholder or by
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operation of law, whether by the death or incapacity of such Selling
Securityholder (or, in the case of a Selling Securityholder that is not an
individual, the dissolution or liquidation of such Selling Securityholder)
or the occurrence of any other event; if any such death, incapacity,
dissolution, liquidation or other such event should occur before the
delivery of such shares of Stock and Warrants hereunder, certificates for
such shares of Stock and Warrants shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such
death, incapacity, dissolution, liquidation or other event had not
occurred, regardless of whether the Custodian shall have received notice of
such death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the
Registration Statement and Prospectus and, although such Selling
Securityholder has not independently verified the accuracy or completeness
of all the information contained therein, nothing has come to the attention
of such Selling Securityholder that would lead such Selling Securityholder
to believe that: (x) on the Effective Date, the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and (y) on the Effective Date the
Prospectus contained and, on the Closing Date and any later date on which
Option Stock is to be purchased, contains any untrue statement of a
material fact or omitted or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(iv) All information furnished in writing by or on behalf
of such Selling Securityholder for use in the Registration Statement and
Prospectus is, and on the Closing Date will be, true, correct, and complete
in all material respects, and does not, and on the Closing Date will not,
contain any untrue statement of a material fact or omit to state any
material fact necessary to make such information not misleading.
(v) Such Selling Securityholder has no reason to believe
that any representation or warranty of the Company set forth in Section
2(a) above is untrue or inaccurate in any material respect.
(vi) The sale of the Stock and Warrants by such Selling
Securityholder pursuant hereto is not prompted by any material adverse
information concerning the Company which is not set forth in the
Registration Statement and Prospectus.
(vii) The execution and delivery by such Selling
Securityholder of, and the performance by such Selling Securityholder of
its obligations under, this Agreement, the Custody Agreement signed by or
on behalf of such Selling Securityholder and the Custodian (with the
exception of the Shaw/Renshaw Group), relating to the deposit of the Stock
and the Warrants to be sold by such Selling Securityholder (herein called
the Custody Agreement) and the power of attorney appointing certain
individuals as such Selling Securityholder's attorneys-in-fact to the
extent set forth therein (with the exception of the Shaw/Renshaw Group),
relating to the transactions contemplated hereby and by the Registration
Statement (herein called the Power of Attorney) will not contravene any
provision of applicable law binding upon such Selling Securityholder, or
the certificate or articles of incorporation or by-laws of such Selling
Securityholder (if such Selling Securityholder is a corporation), or any
agreement or other instrument
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<PAGE>
binding upon such Selling Securityholder or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over such
Selling Securityholder, and no consent, approval, authorization or order of
or qualification with any court or governmental body or agency is required
for the performance by such Selling Securityholder of its obligations under
this Agreement, the Custody Agreement or the Power of Attorney of such
Selling Securityholder, except such as may be required under the Securities
Act or by the securities or blue sky laws of various states in connection
with the offer and sale of the Stock by the Underwriters.
(viii) Such Selling Securityholder has, and on the Closing
Date will have, the legal right and power, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement (with the exception of the Shaw/Renshaw Group) and the Power of
Attorney (with the exception of the Shaw/Renshaw Group) and to sell,
transfer and deliver in the manner provided in this Agreement the shares of
Stock and Warrants to be sold by such Selling Securityholder.
(ix) Each of this Agreement, the Custody Agreement (with
the exception of the Shaw/Renshaw Group) and the Power of Attorney (with
the exception of the Shaw/Renshaw Group) has been duly authorized, executed
and delivered by or on behalf of such Selling Securityholder and, assuming
due authorization, execution and delivery by the other parties thereto,
constitutes a valid and binding obligation of such Selling Securityholder
enforceable in accordance with its terms, except as rights to indemnity or
contribution may be limited by federal or state securities laws and except
as enforcement (i) may be limited by the effect of bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other
similar laws relating to or affecting the rights of creditors generally,
(ii) is subject to general principles of equity and similar principles,
including, without limitation, concepts of materiality, reasonableness,
unconscionability, good faith and fair dealing and the possible
unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (iii) is subject to the effect of public policy.
(c) Each member of Shaw/Renshaw Group, severally and not jointly,
hereby represents, warrants and covenants that certificates in negotiable form
for the shares of Stock and Warrants to be sold by such member of the
Shaw/Renshaw Group hereunder shall be delivered to Norwest Bank Minnesota, N.A.,
as the Company's transfer agent, together with stock powers with signatures
guaranteed by an eligible guarantor under a medallion signature guarantee
program, authorizing transfer of such Stock and Warrants into such names as the
Underwriters shall instruct against payment for such Stock and Warrants on the
terms set forth herein. Each member of the Shaw/Renshaw Group agrees that the
shares of the Stock and Warrants represented by the certificates to be provided
to the Underwriters hereunder are subject to the interests of the several
Underwriters and the Company, that the obligations of such Selling
Securityholder hereunder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by death or incapacity of such
Selling Securityholder (or, in the case of a Selling Securityholder that is not
an individual, the dissolution or liquidation of such Selling Securityholder) or
the occurrence of any other event, if any such death, incapacity, dissolution,
liquidation or other such event should occur before the delivery of such Stock
and Warrants hereunder, certificates for such Stock and Warrants shall be
delivered by a representative of the
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Selling Securityholder in accordance with the terms of this Agreement as if such
death, incapacity, dissolution, liquidation or other event had not occurred.
