<PAGE>
As filed with the Securities and Exchange Commission on May 7, 1999
Registration No. 333-77049
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PEERLESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
Delaware 5045 95-3732593
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of incorporation ororganization) Classification Code Number)
2381 Rosecrans Avenue
El Segundo, CA 90245
(310) 536-0908
</TABLE>
(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. BROOKS STOUGH, ESQ. PAUL ESCOBOSA, ESQ.
Skadden, Arps, Gunderson Dettmer Stough Coblentz, Patch, Duffy &
Slate,Meagher & Flom LLP Villeneuve Franklin & Bass LLP
525 University Avenue, Hachigian LLP 222 Kearny Street, 7th Floor
Suite 220 155 Constitution Drive San Francisco, CA 94108
Palo Alto, CA 94301 Menlo Park, CA 94025 (415) 391-4800
(650) 470-4500 (650) 321-2400
----------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective time of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instructions G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================
Proposed Maximum Proposed
Title of each class of Amount aggregate Maximum Amount of
securities to be to be offering price aggregate registration
registered registered (1)(3) per share (2) offering price (2) fee
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value
$0.001 per share....... 2,500,000 shares $6.1875 $15,468,750 $4,300.31
============================================================================================
</TABLE>
(1) Represents the estimated maximum number of Common Shares issuable upon
consummation of the merger of a subsidiary of the Registrant with and into
AUCO, Inc. ("Auco") assuming the conversion of all shares of preferred
stock, no par value, of Auco and assuming exercise of all options to
purchase shares of common stock, no par value, of Auco.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) promulgated under the Securities Act of 1933, as amended,
based on the average of the high and low prices for the Peerless Common
Shares as reported on the Nasdaq National Market on April 20, 1999. This
initial registration fee was previously paid in connection with the
Registrant's original filing on April 26, 1999.
(3) One right to purchase one-thousandth of a share of a Series A Participating
Preferred Stock of Peerless Systems Corporation is associated with each
share of common stock. The rights are not transferable separately from the
common stock except in limited circumstances.
----------------
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 which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
[LOGO] [LOGO]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The boards of directors of Peerless Systems Corporation and AUCO, Inc. have
agreed to a merger in which Peerless Systems Corporation will acquire AUCO,
Inc. We are seeking your vote FOR this important transaction.
If the merger is completed, Auco shareholders will receive .2585 of a share
of Peerless common stock for each share of Auco common stock that they own.
Holders of Auco preferred stock will convert their shares into shares of common
stock prior to the completion of the merger, and then these shares of common
stock will be exchanged for shares of Peerless common stock at the same
exchange ratio. The Peerless shareholders will continue to own their existing
shares after the merger. If the merger is completed, the shareholders of Auco
prior to the merger will own approximately 18.5% of the total outstanding
shares of Peerless common stock on a fully diluted basis (assuming the exercise
of all stock options outstanding as of today of both Peerless and Auco). If
either Peerless or Auco issues additional shares or options before the
completion of the merger, this relative percentage of ownership will change.
Peerless shares of common stock to be issued in the merger will be listed on
the NASDAQ National Market System under the symbol "PRLS."
The merger cannot be completed unless the Auco shareholders approve and adopt
the merger agreement and the Peerless shareholders approve issuing the Peerless
shares of common stock to be delivered to Auco shareholders in connection with
the merger. We have scheduled a special meeting for Peerless shareholders to
vote on these matters. Auco shareholders will vote by written consent. Your
vote is very important.
Whether or not Peerless shareholders plan to attend the special meeting, we
ask that you please take the time to vote by signing, dating and returning the
enclosed proxy card. We also ask that Auco shareholders sign, date and return
the action by written consent. If you execute your proxy card without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the proposal. If you fail to return a proxy card for your Peerless common
shares, your shares will not be counted as present or voting unless you attend
and vote in person. If you are an Auco shareholder and fail to return your
action by written consent, your shares will not be counted as a vote in favor
of the proposal.
The date, time and place of the Peerless shareholders meeting is as follows:
June 10, 1999
2:00 p.m., local time
2381 Rosecrans Avenue
El Segundo, California 90245
The date of the Auco written consents will be the date that Auco receives
written consents from shareholders with a majority of the voting power of Auco
common stock. The written consents will not take effect until twenty (20)
business days after we mail you this document.
This Proxy Statement/Prospectus/Information Statement provides you with
detailed information about the proposed merger and, the full text of the merger
agreement appears in the back as Annex A. You can also get information about
Peerless from documents we have filed with the Securities and Exchange
Commission. See "Where to Find More Information." We encourage you to read this
entire document carefully.
If you are an Auco shareholder and have any questions about the merger or how
to vote your shares, please contact Adam Au or Mannan Latif at (650) 569-4400.
If you are a Peerless shareholder and have any questions about the merger or
how to vote your shares, please contact MacKenzie Partners at 1-800-322-2885
(toll free in the United States).
/s/ Edward Gavaldon /s/ Adam Au
------------------- -----------
Edward Gavaldon Adam Au
Chairman and Chief Executive Officer Chairman and Chief Executive
Peerless Systems Corporation Officer
AUCO, Inc.
See "RISK FACTORS" beginning on page 8 for a discussion of risks which should
be considered by shareholders with respect to the merger.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved the Peerless common stock to be issued in the merger
or determined if this Proxy Statement/Prospectus/Information Statement is
accurate or adequate. Any representation to the contrary is a criminal
offense.
Proxy Statement/Prospectus/Information Statement dated May 7, 1999
and first mailed to shareholders on or about May 13, 1999.
<PAGE>
WHERE TO FIND MORE INFORMATION
Peerless files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information filed by Peerless at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Peerless' filings with the SEC are also available to the public from commercial
document retrieval services and at the world wide web site maintained by the
SEC at "http://www.sec.gov."
Peerless filed a Registration Statement on Form S-4 to register with the SEC
the Peerless common shares to be delivered in connection with the merger. This
document is a part of that Registration Statement and constitutes a prospectus
of Peerless in addition to being a proxy statement of Peerless for the special
Meeting and an information statement of Auco. As allowed by SEC rules, this
document does not contain all the information you can find in the Registration
Statement or the exhibits to the Registration Statement.
The SEC allows Peerless to "incorporate by reference" information into this
document, which means that Peerless can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Proxy
Statement/Prospectus/ Information Statement, except for any information
superseded by information in this document. This document incorporates by
reference the documents set forth below that Peerless has previously filed with
the SEC. These documents contain important information about Peerless and its
finances.
<TABLE>
<CAPTION>
Peerless SEC Filings (File No. 000-
21287) Period
----------------------------------- ------
<S> <C>
Annual Report on Form 10-K Fiscal year ended January 31, 1999
Current Report on Form 8-K Filed on April 20, 1999
Form 8-A that describes the Peerless Filed on August 30, 1996
common stock issued in the merger
Form 8-A that describes the right to Filed on October 13, 1998
purchase preferred stock that is
associated with the Peerless common
stock that Peerless will issue in
the merger
</TABLE>
Peerless is also incorporating by reference additional documents that it
files with the SEC between the date of this document and the date of the
special meeting.
If you are a Peerless shareholder, Peerless may have sent you some of the
documents incorporated by reference, but you can obtain any of them through
Peerless or the SEC. Documents incorporated by reference are available from
Peerless without charge. Exhibits to the documents will not be sent, however,
unless those exhibits have specifically been incorporated by reference as
exhibits in this document. Shareholders may obtain documents incorporated by
reference in this document by requesting them in writing or by telephone from
the appropriate party at the following address:
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
(310) 536-0908
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM PEERLESS, PLEASE DO SO BY JUNE
1, 1999 TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this document to vote on the matters submitted to you. Neither
Peerless nor Auco has authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated
May 7, 1999. You should not assume that the information contained in the
document is accurate as of any date other than such date, and neither the
mailing of this document to shareholders nor the issuance of Peerless common
shares to be delivered in connection with the merger shall create any
implication to the contrary.