3. PURCHASE OF THE STOCK AND WARRANTS BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell 2,500,000 shares of the Underwritten Stock to the
several Underwriters, each Selling Securityholder agrees to sell to the several
Underwriters the number of shares of the Outstanding Stock and the Warrants that
are net exercisable into the number of shares of Warrant Stock set forth in
Schedule II opposite the name of such Selling Securityholder, and each of the
Underwriters agrees to purchase from the Company and the Selling Securityholders
the respective aggregate number of shares of Principal Stock and the Warrants
that are net exercisable into the number of shares of Warrant Stock collectively
set forth opposite its name in Schedule I. The price at which each share of
Principal Stock shall be sold by the Company and the Selling Securityholders and
purchased by the several Underwriters shall be $___ per share. The price at
which each Warrant shall be sold by the Selling Securityholders and purchased by
the Underwriters shall be $___ per share of Common Stock which may be acquired
on a net exercise basis of such Warrant on the date hereof, using a fair market
value per share of Common Stock for the calculation of such net exercise of
$____ per share. Each of the Underwriters hereby agrees to exercise each Warrant
at the Closing Date (as hereinafter defined) in accordance with the terms of the
Warrant on a net exercise basis and the Company shall thereupon immediately
issue to such Underwriters such number of shares as are issuable pursuant to the
net exercise of the Warrant, subject in each case to such allocation adjustments
as the Underwriters in their discretion shall make to eliminate any sales or
purchases of fractional shares. The obligation of each Underwriter to the
Company and each of the Selling Securityholders shall be to purchase from the
Company and the Selling Securityholders that number of shares of Principal Stock
and Warrants which represents the same proportion of the total number of shares
of Principal Stock and Warrants, respectively, to be sold by each of the Company
and the Selling Securityholders pursuant to this Agreement as the number of
shares of Underwritten Stock set forth opposite the name of such Underwriter in
Schedule I hereto represents of the total number of shares of Underwritten Stock
to be purchased by all Underwriters pursuant to this Agreement, as adjusted by
you in such manner as you deem advisable to avoid fractional shares. In making
this Agreement, each Underwriter is contracting severally and not jointly;
except as provided in paragraphs (b) and (c) of this Section 3, the agreement of
each Underwriter is to purchase only the respective number of shares of the
Principal Stock and Warrants specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock and Warrants agreed to be purchased by
such Underwriter or Underwriters, the Company or the Selling Securityholders
shall immediately give notice thereof to you, and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by you of
such notice to purchase, or procure one or more other Underwriters to purchase,
in such proportions as may be agreed upon between you and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, all or any part
of the shares of the Stock and Warrants which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make
such arrangements with respect to all such shares and portion, the number of
shares of the Stock
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<PAGE>
and Warrants which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the non-
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defaulting Underwriters shall not be obligated to purchase the shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock and Warrants exceeds 10% of the
total number of shares of the Stock and Warrants which all Underwriters agreed
to purchase hereunder. If the total number of shares of the Stock and Warrants
which the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers reasonably satisfactory to you for purchase of
such shares and portion on the terms herein set forth. In any such case, either
you or the Company and the Selling Securityholders shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company and the
Selling Securityholders shall make arrangements within the 24-hour periods
stated above for the purchase of all the shares of the Stock and Warrants which
the defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company or the Selling Securityholders. Nothing in
this paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to [194,892] shares of the Option Stock from the Company at the
same price per share as the Underwriters shall pay for the Underwritten Stock,
and the Selling Securityholders grant an option to the several Underwriters to
purchase, severally and not jointly, up to the number of shares of Option Stock
set forth opposite the name of each Selling Securityholder in Schedule II at the
same price per share as the Underwriters shall pay for the Outstanding Stock.