<PAGE>
PEERLESS SYSTEMS CORPORATION
----------------
NOTICE OF SPECIAL MEETING
TO BE HELD ON JUNE 10, 1999
----------------
To the Shareholders of Peerless Systems Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of Peerless Systems
Corporation will be held on June 10, 1999 at 10:00 a.m. local time, at 2381
Rosecrans Avenue, El Segundo, California 90245, to approve the issuance of
Peerless common shares, par value $0.001 per share, to be delivered in
connection with the merger contemplated by the Agreement and Plan of
Reorganization and Merger, dated as of April 6, 1999, by and among Peerless
Systems Corporation ("Peerless"), Auco Merger Sub, Inc., a wholly-owned
subsidiary of Peerless, and AUCO, Inc.
A copy of the merger agreement is attached as Annex A to the accompanying
Proxy Statement/ Prospectus/Information Statement. Only shareholders of record
on the close of business on May 11, 1999 are entitled to notice of and to vote
at the special meeting or any adjournments or postponements of the special
meeting.
You are cordially invited to attend the Peerless special meeting. Whether or
not you plan to attend the meeting, please sign, date and return the
accompanying proxy card to ensure that your shares are represented at the
meeting. If you attend the Peerless special meeting, you may vote in person if
you wish, whether or not you have executed and returned your proxy card. Your
proxy may be revoked at any time before it is voted. Please review the Proxy
Statement/Prospectus/Information Statement accompanying this notice for more
complete information regarding the matters proposed for your consideration at
the Peerless special meeting.
By Order of the Board of Directors
/s/ Edward A. Gavaldon
Edward A. Gavaldon, Acting Secretary
May 7, 1999
El Segundo, California
NOTES:
1. A shareholder is entitled to appoint a proxy to attend and vote at the
meeting on his or her behalf. A proxy must be a shareholder.
2. Proxy cards should be signed, dated and returned as soon as possible in
accordance with the instructions in the accompanying Proxy
Statement/Prospectus/Information Statement of Peerless dated May 7, 1999
and the notes on the proxy card.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FORWARD LOOKING INFORMATION............................................... 1
QUESTIONS AND ANSWERS ABOUT THE PEERLESS/AUCO MERGER...................... 2
SUMMARY................................................................... 4
Peerless and Auco........................................................ 4
Our Reasons for the Merger............................................... 4
Recommendations to Shareholders.......................................... 5
The Merger............................................................... 5
RISK FACTORS.............................................................. 8
SELECTED HISTORICAL AND UNAUDITED SELECTED
PROFORMA COMBINED FINANCIAL DATA......................................... 13
Selected Historical Financial Data of Peerless........................... 14
Selected Historical Financial Data of Auco............................... 15
Unaudited Combined Pro Forma for Peerless and Auco....................... 16
Auco's Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 17
COMPARATIVE PER SHARE INFORMATION......................................... 20
PEERLESS MARKET PRICE AND DIVIDENDS INFORMATION........................... 21
THE AUCO SOLICITATION OF WRITTEN CONSENTS................................. 22
Purpose.................................................................. 22
Record Date; Consent Rights;............................................. 22
Solicitation of Written Consents......................................... 22
Required Consents........................................................ 23
PEERLESS SPECIAL MEETING.................................................. 24
Purpose.................................................................. 24
Solicitation of Proxies.................................................. 24
Record Date; Voting Rights; Proxies...................................... 24
Quorum................................................................... 25
Required Vote............................................................ 25
THE MERGER................................................................ 26
Background of the Merger................................................. 26
Recommendation of the Board of Directors of Auco; Reasons of Auco for the
Merger.................................................................. 27
Recommendation of the Board of Directors of Peerless; Reasons of Peerless
for the Merger.......................................................... 29
Opinion of Peerless' Financial Advisor................................... 29
Interests of Certain Persons in the Merger............................... 33
Certain United States Federal Income Tax Consequences of the Merger...... 34
Accounting Treatment of the Merger....................................... 35
U.S. Federal Securities Laws Consequences................................ 35
THE EXCHANGE RATIO AND ITS EFFECT ON AUCO
SECURITIES AND STOCK OPTION PLANS........................................ 36
General.................................................................. 36
The Exchange Ratio....................................................... 36
Fractional Shares........................................................ 36
Treatment of Auco Stock Options.......................................... 37
Stock Exchange Listing................................................... 37
</TABLE>
i
<PAGE>
<TABLE>
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Page
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<S> <C>
THE MERGER AGREEMENT...................................................... 39
General.................................................................. 39
The Merger Agreement..................................................... 39
Effective Time.......................................................... 39
Charter and Bylaws...................................................... 39
Directors and Officers.................................................. 39
Conversion of Auco Stock................................................ 39
Exchange Procedures..................................................... 39
Representations and Warranties........................................... 40
Escrow Fund.............................................................. 40
Conduct of Business by Auco.............................................. 40
No Solicitation.......................................................... 42
Certain Other Covenants.................................................. 43
Conditions to the Merger................................................. 44
Indemnification and Escrow............................................... 46
Amendment and Waiver; Parties in Interest................................ 47
Escrow Fund Agreement.................................................... 47
Shareholder Agreement.................................................... 47
INFORMATION ABOUT PEERLESS................................................ 48
Industry Background...................................................... 48
Peerless Products and Solutions.......................................... 50
Technology............................................................... 52
Customers and Markets.................................................... 53
Seasonality.............................................................. 54
Sales and Marketing...................................................... 55
Product Development and Engineering Services............................. 55
Intellectual Property and Proprietary Rights............................. 55
Competition.............................................................. 56
Employees................................................................ 56
INFORMATION ABOUT AUCO.................................................... 57
Overview.................................................................. 57
Industry Background....................................................... 57
Auco Technologies and Products............................................ 58
Auco Modular Software Architecture........................................ 58
Maintenance and Technical Support......................................... 61
Engineering Services...................................................... 61
Market.................................................................... 62
Customers................................................................. 63
Business Model............................................................ 63
Alliances................................................................. 63
Sales and Marketing....................................................... 63
Competition............................................................... 64
Employees................................................................. 64
Legal Proceedings......................................................... 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF AUCO................... 65
COMPARISON OF SHAREHOLDER RIGHTS.......................................... 66
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION........................ 75
OTHER MATTERS............................................................. 81
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
LEGAL MATTERS............................................................. 81
EXPERTS................................................................... 81
FINANCIAL STATEMENTS...................................................... F-1
Index to AUCO, Inc. Financial Statements................................. F-1
ANNEXES
A. AGREEMENT AND PLAN OF REORGANIZATION AND MERGER INCLUDING EXHIBITS.... A-1
B. SHAREHOLDER AGREEMENT................................................. B-1
C. FAIRNESS OPINION OF DAIN RAUSCHER WESSELS............................. C-1
D. FORM OF AUCO WRITTEN CONSENT.......................................... D-1
E. FORM OF PEERLESS PROXY CARD........................................... E-1
F. CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW.................. F-1
</TABLE>
iii
<PAGE>
FORWARD LOOKING INFORMATION
Certain statements in this document are "forward looking statements" within
the meaning of the United States Private Securities Litigation Reform Act of
1995. All forward looking statements involve risks and uncertainties. In
particular, any statements regarding the benefits of the merger, as well as
expectations with respect to future sales, operating efficiencies and product
expansion, are subject to known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of Peerless and/or Auco,
which may cause actual results, performance or achievements to differ
materially from anticipated results, performance or achievements. Factors that
might affect such forward looking statements include, among other things the
ability to integrate Auco into Peerless operations, overall economic and
business conditions, the demand for Peerless and/or Auco products and services,
competitive factors in the industries in which Peerless and/or Auco compete,
changes in government regulation, changes in tax requirements (including tax
rate changes, new tax laws and revised tax law interpretations), interest rate
fluctuations and other capital market conditions, including foreign currency
rate fluctuations, economic and political conditions in international markets,
including governmental changes and restrictions on the ability to transfer
capital across borders, the ability to achieve anticipated synergies and other
cost savings in connection with acquisitions, the timing, impact and other
uncertainties of future acquisitions by Peerless and the ability of Peerless
and Auco, and the ability of their respective customers and suppliers, to
replace, modify or upgrade computer programs in order to adequately address the
Year 2000 issue. For a description of some of the factors or uncertainties that
exist in Peerless' operations and business environment which could cause actual
results to differ, reference is made to the section entitled "Cautionary
Statements for Purposes of the 'Safe Harbor' " in Peerless' Annual Report on
Form 10-K for the year ended January 31, 1999.
1
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PEERLESS/AUCO MERGER
Q: Why have Peerless and Auco agreed to a business combination?
A: We believe that the merger, by combining Peerless' embedded imaging
technology with Auco's embedded networking technology, as well as the other
complementary product offerings, customer bases and other resources of our
companies, will position the combined company to enjoy greater growth and
earnings than either company would have experienced individually. To review the
reasons for the merger in greater detail, see pages 27 through 29.
Q: What will shareholders receive in the merger?
A: Auco shareholders will receive .2585 of a share of Peerless common stock in
exchange for each of their shares of Auco common stock. This fraction is
referred to as the "exchange ratio." For example, if you currently own 10,000
shares of Auco common stock, then after the merger you will receive
2,585 shares of Peerless common stock. The value of the Peerless common stock
that you will receive depends on the price of the Peerless common stock
immediately after the merger. Peerless will not issue fractional shares.
Instead, you will receive cash for any fractional shares of Peerless common
stock owed to you in an amount equal to the fraction of a share of Peerless
common stock multiplied by the ten-day average closing sale price of Peerless
common stock as reported on NASDAQ for the period ending three days prior to
the date that the merger is completed. Holders of shares of Auco preferred
stock will convert their shares into shares of common stock prior to the
completion of the merger, and these shares of common stock will convert into
Peerless common stock at the same exchange ratio.
Peerless shareholders will not change their holdings of Peerless common shares
as a result of the merger.
Q: If I am an Auco shareholder, will I receive all of the shares of Peerless
common stock at the time of the merger?
A: No. Peerless will issue, at the time of the completion of the merger, 90% of
the total number of shares to be issued to you in the merger. The remaining 10%
will be held in escrow to satisfy claims of indemnity, if any, from Peerless
because of any inaccuracy in the representations and warranties of Auco
appearing in the merger agreement, any failure by Auco to perform its covenants
or obligations under the merger agreement and any claims by third parties
relating to these two circumstances. If, and to the extent, there are no claims
for indemnity by Peerless before the first anniversary of the completion of the
merger or, in some cases, sooner, Peerless will issue to Auco shareholders the
remaining 10%, or some portion of it, of the total number of shares to be
issued in the merger.
Q: What will happen to my options to purchase Auco stock?
A: Peerless will assume all options to purchase Auco common stock at the same
.2585 exchange ratio that applies to Auco common stock. Thus, for each share of
Auco common stock on which you have an option, you will receive an option to
purchase .2585 of a share of Peerless common stock. In addition, the exercise
price per share will be adjusted by dividing the current exercise price
by .2585. For example, an option to purchase 10,000 shares of Auco common stock
at an exercise price of $0.25 per share will convert to an option to purchase
2,585 shares of Peerless common stock (10,000 x .2585) at an exercise price of
$0.97 per share ($0.25/.2585).
Q: What risks should I consider?
A: You should review "RISK FACTORS" on pages 8 through 12.
Q: When will the merger take effect?
A: Auco and Peerless expect that the merger will become effective promptly
after shareholders of Auco approve and adopt the merger agreement and
shareholders of Peerless approve the issuance of the Peerless common shares to
be delivered in connection with the merger, provided that the other conditions
to the merger have been satisfied. The special shareholders meeting of Peerless
is scheduled for June 10, 1999.
2
<PAGE>
The Auco action by written consent will take effect when Auco receives written
consents from shareholders with a majority of the voting power of Auco common
stock and preferred stock as long as that date is at least twenty business days
after we mail you this document.
Q: Will shareholders have dissenters rights?
A: Yes. Auco shareholders will have the right to demand fair value in cash as a
result of the merger. For a general discussion of dissenters' rights, see
"Rights of Dissenting Auco Shareholders".
Q: What are the United States federal income tax consequences of the merger for
the shareholders of Auco?
A: The receipt of shares of Peerless common stock in the merger will generally
be tax free to the shareholders of Auco. You, however, may have to pay taxes on
cash received for fractional shares. If you choose to vote against the merger
by not returning your signed written consent and also perfect your dissenter's
rights under California law, you will receive the fair value of your Auco
shares in cash, which would be taxable to you to the extent of gain on such
shares. To review the tax consequences to Auco shareholders in greater detail,
see pages 34 through 35.
You are urged to consult your own tax advisors as to the specific consequences
of the merger to you.
Q: What should shareholders do now?
A: Shareholders of Peerless should mail their signed proxy card in the enclosed
postage paid envelope, as soon as possible, so that their shares will be
represented at the special meeting. Shareholders of Auco should promptly mail
their signed written consent in the enclosed postage paid envelope.
The board of directors of Auco unanimously recommends that Auco shareholders
vote for approval and adoption of the merger agreement.
The board of directors of Peerless unanimously recommends that Peerless
shareholders vote for the approval of the issuance of Peerless common shares to
be delivered in connection with the merger.
After the merger is completed, Auco shareholders will receive written
instructions for exchanging their share certificates.
Q: Can shareholders change their vote after they have mailed in a signed proxy
card or action by written consent?
A: Yes. Peerless shareholders can change their vote in one of the following
ways at any time before their proxies are voted at the special meeting. First,
shareholders can revoke their proxies by written notice. Second, shareholders
can submit new, later dated proxy cards. Third, shareholders can attend the
special meeting and vote in person. Fourth, Peerless shareholders may alter the
instructions as to how their proxies are to vote (without revoking the proxies)
by giving notice of the alteration to the secretary of Peerless before the vote
is taken.
If you are an Auco shareholder, you cannot revoke an action by written consent
after Auco receives sufficient consents to approve the merger with Peerless in
accordance with California law. Auco expects to receive sufficient consents to
approve the merger promptly because a shareholder who has a significant amount
of the outstanding voting power of Auco stock has agreed to deliver his
consent.
Q: Should Auco shareholders send in their share certificates now?
A: No. After the merger is completed, Auco shareholders will be sent written
instructions for sending in their share certificates and receiving the Peerless
common shares and cash, if any, to which they are entitled.
Q: Whom should shareholders call with questions?
A: Auco shareholders who have questions about the merger or how to vote their
shares, should call Adam Au or Mannan Latif at (650) 569-4400.
Peerless shareholders who have questions about the merger or how to vote their
shares should call MacKenzie Partners at (800) 322-2855.
3
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To better understand
the merger and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which you have been referred. See "WHERE TO FIND MORE INFORMATION" (inside
front cover page).
Peerless and Auco
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, California 90245
(310) 536-0908
Peerless is a leading provider of software-based embedded imaging systems to
original equipment manufacturers of digital document products. Digital document
products include printers, copiers, fax machines and scanners, as well as
multifunction products 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. Peerless' technology and engineering
services provide advanced embedded imaging solutions that enable original
equipment manufacturer customers to develop digital printers, copiers and
multifunction products quickly and cost effectively. Peerless was incorporated
in California in 1982 and reincorporated in Delaware in September 1996. (See
"INFORMATION ABOUT PEERLESS.")
AUCO, Inc.
386 Main Street
Redwood City, California 94063
(650) 569-4400
AUCO, Inc. is a closely held California-based software company established
in 1994. Auco provides networking software to original equipment manufacturers
of office equipment such as printers, copiers, scanners and facsimile machines.
In order for such office equipment to have full network connectivity on
Microsoft Windows, Novell NetWare, Unix, Apple networks or on the Internet,
they need a full set of networking protocols, networked applications and
management software, collectively known as embedded networking software. Auco
provides products and engineering services, to help office equipment original
equipment manufacturers include customized, embedded networking software
support in their products. Auco had total assets of $1.5 million and
shareholders' equity of $0.4 million at December 31, 1998. Auco's principal
office is located in Redwood City. (See "INFORMATION ABOUT AUCO, INC.")
Auco Merger Sub, Inc.
2381 Rosecrans Avenue
El Segundo, California 90245
(310) 536-0908
Auco Merger Sub is a special purpose wholly-owned subsidiary of Peerless
organized for the sole purpose of merging with Auco resulting in Auco becoming
a wholly-owned subsidiary of Peerless.