Said options may be exercised only to cover over-allotments in the sale of the
Underwritten Stock by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the thirtieth day after the
date of this Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of shares of the Option Stock as to which the
several Underwriters are exercising the option. Delivery of certificates for the
shares of Option Stock, and payment therefor, shall be made as provided in
Section 5 hereof. The number of shares of the Option Stock to be purchased by
each Underwriter shall be the same percentage of the total number of shares of
the Option Stock to be purchased by the several Underwriters as such Underwriter
is purchasing of the Underwritten Stock, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In the event that the
Underwriters purchase less than the total number of shares of Option Stock
available to be purchased, the number of shares of Option Stock to be sold by
each of the Company and the Selling Securityholders shall be a pro rata
percentage of the total number of shares of Option Stock each would sell if the
Underwriters purchased the total
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<PAGE>
number of shares of Option Stock available to be purchased, adjusted by the
Underwriters in such a manner as they deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page and under the caption "Underwriting" in the Registration Statement,
any Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in the Registration Statement, any Preliminary Prospectus, and the Prospectus,
and you on behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK AND WARRANTS
(a) Delivery of certificates for the shares of the Underwritten Stock
and Warrants and the shares of Option Stock (if the option granted by Section
3(c) hereof shall have been exercised not later than 7:00 A.M., San Francisco
time, on the date two business days preceding the Closing Date), and payment
therefor, shall be made at the office of Cooley Godward LLP, Five Palo Alto
Square, Palo Alto, California 94306, at 7:00 a.m., San Francisco time, on the
[FOURTH] business day after the date of this Agreement, or at such time on such
other day, not later than seven full business days after such [FOURTH] business
day, as shall be agreed upon in writing by the Company, the Selling
Securityholders and you. The date and hour of such delivery and payment (which
may be postponed as provided in Section 3(b) hereof) are herein called the
Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Cooley Godward LLP, Five Palo
Alto Square, Palo Alto, California 94306, at 7:00 a.m., San Francisco time, on
the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order; with the exception of the Shaw/Renshaw Group, payment
for the Stock and Warrants purchased from the Selling Securityholders shall be
made to the Custodian, for the account of the Selling Securityholders; and with
respect to the Shaw/Renshaw Group, payment for the Stock and Warrants purchased
from them shall be made to the individual members of the Shaw/Renshaw Group; in
each case by one or more certified or official bank check or checks in next day
funds (and the Company and the Selling Securityholders agree not to deposit any
such check in the bank on which drawn until the day following the date of its
delivery to the Company, the Custodian or the Shaw/Renshaw Group, as the case
may be). Such payment shall be made upon delivery of certificates for the Stock
and Warrants to you for the respective accounts of the several Underwriters
against receipt therefor signed by you. Certificates for the Stock to be
delivered to you shall be registered in such name or names and shall be in such
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denominations as you may request at least one business day before the Closing
Date, in the case of Underwritten Stock, and at least one business day prior to
the purchase thereof, in the case of the Option Stock. Such certificates will be
made available to the Underwriters for inspection, checking and packaging at the
offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on
the business day prior to the Closing Date or, in the case of the Option Stock,
by 3:00 p.m., New York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares and Warrants to be purchased by any
Underwriter whose check shall not have been received by you on the Closing Date
or any later date on which Option Stock is purchased for the account of such
Underwriter. Any such payment by you shall not relieve such Underwriter from
any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS. The
Company and, with respect to Sections 6(i), (j), (k) and (m) hereof, the Selling
Securityholders, severally and not jointly, covenant and agree as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement
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to the Prospectus and of any amended prospectus, filed by the Company with the
Commission, as you may reasonably request for the purposes contemplated by the
Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
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general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of three years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
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(i) The Company and the Selling Securityholders jointly and severally
agree to pay all costs and expenses incident to the performance of its
obligations under this Agreement, including all costs and expenses incident to
(i) the preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. of the Registration Statement, any
Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The Selling
Securityholders will pay any transfer taxes incident to the transfer to the
Underwriters of the shares of Stock and Warrants being sold by the Selling
Securityholders.
(j) The Company and the Selling Securityholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for blue
sky fees and related disbursements (including reasonable counsel fees and
disbursements and cost of printing memoranda for the Underwriters) paid by or
for the account of the Underwriters or their counsel in qualifying the Stock
under state securities or blue sky laws and in the review of the offering by the
NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the Effective Date, directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in, make
any short sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock. The foregoing sentence shall not apply to: (A)
the Stock to be sold to the Underwriters pursuant to this Agreement; (B) shares
of Common Stock issued pursuant to currently outstanding warrants, shares of
Common Stock issued by the Company upon the exercise of options that are
currently outstanding under the option plans of the Company (the "Option
Plans"), as described in footnote (3) to the table under the caption
"Capitalization" in the Prospectus; and (C) options to purchase Common Stock
granted under the Option Plans and shares of Common Stock issuable under the
Company's 1996 Employee Stock Purchase Plan, provided that, without the prior
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written consent of Hambrecht & Quist LLC on behalf of the Underwriters, any
stock issuable upon the exercise of such additional options under the Option
Plans and such additional stock issuable under the 1996 Purchase Plan shall not
be saleable during such 180-day period.
(m) The Selling Securityholders agree that, without the prior written
consent of Hambrecht & Quist LLC acting alone or of each of the Representatives
acting jointly, the Selling Securityholders will not, for a period of 180 days
following the Effective Date, directly or indirectly, sell, offer, contract to
sell, transfer the economic risk of ownership in, make any short
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sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock, whether any such transaction is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to the Stock and Warrants to be sold to the
Underwriters pursuant to this Agreement.