Our Reasons for the Merger
The Peerless and Auco boards of directors have determined that the merger
agreement and the transactions associated with it (including, in the case of
Peerless, the issuance of Peerless common shares to Auco shareholders) are in
the best interests of their respective shareholders. In reaching their
respective decisions, the boards of directors of the two companies considered
the following factors, among other things:
. The merger would create a leader in the market to provide an integrated
embedded software solution that would allow Peerless' original equipment
manufacturing customers to purchase both embedded imaging and embedded
networking software from a single supplier, resulting in more cost-
efficient embedded products than are currently available.
. Potential product and sales synergies could be achieved through cross-
marketing each company's products to the other company's customers. For
example, Auco's expertise in Internet printing will
4
<PAGE>
allow Peerless-enabled printers and multifunction products to become
accessible to users worldwide.
To review the reasons for the merger in greater detail, as well as related
uncertainties, see "THE MERGER--Recommendation of the Board of Directors of
Auco; Reasons of Auco for the Merger," page 27 and "--Recommendation of the
Board of Directors of Peerless; Reasons of Peerless for the Merger" on page 29.
Recommendations to Shareholders (pages 28 and 29)
To Auco Shareholders:
The Auco board of directors believes that the merger is fair to you and in
your best interests and unanimously recommends that you submit a written
consent to approve the merger and adopt the merger agreement.
To Peerless Shareholders:
The Peerless board of directors believes that the merger is in your best
interests and unanimously recommends that you vote FOR the proposal to approve
the issuance of Peerless common shares to be delivered in connection with the
merger.
Auco Written Consent and Vote Required (page 22)
The affirmative vote of the holders of a majority of the outstanding shares
of Auco common stock, voting as a separate class, and the affirmative vote of a
majority of the outstanding shares of Auco preferred stock, voting as a
separate class, are required to approve the merger agreement and the
transactions associated with it. As of April 13, 1999, Adam Au, a director and
executive officer of Auco held approximately 16.4% of its outstanding shares of
preferred stock, and 88.5% of its outstanding shares of common stock. No other
director or executive officer of Auco held common or preferred shares of Auco
as of that date. Your failure to return a signed consent form will have the
effect of a vote against the merger agreement and the transactions associated
with it.
Peerless Special Meeting and Vote Required (page 24)
The meeting of the Peerless shareholders will be held on June 10, 1999 at
2:00 p.m. local time.
Notice of the Peerless special meeting is being sent to all holders of
record of Peerless common shares together with this document. Holders of record
of Peerless common shares on May 11, 1999 will be entitled to vote at that
meeting. On that day, there were approximately 11,204,099 shares of common
stock outstanding.
The favorable vote of a majority of the votes cast at the Peerless special
meeting on the proposal to issue the Peerless common shares to be delivered in
connection with the merger is required to approve this proposal, as long as at
least a majority of the outstanding Peerless common shares vote on such
proposal.
The Merger (page 26)
The Merger agreement is attached to the back of this document as Annex A to
this document. You should read these documents, as they are the legal documents
that govern the merger.
Consequences of the Merger
In the merger, Auco will merge with a wholly-owned subsidiary of Peerless.
As a result, Auco, as the surviving corporate entity, will become a direct
wholly-owned subsidiary of Peerless, and the former shareholders of Auco will
become shareholders of Peerless.
What Auco Shareholders Will Receive in the Merger
In the merger, Auco shareholders will receive .2585 of a share of Peerless
common stock in exchange for each of their shares of Auco common stock.
Certain U.S. Federal Income Tax Consequences
The transaction is intended to be a tax-free reorganization under the United
States Internal Revenue Code of 1986, as amended. Shareholders of
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Auco will generally not have any taxable gain or loss for U.S. federal income
tax purposes upon receipt of Peerless common shares in the merger; however, a
shareholder may be required to pay taxes on cash received in lieu of a
fractional Peerless common share.
For further details, see "Certain U.S. Federal Income Tax Consequences."
Conditions to the Merger
The consummation of the merger depends upon satisfaction of a number of
conditions, including:
. approval and adoption of the merger agreement by the Auco preferred
stock and common stock shareholders;
. approval by the Peerless shareholders of the issuance of Peerless common
shares to be delivered in connection with the merger;
. the absence of legal restraints to the consummation of the merger;
. receipt of opinions with respect to the tax-free nature of the merger;
and
. receipt of a letter from PricewaterhouseCoopers LLP as to the
appropriateness of pooling of interests accounting for the merger.
Termination of the Merger Agreement
Either Auco or Peerless may call off the merger if:
. both parties consent in writing;
. the merger is not completed by September 30, 1999 through no fault of
the party seeking to call off the merger;
. there exist legal restraints preventing the merger;
. the Auco shareholders do not approve the merger or the Peerless
shareholders do not approve the issuance of the Peerless common shares
to be delivered in connection with the merger; or
. the other party breaches in a material way its representations,
warranties, covenants or agreements under the merger agreement and that
breach is not or cannot be remedied.
In addition, Peerless may also terminate the merger agreement if:
. the board of directors of Auco withdraws or adversely modifies its
approval or recommendation of the merger or recommends a business
combination transaction with a third party.
For further details, see "Termination."
Termination Fee and Expenses; Certain Non-solicitation Provisions
Auco is required to pay to Peerless a termination fee of $1 million, and pay
up to $500,000 of Peerless' reasonable out-of-pocket expenses, if the merger
agreement is terminated under certain circumstances.
For further details, see "Termination--Fees and Expenses."
The merger agreement has certain provisions pursuant to which Auco has
agreed that neither it, nor any of its agents or employees, directly or
indirectly, will initiate, solicit or encourage any inquires or the making of
any proposal or offer for furnishing confidential information relating to, or
engage in any negotiations or discussions concerning, any acquisition or
purchase of Auco by anyone other than Peerless. See "No Solicitation."
The termination fee and the no-solicitation provisions of the merger
agreement may have the effect of discouraging persons who might be interested
in entering into a business combination with Auco from proposing such a
transaction, even where the consideration payable to Auco shareholders in such
a transaction would exceed the consideration payable in the merger.
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Shareholder Agreement (page 47)
In connection with the merger a certain shareholder of Auco holding
approximately 16.4% of shares of Auco preferred stock and 88.5% of shares of
Auco common stock as of the date of mailing this document had agreed to vote
his shares in favor of the merger agreement and the transactions associated
with it. A form of the shareholder agreement is attached as Annex B at the back
of this document. We encourage you to read this agreement.
Anticipated Accounting Treatment
Peerless and Auco expect the merger to qualify as a pooling of interests for
accounting purposes, which means that the companies will be treated as if they
had always been combined for accounting and financial reporting purposes. As a
condition to the Merger, Peerless must receive a letter from its independent
accounting firm as to the appropriateness of pooling of interests accounting
for the merger. See "Accounting Treatment of the Merger."
Opinion of Peerless Financial Advisor
Peerless' financial advisor, Dain Rauscher Wessels, has given a written
opinion to the board of directors of Peerless as to the fairness to Peerless,
from a financial point of view, of the exchange ratio pursuant to the merger
agreement. The full text of the written opinion of Dain Rauscher Wessels dated
April 5, 1999 is attached to this document as Annex C and should be read
carefully in its entirety. The opinion of Dain Rauscher Wessels is directed to
the Peerless board and does not constitute a recommendation to any shareholder
as to how such shareholder should vote on the issuance of Peerless common
shares to be delivered in connection with the merger or the other matters being
presented to a vote by Peerless shareholders.
Dissenters' Rights
Auco shareholders who vote against the merger are entitled to dissenters'
rights under California law if they follow the required steps. Dissenters'
rights generally entitle the dissenting shareholder to the fair market value of
his or her shares of Auco common stock in cash in a taxable transaction. See
"Rights of Dissenting Auco Shareholders."
Listing of Peerless Common Shares
The Peerless common shares issued to Auco shareholders will be listed on the
Nasdaq National Market, trading under the symbol "PRLS."
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RISK FACTORS
In evaluating the merger and the merger agreement, shareholders should take
into account the following risks, as well as other information included in or
incorporated by reference into this document:
Risks Related to the Merger
Fixed exchange ratio may limit the value of Peerless stock being issued.