(n) At any time during the 180-day period after the Registration
Statement becomes effective, the Company will use its best efforts to enforce
the "lock-up" agreements and provisions against any person who is subject to (A)
any of the "lock-up" agreements between you and all of the Company's executive
officers and directors and the stockholders, warrant holders, debenture holders
and optionees of the Company listed on Schedule III hereto, delivered to you
before the date hereof, or (B) the "lock-up" provisions imposed in connection
with the 1992 Option Plan and 1996 Equity Plan, including but not limited to
instructing its transfer agent to refuse to make a transfer of such shares prior
to the expiration of such 180-day period.
(o) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
7. INDEMNIFICATION AND CONTRIBUTION
(a) (i) Subject to the provisions of paragraph (f) of this
Section 7, the Company and the Selling Securityholders severally and not jointly
agree to indemnify and hold harmless each Underwriter and each person (including
each partner or officer thereof) who controls any Underwriter within the meaning
of Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders severally and not
jointly agree to reimburse each such Underwriter and controlling person for any
reasonable legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of
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the circumstances under which they were made, not misleading; provided, however,
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that (1) the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a)(i) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto and (2) the
indemnity agreement contained in this paragraph (a)(i) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof.
(ii) The indemnity agreements of the Company and the Selling
Securityholders contained in paragraph (a)(i) of this Section 7 and the
representations and warranties of the Company and the Selling Securityholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock and Warrants.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter, each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders and each person
(including each partner or officer thereof) who controls any 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, or the common law or otherwise and to
reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the 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
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was made in reliance upon and in conformity with information furnished as herein
stated or otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock and Warrants.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
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party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the reasonable
legal and other expenses of one counsel for the indemnified parties incurred in
connection with the conduct of the defense as referred to in clause (i) of the
proviso to the preceding sentence and (B) the indemnifying party or parties
shall bear such other expenses as it or they have authorized to be incurred by
the
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indemnified party or parties. If, within a reasonable time after receipt of the
Notice, no Notice of Defense has been given, the indemnifying party or parties
shall be responsible for any reasonable legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, provided that it shall only be responsible
for the legal fees and expenses of one counsel.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a)(i) of this Section 7 or under paragraph (b) of this Section 7,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in paragraph
(a)(i) of this Section 7 or in paragraph (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Stock and sale of the Warrants received by
the Company and the Selling Securityholders and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Stock. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party
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or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders, without the
prior written consent of each Underwriter, will settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under the indemnity,
contribution and reimbursement agreements contained in the provisions of this
Section 7 and of Section 11 hereof and under the representations and warranties
contained in Sections 2(b)(iii) and (v) hereof shall be limited to an amount
equal to the respective proceeds received by each such Selling Securityholder
from the sale to the Underwriters of the Stock in the initial public offering.
In addition, no Selling Securityholder shall be liable under the indemnity and
reimbursement agreements of Sections 7 and 11 hereof unless and until the
Underwriters have made written demand on the Company for payment under such
Sections which shall not have been paid by the Company within 60 days after
receipt of such demand. The Company and the Selling Securityholders may agree,
as among themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for which they
each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company and the Selling
Securityholders if after the date of this Agreement trading in the Common Stock
shall have been suspended, or if there shall have occurred (i) the engagement in
hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, (ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, calamity, crisis or change in economic or political conditions
in the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
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Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
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any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock and Warrants shall be
subject to the performance by the Company of all its obligations to be performed
hereunder at or prior to the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock and the
Warrants hereunder and the validity and form of the certificates representing
the Stock and Warrants, all corporate proceedings and other legal matters
incident to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein), shall have
been approved at or prior to the Closing Date by Fenwick & West LLP, counsel for
the Underwriters.
(c) You shall have received from Cooley Godward LLP, counsel for the
Company, Blakely, Sokoloff, Taylor & Zafman, patent counsel for the Company, and
counsel for each of the Selling Securityholders who are not individual persons,
opinions, addressed to the Underwriters and dated the Closing Date, covering the
matters set forth in Annex A, Annex B and Annex C hereto, respectively, and if
Option Stock is purchased at any date after the Closing Date, additional
opinions from each such counsel, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing Date in
such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct in all material respects and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not misleading,
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
(iv) the Company does not have any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus, (v) there are not
any pending or known threatened
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<PAGE>
legal proceedings to which the Company is a party or of which property of the
Company is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus, (vi) there are not any franchises,
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required, and (vii)
the representations and warranties of the Company herein are true and correct in
all material respects as of the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed on behalf of the Company by the
President and the Chief Financial Officer of the Company, stating that the
respective signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from Coopers & Lybrand LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(i) Prior to the Closing Date, you shall have received from all of
the Company's executive officers and directors and the stockholders, warrant
holders, debenture holders and optionees of the Company listed on Schedule III
hereto, agreements, in form reasonably satisfactory to Hambrecht & Quist LLC,
stating that without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, such person or entity will not, for a period of 180
days following the commencement of the public offering of the Stock by the
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Underwriters, directly or indirectly, sell, offer, contract to sell, transfer
the economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock. The foregoing sentence shall not apply to the Stock and Warrants to be
sold by the Selling Securityholders to the Underwriters pursuant to this
Agreement.
(j) Prior to the Closing Date, the Company shall have furnished to
the Underwriters such further information, certificates and documents as the
Underwriters may reasonably request.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Fenwick & West LLP, counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
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termination, the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all reasonable out-of-
pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock and the Warrants shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
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the Company and the Selling Securityholders agree to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholders under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
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11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7,
including the penultimate sentence thereof), the Company and the Selling
Securityholders hereby severally and not jointly agree to reimburse on a
quarterly basis the Underwriters for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
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ultimately held to be improper, the persons receiving such payments shall
promptly refund them with interest thereon at the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by the Bank of America NT & SA, San Francisco, California and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104, Attn.: Bruce Crocker (with a copy to the
General Counsel); and if to the Company or the Selling Securityholders, shall be
mailed, telegraphed or delivered to the Company or the Selling Securityholders
at the Company's office, 2381 Rosecrans Avenue, El Segundo, California 90245,
Attn: Edward A. Gavaldon (with a copy to Gregory C. Smith, Esq. at Cooley
Godward LLP). All notices given by telegraph shall be promptly confirmed by
letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock and Warrants under this
Agreement; provided, however, that if this Agreement is terminated prior to the
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Closing Date, the provisions of paragraphs (l) and (m) of Section 6 hereof shall
be of no further force or effect.
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This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-26-
<PAGE>
Please sign and return to the Company and the Selling Securityholders the
enclosed duplicates of this letter, whereupon this letter will become a binding
agreement among the Company, the Selling Securityholders and the several
Underwriters in accordance with its terms.
Very truly yours,
PEERLESS SYSTEMS CORPORATION
By: ________________________________________
Edward A. Gavaldon
President and Chief Executive Officer
SELLING SECURITYHOLDERS:
_____________________________________________
Attorney-in-Fact (for the Selling
Securityholders other than those listed below)
_____________________________________________
Lauren L. Shaw
_____________________________________________
Barbara B. Renshaw
_____________________________________________
Renshaw/Shaw Charitable Remainder Trust
_____________________________________________
Lauren L. Shaw 1996 Trust
_____________________________________________
Barbara B. Renshaw 1996 Trust
-27-
<PAGE>
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
PRUDENTIAL SECURITIES INCORPORATED
WESSELS, ARNOLD & HENDERSON L.L.C.
By Hambrecht & Quist LLC
By: __________________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
-28-
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Underwritten Stock
-------------------------------
Number of
Number of Shares Net
Shares of Exercisable
Principal Pursuant to
Stock to be Warrants to be
Purchased Purchased
----------- ---------------
<S> <C> <C>
Underwriters
- ------------
Hambrecht & Quist LLC....................
Prudential Securities Incorporated.
Wessels, Arnold & Henderson L.L.C........
--------- -------
Total................... 3,573,125 176,875
========= =======
</TABLE>
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
Underwritten Stock
--------------------------------------------
Number of
Number of Shares Net Number of
Shares of Exercisable Shares of
Outstanding Pursuant to Option
Stock to be Sold Warrants Sold Stock to be Sold
---------------- ------------- ----------------
Name of Selling Securityholder
- -------------------------------
<S> <C> <C> <C>
Lauren L. Shaw 65,000 -- --
Barbara B. Renshaw 91,666 -- --
Lauren L. Shaw and Barbara B. Renshaw 27,451 90,703 --
Lauren L. Shaw 1996 Trust -- -- 16,259
Barbara B. Renshaw 1996 Trust -- -- 16,259
Renshaw/Shaw Charitable Reminder Trust 599,888 -- 26,778
Morgan Keegan Merchant Banking Fund, L.P. 38,095 -- 38,095
Morgan Keegan Merchant Banking Fund II, L.P. 114,286 -- 114,286
Stephen R. Butterfield 37,883 -- 38,117
Thomas B. Ruffolo 5,203 -- --
Reginald Cardin 1,836 -- --
Steven K. Nelson 23,010 -- 7,667
Robert F. Hossley 19,801 -- --
William Bailey 16,548 -- 2,333
Comdisco, Inc. -- 58,257 58,256
Silicon Valley Bank -- 17,333 17,332
William S. Wood 10,666 -- 10,666
Bayview Investors 20,187 7,322 --
Larry Feldman 969 -- --
Cary Kimmel 636 -- --
First Portland Corporation -- 3,260 --
Edward Gavaldon -- -- 21,560
--------- ------- -------
Total 1,073,125 176,875 367,608
========= ======= =======
</TABLE>
<PAGE>
SCHEDULE III
Add Venture Associates
Adobe Ventures L.P.