Each outstanding share of Auco common stock will be converted into the right
to receive .2585 of a share of Peerless common stock at the effective time of
the merger. There will be no adjustment of the exchange ratio based on
fluctuations in the price of Peerless common stock. Consequently, the value of
the equivalent per share price that Auco shareholders may expect to receive for
each share of Auco common stock exchanged in the merger could decrease from the
date that Peerless shareholders and Auco shareholders submit their proxy or
action by written consent, as the case may be, and the effective date of the
merger. The price of the Peerless common stock could change because of changes
in the business, operations or prospects of Peerless or Auco, market
assessments of the merger, general market and economic conditions or other
factors. If the market price for Peerless common stock decreases before the
effective time, the market value at the effective time of the Peerless common
stock would correspondingly decrease and, as noted above, Auco shareholders
will not be compensated for decreases in the market price of Peerless common
stock. Auco shareholders voting on the merger are urged to obtain recent market
quotations for Peerless common stock. We cannot predict or give any assurance
as to the market price of Peerless common stock at any time before the
effective time or at any time after the consummation of the merger.
Auco shareholders may never receive shares held in escrow.
Peerless will not pay all of the aggregate merger consideration to the Auco
shareholders at the closing of the merger. Instead, Peerless will issue 10% of
the aggregate merger consideration to the escrow agent which will release this
portion of the aggregate merger consideration to Auco shareholders only if no
claims of indemnity are made by Peerless for:
. any inaccuracy in any of the representations and warranties made by Auco
in the merger agreement;
. any failure by Auco to perform or comply with any covenant or obligation
in the merger agreement; or
. any claim by a third party relating to the two circumstances above.
If, and to the extent, it is determined that Auco and its shareholders and
option holders have any liability for indemnification or otherwise under the
merger agreement, Auco shareholders will not receive all of the shares that
Peerless issued to the escrow agent. (See "THE MERGER AGREEMENT--Escrow Fund.")
Additionally, Auco shareholders may recognize taxable gain on the payment of
escrow shares to Peerless. (See "Certain U.S. Federal Income Tax
Consequences.")
Integrating the operations of Peerless and Auco may be difficult.
Integrating the operations of Auco with those of Peerless after the merger
may be difficult and time consuming. Management of the combined company will
need to successfully integrate, among other things, the product offerings,
product development, sales and marketing and customer service functions, and
the management information systems of both companies. In addition, the combined
company will need to retain the management, key employees, customers,
distributors, vendors and other business partners of both companies. The
integration of these organizations may temporarily distract management from the
day-to-day business of the combined company following the merger. The combined
company may fail to manage this integration so as to achieve any of the
anticipated synergies and other benefits that both companies hope to achieve
from the merger.
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The costs associated with the merger are difficult to estimate, may be
higher than expected and may harm the financial results of the combined
company.
Peerless and Auco estimate that they will incur transaction costs,
consisting primarily of fees for investment bankers, attorneys, accountants,
consultants, financial printing and other related charges, of approximately
$2.3 million, which will be expensed upon consummation of the merger. If the
total costs of the merger exceed estimates or the benefits of the merger do not
exceed the total costs of the merger, then the financial results of the
combined companies could be adversely affected.
The market price of Peerless common stock could decline as a result of the
merger.
The market price of the Peerless common stock may decline significantly as a
result of the merger if:
. the integration of Peerless' and Auco's operations is not successful; or
. the combined company does not experience the benefits of the merger as
quickly, or to the extent, as may be expected by financial analysts; or
. if the effect of the merger is not in line with the expectations of
financial analysts.
If the merger doesn't qualify as a pooling of interests, then Peerless would
have to account for the transaction using purchase accounting, which would
reduce Peerless' earnings and could cause the Peerless stock price to decline.
The pro forma combined financial results in this document are based on the
merger being treated as a pooling of interests under accounting and financial
reporting rules. If the merger fails to qualify for pooling of interests
accounting treatment for financial reporting purposes for any reason, then
Peerless' reported earnings and, potentially, the price of Peerless' common
stock, would be materially adversely affected. If the merger fails to qualify
as a pooling of interests, then Peerless would be required to account for the
transaction under the purchase method of accounting for business combinations.
Under the purchase method, Peerless would be required to record the excess of
the purchase price of Auco over the fair market value of Auco's assets as
goodwill. This goodwill would be amortized over its useful life, which would
reduce Peerless' earnings.
While the consummation of the merger is conditioned upon Peerless receiving
from PricewaterhouseCoopers a letter to the effect that, subject to the
qualifications contained in the letter, they concur with management's
conclusion that no conditions exist that would preclude accounting for the
merger as a pooling of interests, there are also events after the merger that
can affect the availability of pooling of interests accounting that may not be
within the control of Peerless or Auco shareholders. Such events include but
are not limited to:
. significant changes in the business of Peerless, including certain
dispositions of assets by Peerless, for two years following the merger;
and
. the sale by affiliates of both companies of their shares of common stock
of Peerless and Auco within a period of time following the merger.
The rights of shareholders of Peerless under Delaware law in some ways are
not as favorable as the rights of shareholders of Auco under California law.
Certain provisions of Peerless' certificate of incorporation and bylaws and
certain provisions of Delaware law 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 Peerless. Such provisions could limit the
price that investors might be willing to pay in the future for Peerless' common
stock. These provisions permit the issuance of "blank check" preferred stock by
the board of directors without stockholder approval, require super-majority
approval to amend certain provisions in the certificate of incorporation 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
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other requirements that could make it more difficult for stockholders to effect
certain corporate action. Furthermore, Peerless is subject to the anti-takeover
provisions of section 203 of the Delaware General Corporation Law, which
prohibits Peerless 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 Peerless.
Risks Related to Peerless
Peerless has a short history of operating profits.
Peerless has been profitable only since the quarter ended December 31, 1995.
Peerless recognized net losses of approximately $639,000 and $1.2 million for
the years ended December 31, 1995 and 1994, respectively. Although Peerless
reported net income of $4.6 million, $4.9 million and $4.4 million for the
fiscal years ended January 31, 1999, 1998 and 1997, respectively, we cannot
predict or give any assurance that Peerless will maintain profitability on a
quarterly or annual basis in the future.
Peerless' operating results can fluctuate dramatically from quarter to
quarter.
Peerless' operating results can fluctuate dramatically. For example, in
recent quarters Peerless' quarterly revenues have been significantly affected
by the timing of one-time licensing transactions, by decreases in recurring
product licensing revenues resulting from the phase-out by Peerless' original
equipment manufacturing customers of products incorporating Peerless'
technology and by variations in end-user demand. Peerless' operating results
fluctuate because of a wide variety of other factors, including:
. initiation or termination of arrangements between Peerless and its
existing and potential original equipment manufacturing customers;
. the timing of introductions of new products or product enhancements by
Peerless, its original equipment manufacturing customers and their
competitors;
. the phase-out or early termination of original equipment manufacturing
customers' products incorporating Peerless' technology;
. the size and timing of engineering contracts;
. inventories of digital document products carried by the original
equipment manufacturers' distributors that exceed current or projected
end-user demand;
. customer order deferrals in anticipation of new products or product
enhancements; and
. changes in Peerless' operating expenses because of software bugs,
product delays or other product quality problems.
Peerless depends on sole source providers.
Peerless is dependent on three independent parties, Motorola, Inc., IBM
Microelectronics Division of International Business Machines Corporation and
Intel Corporation, each of which provides unique application specific
integrated circuits incorporating Peerless' imaging technology to certain of
Peerless' original equipment manufacturing customers. Peerless has a set of
relationships with Adobe Systems Incorporated that address many critical
aspects of Peerless' original equipment manufacturing customers' needs.
Peerless has licensed (for internal development purposes) from Adobe the right
to use Adobe's PostScript Software to enable Peerless' products to be used with
Adobe's PostScript Software, has licensed to Adobe several of Peerless'
technologies and has developed technologies for Adobe for which Peerless
receives royalties and engineering services fees. 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 Peerless' customers and
thereby adversely affect Peerless' customer relationships. Any such disruption
could limit or delay production or shipment of the products incorporating
Peerless' technology, which could have a material adverse effect on the
Peerless' operating results.
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Peerless' success depends on developing the nascent markets for its
products.
A substantial portion of Peerless' recent development efforts has been
directed at the development of new embedded imaging technologies, particularly
for laser and inkjet multifunction products, color products and digital
photography. The markets for these products are new and rapidly evolving.