Ahl, Douglas
Bailey, William
Battery Ventures II, LP
Bayview Investors
Braue, Richard
Brown, Randall
Brudnicki, Russell
Butterfield, Stephen
Capform VII
Cardin, Reginald
Carney, Bridgeman
Central Securities Corporation
Chen, Gordon
Chervinsky, Paul
Chura, David
Comdisco, Inc.
Connell, Dermot
Croff, Doris
Cunningham, Robert
Curtis, Alan
Feldman, Larry
Ferdinand, Richard
First Portland Leasing Corp.
Folden, Rudy
Fournier, David
GC&H Partners
G.P. Investors
Gaskell, Diana Jean
Gavaldon, Edward
Ghaffari, Bahareh
Glover, Diana
Gould, Gary
H&Q Peerless Investors, L.P.
The Hall Family Trust
Heidebrecht, J.B.
Hernandez, Frank
Horwitz, Alan
Hossley, Robert
Ishakian, Varujan
Jones, Donald
Kakaris, Aristotelis
Kane, Gary
Kimmel, Cary
<PAGE>
Lipman, Mathew
Maready, Mike
Morgan Keegan Merchant Banking Fund, L.P.
Morgan Keegan Merchant Banking Fund II, L.P.
Nelson, Steven
Nguyen, Duong
OSCCO III, L.P.
Parke, Reyn
Pham, Jonathan
Printer, Hoshi
Pusser, Gordon
Ramirez, Maria
Raschka, Chester
Renshaw, Barbara
Reymond, Jeffrey
Rosen, Ph.D, Gary
Rossi, Susan Mary
Ruffolo, Thomas
Salazar, Ray
Schafer, Steven
Schmidt, Kenneth
Schwartz, Steve
Segel, G.
Segel, Robert
Shaw, Lauren
Sherer, Ronen
Silicon Valley Bank
Tarr, Daniel
Tomassi, Eric
Tury, James
Twitchell, Gregory
Van Petten, H.O.
Will, Joseph
WOOD, WILLIAM
2
<PAGE>
ANNEX A
-------
MATTERS TO BE COVERED IN THE OPINION OF COOLEY GODWARD LLP
COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good standing
in all jurisdictions in which the character of the property owned or leased or
the nature of the business transacted by it makes qualification necessary
(except where the failure to be so qualified would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company), and has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus;
(ii) the execution and delivery of the Agreement and Plan of Merger
dated as of _________, 1996 (herein called the Merger Agreement) between
Peerless Systems Corporation, a California corporation (herein called the
California Corporation), and the Company, which effected the reincorporation of
the California Corporation under the laws of the State of Delaware on
__________, 1996, was duly authorized by all necessary corporate action on the
part of each of the California Corporation and the Company. Each of the
California Corporation and the Company had all corporate power and authority to
execute and deliver the Merger Agreement, to file the Merger Agreement with the
Secretary of State of California and the Secretary of State of Delaware and to
consummate the reincorporation contemplated by the Merger Agreement, and the
Merger Agreement at the time of execution and filing constituted a valid and
binding obligation of each of the California Corporation and the Company,
enforceable in accordance with its terms;
(iii) the authorized capital stock of the Company consists of 5,000,000
shares of Preferred Stock, of which there are no shares outstanding, and
30,000,000 shares of Common Stock, $.001 par value, of which there are
outstanding _______ shares (including the Underwritten Stock plus the number of
shares of Option Stock issued on the date hereof); proper corporate proceedings
have been taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Underwritten Stock and
the shares of Option Stock issued, if any) and the Warrants have been duly and
validly issued and are fully paid and nonassessable; any Option Stock purchased
after the Closing Date, when issued and delivered to and paid for by the
Underwriters as provided in the Underwriting Agreement, will have been duly and
validly issued and will be fully paid and nonassessable; and no preemptive
rights of, or rights of refusal in favor of, stockholders exist with respect to
the Stock or Warrants, or the issue and sale thereof, pursuant to the
Certificate of Incorporation or Bylaws of the Company and, to the knowledge of
such counsel, there are no contractual preemptive rights that have not been
waived, rights of first refusal or rights of co-sale which exist with respect to
the issue and sale of the Stock or Warrants;
(iv) the Registration Statement has become effective under the
Securities Act and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or suspending or preventing the
use of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
<PAGE>
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1, to the knowledge of such counsel, accurately and adequately
set forth therein in all material respects or no response is required with
respect to such Items, and the description of the Company's stock option plans
and the options granted and which may be granted thereunder set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to said plans and options to the extent required by the Securities
Act and the rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Company has full corporate power and corporate authority to
enter into the Underwriting Agreement, and the Underwriting Agreement has been
duly authorized, executed and delivered by the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its terms;
(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Company or any agreement or instrument known to such counsel to which the
Company is a party or any applicable law or regulation, or so far as is known to
such counsel, any order, writ, injunction or decree, of any jurisdiction, court
or governmental instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters;
(xii) the Company is not now, and upon the Closing Date, and after
application of the net proceeds from the offering as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
2
<PAGE>
(xiii) the Stock has been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance;
(xiv) the Company is, to such counsel's knowledge, not in violation of
its Certificate of Incorporation or Bylaws, or, to such counsel's knowledge, not
in default (nor has an event occurred which with notice or lapse of time or both
would constitute a default or acceleration) in the performance of any
obligation, agreement or condition contained in any material agreement or
instrument to which the Company is a party or by which any of its properties is
bound or affected where such violation or default might have a material adverse
effect on the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(xv) the Custody Agreement between each Selling Securityholder who is
an individual (an "Individual Selling Securityholder") and Norwest Bank
Minnesota, N.A., as Custodian, and the Power of Attorney referred to in such
Custody Agreement, have been duly executed and delivered by or on behalf of each
of the Individual Selling Securityholders [other than Lauren L. Shaw and Barbara
B. Renshaw], and the Custody Agreement and the Power of Attorney constitute
valid and binding agreements of each such Individual Selling Securityholder in
accordance with their terms;
(xvi) the Underwriting Agreement has been duly executed and delivered by
or on behalf of each of the Individual Selling Securityholders, and constitutes
a valid and binding agreement of each of the Individual Selling Securityholders,
enforceable in accordance with its terms;
(xvii) to such counsel's knowledge, no consent, approval, authorization
or order of any court or governmental agency or body is required for the
consummation of the transactions contemplated by the Underwriting Agreement in
connection with the Stock or the Warrants to be sold by such Selling
Securityholder thereunder, except such as have been obtained under the
Securities Act and such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters;
(xviii) each Individual Selling Securityholder has full legal right and
authority to enter into the Underwriting Agreement and to sell, transfer and
deliver in the manner provided in the Underwriting Agreement the shares of Stock
or the Warrants sold by such Individual Selling Shareholder thereunder; and
(xix) upon delivery of and payment for the Stock or the Warrants sold by
each Individual Selling Securityholder as contemplated in the Underwriting
Agreement, the Underwriters will be the owners of such Stock or the Warrants
free and clear of any adverse claim, lien, encumbrance, equity or security
interest, assuming the Underwriters have purchased such Stock or the Warrants in
good faith and without notice of adverse claims.
In the course of the preparation of the Registration Statement and the
Prospectus, such counsel has participated in discussions and conferences with
officers of the Company and with representatives of its independent public
accountants as well as with the Underwriters and their counsel during which
successive drafts of the Registration Statement and the Prospectus were
reviewed, and such counsel has also reviewed and discussed with various of such
persons
3
<PAGE>
materials submitted for use in the Registration Statement, the Prospectus and
certain other data and information furnished in support of the statements made
therein. While such counsel has not independently verified the accuracy,
completeness or fairness of the Registration Statement or the Prospectus, such
counsel advises the underwriters that nothing has come to such counsel's
attention which would lead such counsel to believe that the Registration
Statement as of its effective date contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus,
as of its date and as of the date hereof, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (except, in each case, for the financial statements, schedules and
other financial and statistical information derived therefrom, as to which such
counsel expresses no view).
4
<PAGE>
ANNEX B
-------
MATTERS TO BE COVERED IN THE OPINION OF BLAKELY, SOKOLOFF, TAYLOR & ZAFMAN
PATENT COUNSEL FOR THE COMPANY
Such counsel is familiar with the technology used by the Company in its
business and the manner of its use thereof, to the extent such technology is
generally related to patent applications prepared and filed by such counsel, and
has read the Registration Statement and the Prospectus, including particularly
the portions of the Registration Statement and the Prospectus referring to
patents, trademarks, service marks or other proprietary information or materials
and:
(i) such counsel has no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a material fact
with respect to patents, trademarks, service marks or other proprietary
information or materials owned or used by the Company, or the manner of its use
thereof, or any allegation on the part of any person that the Company is
infringing any patent rights, trademarks, service marks or other proprietary
information or materials of any such person or (B) omits to state any material
fact relating to patents, trademarks, service marks or other proprietary
information or materials owned or used by the Company, or the manner of its use
thereof, or any allegation of which such counsel has knowledge, that is
necessary to make the statements therein not misleading;
(ii) to the best of such counsel's knowledge, there are no legal or
governmental proceedings pending (other than routine administrative proceedings
of the U.S. Patent and Trademark Office concerning pending patent and trademark
applications of the Company) relating to patent rights, trademarks, service
marks or other proprietary information or materials of the Company, and to the
best of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or others;
(iii) such counsel does not know of any contracts or other documents,
relating to governmental regulation affecting the Company or the Company's
patents, trademarks, service marks or other proprietary information or
materials, of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus that are not filed or described as required;
(iv) to the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, trademarks (other than as
expressly specified in the Registration Statement), service marks or other
proprietary information or materials, of others, and to the best of such
counsel's knowledge, there are no infringements by others of any of the
Company's patents, trademarks, service marks or other proprietary information or
materials which in the judgment of such counsel could affect materially the use
thereof by the Company; and
(v) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents, trademarks
(other than as expressly specified in the Registration Statement), service marks
or other proprietary information or materials necessary to conduct the business
now being or proposed to be conducted by the Company as described in the
Prospectus.