Peerless' original equipment manufacturing customers currently are selling
laser monochrome and color network printers and multifunction products,
incorporating Peerless' technology. Although certain Peerless technology is
currently available to original equipment manufacturing customers, once an
agreement with an original equipment manufacturer is entered into, the
technology must undergo further development, or customization, before it can be
incorporated into an original equipment manufacturer's specific digital
document product. Peerless' original equipment manufacturing customers have not
yet shipped any inkjet products incorporating Peerless' technology, and
Peerless has limited experience in the small office/home office market to date.
Further, Peerless' digital photography effort remains in the early start-up
phase and Peerless has signed no original equipment manufacturer contracts for
this technology to date. Peerless' future success will be dependent to a
significant degree upon broad market acceptance of its technologies under
development. This success will be dependent in part on the ability of Peerless'
original equipment manufacturing customers 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 new generation
products for office and desktop use. We cannot give any assurance that:
. the market for multifunction products, color printing and other products
proposed by Peerless will develop or continue to expand;
. Peerless will be able to offer its new technologies in a timely manner,
if at all;
. Peerless' original equipment manufacturing customers will choose the
Peerless technology for use in their multifunction products, color
printers, digital cameras or other products;
. Peerless' original equipment manufacturing customers will be successful
in developing such multifunction products, color printers, digital
cameras 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 Peerless' operating results.
The transition to the Year 2000 may harm Peerless' operations.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Peerless'
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Peerless has divided its review of the Year 2000 issue into three major
areas: (1) internal systems, (2) Peerless products, and (3) potential year 2000
problems associated with outside development partners, vendors and customers.
Peerless has substantially completed its review of its internal system,
including its development tools and business critical applications such as
general ledger, accounts payable, accounts receivable, job cost, and
purchasing. The Company has identified certain systems that require updating
and has begun to purchase and install updates that have been certified as year
2000 compliant by vendors. Peerless expects to complete its review of internal
systems by July 31, 1999 and does not expect the review to uncover a risk that
would result in a material adverse effect on its operations.
Peerless is in the process of reviewing the year 2000 compliance of its
products developed for original equipment manufacturers. Based on an initial
review, Peerless believes that its products do not contain date sensitive
fields. Testing to validate this assumption is expected to be completed in
July 31, 1999. At this time, Peerless does not believe that product updates
will be necessary.
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Peerless is in the process of identifying any potential year 2000 problems
from outside development partners who work on engineering services projects,
vendors whose facilities manufacture application specific integrated circuits
that incorporate Peerless' technology or whose systems interface with Peerless'
internal systems as well as customers whose products contain technology
licensed from Peerless. Peerless expects to complete its review by July 31,
1999. However, since third-party year 2000 compliance is not within Peerless'
control, Peerless cannot assure stockholders that the year 2000 problems
affecting the systems of other companies will not have a material adverse
effect on Peerless' operations. This impact could include, among other things,
product time to market delays caused by year 2000 problems associated with
development partners which would negatively impact engineering services
revenues and delays in customer shipments which could negatively impact
Peerless' recurring licensing revenues.
Costs to address the Year 2000 issue include hardware, software and
implementation costs for internal work are not expected to exceed $200,000. To
date, Peerless has incurred approximately $75,000 of these costs, all of which
have been expensed.
Peerless presently believes that with the identified modifications, the Year
2000 issue can be mitigated. However, if the modifications are not made, or are
not completed timely, the Year 2000 issue could have a material impact on the
operations of Peerless. Further, there can be no guarantee that the systems of
other companies on which Peerless' systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with Peerless' systems, would not have a material adverse effect
on Peerless.
Risks Related to Auco
Auco has a history of operating losses.
Since its formation in 1994 through December 31, 1998, Auco had net losses
aggregating $6.4 million. We cannot predict or give any assurance that Auco
will achieve profitability on a quarterly or annual basis in the future.
Auco's operating results can fluctuate significantly from quarter to quarter.
Auco's operating results can fluctuate dramatically. For example, in recent
quarters, Auco's revenues have been significantly affected by the timing and
size of engineering services contracts. To date, Auco has been highly dependent
on a small number of major contracts, each of which has had a significant
effect on Auco's financial performance.
Auco's business is highly concentrated.
Auco's business is highly concentrated with a few customers. Three customers
accounted for 89% and 95% of Auco's total revenues for the years ended December
31, 1998 and 1997, respectively. An adverse change in any of these customer
relationships could have a material adverse effect upon Auco's financial
performance.
Dependence on key personnel.
The success of Auco is dependent on certain key executive and technical
personnel. The loss of the services of these persons could have a material
adverse effect on Auco. Auco maintains $1.5 million of key person life
insurance on Adam Au, its chief executive officer. We cannot give any assurance
that such insurance would adequately compensate Auco for the loss of Mr. Au's
services. In addition, such insurance would not provide any offsetting benefit
to Auco if Mr. Au's services were lost by reason of his disability.
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SELECTED HISTORICAL AND UNAUDITED SELECTED
PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of Peerless and Auco
has been derived from their respective audited and unaudited historical
financial statements, and should be read in conjunction with such audited and
unaudited financial statements and the notes thereto. The unaudited selected
pro forma financial information of Peerless and Auco are derived from the
unaudited pro forma combined financial statements, which give effect to the
merger as a pooling of interests, and should be read in conjunction with such
unaudited pro forma statements and notes thereto, which are included elsewhere
in this document.
For Peerless and Auco pro forma purposes, Peerless' historical statements of
income for the three fiscal years ended January 31, 1999, 1998 and 1997, have
been combined with the historical statements of operations of Auco for the year
ended December 31, 1998 and the unaudited historical statements of operations
for the years ended December 31, 1997 and 1996. The unaudited pro forma
combined balance sheet assumes the merger took place January 31, 1999 and
combines Peerless' historical balance sheet at that date with Auco's historical
balance sheet at December 31, 1998. The unaudited pro forma combined statements
of operations assume the merger took place as of the beginning of each of the
periods presented and combine Peerless' historical financial statements of
income for the three fiscal years ended January 31, 1999, 1998 and 1997 and
Auco's historical statements of operations for the years ended December 31,
1998, 1997 and 1996. The unaudited selected pro forma combined financial data
should be read in conjunction with the unaudited pro forma financial statements
included elsewhere in this document.
Peerless has not paid any cash dividends and currently intends to retain any
earnings for future growth and therefore does not anticipate paying any cash
dividends on the Peerless common stock in the foreseeable future.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the merger had been consummated at the times indicated,
nor is it necessarily indicative of future operating results or financial
position.
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Selected Historical Financial Data
Peerless
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Years ended Years ended
January 31, (1) December 31,
----------------------- ------------------
1999 1998 1997 1995 1994
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales......................... $32,583 $25,363 $16,021 $ 10,413 $ 9,336
Operating income (loss)........... 5,689 5,997 1,761 (364) (984)
Net income (loss)................. 4,564 4,944 4,447 (639) (1,226)
Net income (loss) per common
share--assuming dilution......... $ 0.39 $ 0.42 $ 0.46 $ (0.24) $ (0.47)
Shares used in computing net
income (loss) per share.......... 11,821 11,652 9,893 2,664 2,599
BALANCE SHEET DATA:
Working capital (deficit)......... $31,084 $23,713 $25,056 $ (2,307) $ (3,192)
Total assets...................... 47,174 40,095 35,109 4,185 3,541
Long-term obligations............. 1,625 421 317 4,299 2,594
Redeemable preferred stock........ -- -- -- 5,931 6,645
Stockholders' equity (deficit).... 39,799 33,807 28,064 (11,596) (11,941)
</TABLE>
- --------
(1) Peerless changed its fiscal year end to January 31, beginning February 1,
1996.