<PAGE>
ANNEX C
-------
MATTERS TO BE COVERED IN THE OPINION OF
COUNSEL FOR THE NON-INDIVIDUAL SELLING SECURITYHOLDERS
(i) the Custody Agreement between each Selling Securityholder and
Norwest Bank Minnesota, N.A., as Custodian, and the Power of Attorney referred
to in such Custody Agreement have been duly executed and delivered by each of
the Selling Securityholders, and the Custody Agreement and the Power of Attorney
constitute valid and binding agreements of such Selling Securityholder in
accordance with their terms;
(ii) the Underwriting Agreement has been duly executed and delivered by
or on behalf of each of the Selling Securityholders, and constitutes a valid and
binding agreement of each of the Selling Securityholders, enforceable in
accordance with its terms, and the sale of the Stock and the Warrants to be sold
by such Selling Securityholder hereunder and the compliance by such Selling
Securityholder with all of the provisions of the Underwriting Agreement, the
Power of Attorney and the Custody Agreement and the consummation of the
transactions therein contemplated will not conflict with or result in a breach
or violation of any terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which such Selling Securityholder is a
party or by which such Selling Securityholder is bound or to which any of the
property or assets of such Selling Securityholder is subject, nor will such
action result in any violation of the provisions of the articles or certificate
of incorporation or bylaws of such Selling Securityholder if such Selling
Securityholder is a corporation, the Partnership Agreement of such Selling
Securityholder if such Selling Securityholder is a partnership or any order,
rule or regulation known to such counsel of any court or governmental agency or
body having jurisdiction over such Selling Securityholder or the property of
such Selling Securityholder;
(iii) To such counsel's knowledge, no consent, approval, authorization
or order of any court or governmental agency or body is required for the
consummation of the transactions contemplated by the Underwriting Agreement in
connection with the Stock and Warrants to be sold by such Selling Securityholder
thereunder, except such as have been obtained under the Securities Act and such
as may be required under state securities or blue sky laws in connection with
the purchase and distribution of the Stock by the Underwriters;
(iv) each Selling Securityholder has full legal right and authority to
enter into the Underwriting Agreement and to sell, transfer and deliver in the
manner provided in the Underwriting Agreement the shares of Stock and Warrants
sold by such Selling Securityholder hereunder; and
(v) upon delivery of and payment for the Stock and Warrants sold by
each Individual Selling Securityholder as contemplated in the Underwriting
Agreement, the Underwriters will be the owners of such Stock and Warrants free
and clear of any adverse claim, lien, encumbrance, equity or security interest,
assuming the Underwriters have purchased such Stock and Warrants in good faith
and without notice of adverse claims.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF COOLEY GODWARD APPEARS HERE]
September 19, 1996
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Peerless Systems Corporation, a California corporation (the
"Company"), of a Registration Statement on Form S-1, as amended, (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") covering the underwritten public offering of up to 4,312,500
shares of the Company's common stock (the "Common Stock") (including 562,500
shares of Common Stock for which the underwriters will be granted an over-
allotment option).
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Restated Articles
of Incorporation and Amended and Restated Bylaws, the form of Amendment to the
Articles of Incorporation effecting the reverse stock split, the form of
Certificate of Incorporation and Bylaws to be effective upon the reincorporation
in Delaware, the form of Agreement and Plan of Merger and the originals or
copies certified to our satisfaction of such records, documents, certificates,
memoranda and other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below; (ii) assumed that the shares
of the Common Stock will be sold by the underwriters at a price established by
the Pricing Committee of the Board of Directors of the Company; (iii) assumed
that the Company will have received the exercise price for any shares of Common
Stock to be sold by Selling Stockholders pursuant to the cash exercise of
warrants and stock options.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold, issued and paid for in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
<PAGE>
[LOGO OF COOLEY GODWARD APPEARS HERE]
Peerless Systems Corporation
September 19, 1996
Page 2
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Gregory C. Smith
--------------------
Gregory C. Smith
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 3 to registration
statement on Form S-1 (File No. 333-09357) of our report dated July 25, 1996,
on our audits of the financial statements of Peerless Systems Corporation. We
also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Newport Beach, California
September 19, 1996