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Selected Historical Financial Data
Auco
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------ ------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales................ $4,142 $ 1,878 $ 368 $ 317 $ 142
Operating income (loss).. (849) (2,379) (1,415) (850) (571)
Net income (loss)........ (864) (2,541) (1,583) (844) (571)
Net income (loss) per
common share--assuming
dilution................ $(0.27) $ (0.80) $ (0.50) $(0.28) $(0.29)
Shares used in computing
net loss per share...... 3,228 3,164 3,154 3,043 2,000
BALANCE SHEET DATA:
Working capital.......... $ 151 $ 109 $ 1,177 $ 187 $ 60
Total assets............. 1,488 1,137 1,652 408 242
Long-term obligations.... -- -- 1,844 763 763
Shareholders' equity
(deficit)............... 390 422 (466) (377) (531)
</TABLE>
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Selected Financial Data
Unaudited Combined Pro Forma for
Peerless and Auco
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Years ended January 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Net sales.............................................. $36,725 $27,241 $16,389
Operating income....................................... 4,840 3,618 346
Net income ............................................ 3,705 2,587 3,044
Net income per share--assuming dilution................ $ 0.26 $ 0.19 $ 0.26
Shares used in computing net income per share.......... 14,297 13,943 11,628
</TABLE>
<TABLE>
<CAPTION>
January 31, 1999
------------------------------------
Peerless Auco Adjustments Combined
-------- ------ ----------- --------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital........................... $31,084 $ 151 $(1,881) $29,354
Total assets.............................. 47,174 1,488 (1,931) 46,731
Long-term obligations..................... 1,625 -- -- 1,625
Stockholders' equity (deficit)............ 39,799 390 (1,881) 38,308
</TABLE>
16
<PAGE>
Auco Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Highlights
. 1998 revenues grew 120%, an increase of $2.3 million, over 1997.
. 1998 gross profit grew 470% over the previous year.
. Auco invested $1.3 million in research and development, approximately
the same amount it invested in the previous year.
. In 1998, Auco signed its first recurring licensing deal with an OEM for
its networking technology.
Auco is a computer software company whose focus is on providing networking
for office equipment, such as printers, copiers and facsimile machines. Auco
develops software products that are designed to be directly incorporated into
the software contained within common office equipment ("firmware"), and these
products are marketed as software development kits ("SDKs") directly to the
OEMs of office equipment or to suppliers of major components of office
equipment. Auco's goal is to provide all of the networking software that is
used by office equipment OEMs, but to provide it in such a form that it is
suitable for use by printer manufacturers to incorporate directly into the
printer's firmware.
Auco's first product, Auco Print Services (APS), is currently under
exclusive license to Novell, Inc. and is integrally incorporated in the Novell
Embedded System Technology (NEST) Office product. The actual purpose of APS is
to provide a printer the ability to function on a computer network using Novell
NetWare and to print jobs submitted by users of that network without requiring
the printer to be physically connected to a NetWare server.
Whereas APS was designed solely to support Novell NetWare, Auco's second
product, Auco Software Print Server ("Auco SPS") was designed to simultaneously
support network printing protocols found on the Internet, along with network
printing protocols from all major suppliers of computer network software,
including Microsoft, Novell, Sun Microsystems and Apple. Auco SPS, which is not
licensed to Novell, is designed to be a complementary product to Auco APS and
the Novell NEST Office SDK, with Auco SPS using many of the interfaces and
functions found in these products. Together with a suite of network printing
protocols supporting the computer network vendors described above, Auco SPS
also provides a complete range of industry standard protocols used by network
management applications and end users to allow the printer to be configured or
monitored remotely.
Multifunction devices ("MFDs") are peripherals or standalone devices that
integrate within a single device more than one of the following functions:
print, scan, copy, fax. APS Scan is a product that allows OEMs to develop
network scanner devices, and is in effect the scanner analog of Auco SPS. APS
Scan provides support for the Internet, and for Novell and Microsoft networks,
and is licensed to MFD manufacturers as an SDK.
Auco also provides engineering services to help OEMs incorporate its
technology into its products more efficiently and speed the time to market the
OEM products.
During 1998, Auco also started work on an SDK to provide networking to
office storage devices such as CD-ROMs, disk drives etc. With an increasing
number of OEMs shipping products incorporating the NEST Office technology and
new OEMs licensing Auco's SPS technology, Auco believes that it will receive a
much larger proportion of its revenues from product licensing revenues than it
has in the past.
17
<PAGE>
Comparison of 1998 and 1997
1998 revenues increased 120% over the previous year. The revenue growth was
driven primarily by a 112% increase in engineering services and maintenance
revenues over the prior year. The growth in engineering services and
maintenance revenues was the direct result of an increase in both the number of
OEM customers contracting for engineering services and the dollar value of
engineering services provided in 1998 over 1997. Product licensing revenues
increased due to an increase in the number of OEMs shipping products in the
marketplace incorporating Novell's NEST Office technology, which technology
includes Auco's APS technology.
Auco's gross margin as a percentage of total revenues increased to 38% in
1998 from 15% in 1997. The current year revenue mix included a higher
percentage of licensing fees, which have relatively low costs associated with
the revenues being recognized. In addition, the margin on engineering services
and maintenance increased in 1998. The increase in the engineering services
margins from 15% in 1997 to 38% in 1998 was attributable to a larger number of
higher value engineering services contracts in 1998.
Auco continues to invest in the future by funding the research and
development of new technology solutions. Research and development expenses of
$1.3 million were approximately the same in 1998 as in 1997. The expense
resulted primarily from an effort to productize the SPS technology, the
development of the NDPS gateway service offering and development of an SDK for
the networked attached storage market. Management anticipates that research and
development costs will increase in the future.
Sales and marketing expenses decreased 26% between 1998 and 1997. The
decrease reflected the closing down of Auco's test tools business. Sales and
marketing expenses decreased to 8% of total revenues for 1998 from 24% for
1997.
General and administrative expenses for fiscal 1998 decreased 4% from 1997.
Expense growth related primarily to an increase in personnel and expenses
necessary to support the growth in Auco's networking operations partially
offset by a decrease in expenses due to the closing of the test tools business.
Net interest expense in 1998 decreased $147,000 from 1997 primarily due to
the conversion of certain convertible notes into Auco preferred stock.
Auco's effective tax rate for 1998 was close to zero due to current year
losses.
Comparison of 1997 and 1996
The 410% increase in revenues in 1997 over 1996 was driven by an increase in
engineering services revenues. The growth in engineering services revenues was
the direct result of one OEM customer contracting for a substantial increase in
the dollar value of engineering services in 1997 over 1996.
Auco's gross margin as a percentage of total revenues decreased to 15% for
1997 from 49% for 1996. The decrease in gross margin in 1997 was primarily
attributable to the substantial amount of resources needed to provide a broad
array of technology and features to the primary OEM customer.
Research and development expenses increased 60% between 1997 and 1996. The
expense increases resulted primarily from a growth in the engineering headcount
to develop Auco's SPS technology and the development effort in the test tools
business.
Sales and marketing expenses increased 115% between 1997 and 1996. The
increase reflected an expanded emphasis on industry trade shows and other
opportunities to promote Auco's products and services.
General and administrative expense for 1997 increased 58% over 1996. The
expense growth related primarily to an increase in personnel and expenses,
necessary to support the growth in Auco's operations.
18
<PAGE>
Interest expense in 1997 which was approximately the same as in 1996, was
attributable to the convertible notes payable that were outstanding. These
convertible notes were converted to Auco's preferred stock in November 1997.
Auco's effective tax rate for 1997 was close to zero due to current year
losses.
Liquidity and Capital Resources
Compared to December 31, 1997, total assets at December 31, 1998 grew 31% to
$1.5 million and shareholders' equity decreased 8% to $0.4 million. Auco's cash
and cash equivalents were $0.5 million at December 31, 1998 and the current
ratio was 1.1:1. Auco's operations used cash of $0.7 million during 1998.
During 1997, Auco moved into a larger office space in order to accommodate
the current and expected growth in operations. As part of the expansion, Auco
incurred certain capital expenditures. The remaining additions to property and
equipment for 1998 and 1997, related to furniture, computer and equipment
purchases associated with the growth in headcount. Purchases of property and
equipment in 1998 and 1997 were $45,000 and $139,000, respectively. Auco
invests its unused cash in low-risk money market funds. Auco has not
historically, nor does it expect to in the future, purchased derivative
instruments or entered into hedging transactions.
Net cash provided by financing activities during 1998 and 1997 were $0.8
million and $1.7 million, respectively, and related to the issuance of notes
payable, Auco preferred stock and the exercise of common stock options.
19
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following tables set forth certain per share data for Peerless and Auco
on a historical basis, Peerless and Auco on a pro forma combined basis and on a
per share equivalent pro forma combined basis for Auco. The information gives
effect to the proposed merger between Peerless and Auco on a pooling of
interests basis at the exchange ratio of .2585 of a share of Peerless common
stock for each share of Auco capital stock, assuming dilution, and the
conversion of the convertible note. The unaudited pro forma combined and
equivalent financial data do not reflect any cost savings or other synergies
anticipated by Peerless or Auco management as a result of the merger. Also in
connection with the merger, the companies expect to incur charges for merger-
related costs. Neither Peerless nor Auco have included the amount of such
merger-related costs in their historical financial data. The pro forma earnings
per share data do not reflect any such costs. The companies may have performed
differently if they had always been combined. You should not rely on the pro
forma information as being indicative of the historical results the combined
companies would have had or the results that they will experience in the
future.
Peerless' fiscal year ends on January 31 and Auco's year ends on December
31. For purposes of combining Auco's historical financial data with Peerless'
historical financial data in the unaudited pro forma combined financial data in
this document, the financial information of Auco has been reported using the
twelve-month periods ended December 31, 1996, 1997 and 1998.
The information below should be read in conjunction with the unaudited pro
forma combined financial data of Peerless and Auco on pages 76 to 80, the
historical financial statements (and related notes) of Peerless contained in
their reports filed with the Securities and Exchange Commission and the
historical financial statements of Auco on pages F-1 to F-14. See "WHERE YOU
CAN FIND MORE INFORMATION" (inside front cover page).
<TABLE>
<CAPTION>
Year Ended January
31,
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Peerless--Historical
Earnings per common share
Basic................................................ $ 0.90 $ 0.47 $ 0.42
Diluted.............................................. $ 0.46 $ 0.42 $ 0.39
Book value per common share(1)......................... $ 3.59
Auco--Historical
Earnings (loss) per common share
Basic................................................ $(0.50) $(0.80) $(0.27)
Diluted.............................................. $(0.50) $(0.80) $(0.27)
Book value per common share(1)......................... $ 0.12
Pro forma combined(2)
Earnings per common share
Basic................................................ $ 0.47 $ 0.21 $ 0.29
Diluted.............................................. $ 0.26 $ 0.19 $ 0.26
Book value per common share(1)......................... $ 2.91
Equivalent pro forma combined per Auco share(2)
Earnings per common share
Basic................................................ $ 0.12 $ 0.05 $ 0.07
Diluted.............................................. $ 0.07 $ 0.05 $ 0.07
Book value per common share(1)......................... $ .75
</TABLE>
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of outstanding at the end of each period.
Pro forma book value per share is computed by dividing pro forma
stockholders' equity by the pro forma number of shares outstanding at the
end of each period.
(2) Based on the exchange ratio of .2585 of a share of Peerless common stock
for each share of Auco capital stock, assuming dilution, and the
convertible note payable.
20
<PAGE>
PEERLESS MARKET PRICE AND DIVIDENDS INFORMATION
Peerless common stock is quoted through the NASDAQ National Market under the
symbol "PRLS." The following table sets forth the high and low sales price of
Peerless common stock. The information presented below for Peerless was
obtained from the National Association of Securities Dealers, Inc. and reflects
interdealer prices, without retail markup, markdown or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
Price of
Peerless
Common Stock
---------------
High Low
------- -------
<S> <C> <C>
Fiscal Year 2000
First Quarter (through April 22, 1999)....................... $11.500 $ 5.875
Fiscal Year 1999 (ended January 31, 1999)
Fourth Quarter............................................... $10.875 $ 6.750
Third Quarter................................................ $21.375 $ 2.813
Second Quarter............................................... $24.375 $15.500
First Quarter................................................ $21.250 $11.000
Fiscal Year 1998 (ended January 31, 1998)
Fourth Quarter............................................... $16.375 $ 9.000
Third Quarter................................................ $17.250 $12.500
Second Quarter............................................... $17.000 $10.250
First Quarter................................................ $20.750 $ 8.500
</TABLE>
The closing price of Peerless common stock as reported on the NASDAQ
National Market on April 5, 1999, the last trading day prior to the public
announcement of the merger agreement was $8.375 per share. On May 6, 1999, the
most recent date for which prices were available prior to printing this
document, the closing price for Peerless common stock was $6.75 per share.
We urge you to obtain current market quotations for Peerless common stock
before making any decision with respect to the merger. The current market
information for shares of Peerless can be obtained on the world wide web at
http:www.nasdaq-amex.com. Because the exchange ratio is fixed, the exchange
ratio will not be adjusted to compensate Auco shareholders for decreases in the
market price of Peerless common stock that could occur before the merger
becomes effective. In the event the market price of Peerless common stock
decreases or increases prior to the effective time, the value at the effective
time of the Peerless common stock to be received in the merger in exchange for
Auco common stock would correspondingly decrease or increase.
Peerless has never paid cash dividends. Following the effective time,
Peerless intends to retain earnings for the development of its business and not
to distribute earnings to shareholders as dividends. The declaration and
payment by Peerless following the effective time of any future dividends and
the amount thereof, if any, will depend upon the operations, financial
condition, cash requirements, future prospects, limitations imposed by credit
agreements or senior securities and other factors deemed relevant by the
Peerless board of directors following the effective time.
21
<PAGE>
THE AUCO SOLICITATION OF WRITTEN CONSENTS
Purpose
The purpose of the solicitation of the Auco written consents is to approve
the merger and consequently to approve and adopt the Merger Agreement.
In accordance with Auco's articles of incorporation and California law, the
merger may be approved and adopted without a meeting of Auco shareholders by
written consent of at least a majority of the shares of Auco common stock and
preferred stock, voting as separate classes. If a majority of the Auco common
stock and preferred stock, voting as separate classes, consent to the merger,
no further action will be required by Auco shareholders to approve the merger.
The Auco board of directors has unanimously approved the merger agreement,
believes that the terms of the merger agreement are fair to and in the best
interests of Auco and its shareholders, and unanimously recommends that the
Auco shareholders vote "FOR" the merger by executing and returning Auco written
consents.
Record Date; Consent Rights
The record date for determining shareholders entitled to give or withhold
consent to the merger shall be the date on which the first written consent is
given, which is anticipated to be on or about June 10, 1999. As of April 13,
1999, the last practicable date prior to mailing this document, Adam Au, a
director and executive officer of Auco was the registered and beneficial owner
of an aggregate of 763,000 shares of Auco preferred stock and 3,000,000 shares
of Auco common stock (exclusive of any shares issuable upon the exercise of
stock options), or approximately 46.86% of the 8,030,403 total combined shares
of Auco common stock and preferred stock that were issued and outstanding as of
that date. No other director or executive officer of Auco held any of its
common or preferred shares as of that date. Adam Au has entered into a voting
agreement with Peerless pursuant to which he has agreed to vote all of his Auco
shares for approval of the merger. Execution of the voting agreement was
required to induce Peerless to enter into the merger agreement.
Only holders of shares of Auco common stock or preferred stock at the close
of business on the date the first written consent is given, which is
anticipated to be on or about May 11, 1999, are entitled to submit written
consents. As of April 13, 1999, the last practicable date prior to mailing this
document, there were approximately 25 holders of record of Auco shares. There
were 4,641,000 shares of Auco preferred stock issued and outstanding and
3,389,403 shares of Auco common stock issued and outstanding, each of which is
entitled to one vote on the merger. If the merger is completed, the
shareholders of Auco prior to the merger will own approximately 18.5% of the
total outstanding shares of Peerless common stock on a fully diluted basis
(assuming the exercise of all stock options of both Peerless and Auco). If
either Peerless or Auco issues additional shares or options before the
completion of the merger, this relative percentage of ownership will change.
A written consent may be revoked, by delivery of written notice to the
secretary of Auco, at any time prior to the time duly executed Auco written
consents have been returned (and not revoked) by the holders of a majority of
the respective outstanding Auco common stock and preferred stock.
Solicitation of Auco Written Consents
Auco written consents are being solicited by and on behalf of the Auco Board
of Directors. Auco will bear all expenses in connection with such solicitation.
In addition to solicitation by use of the mails, Auco written consents may be
solicited by directors, officers and employees of Auco in person or by
telephone or other means of communication. Such directors, officers and
employees will not be additionally compensated for, but may be reimbursed for
out-of-pocket expenses incurred in connection with, such solicitation.
22
<PAGE>
Required Consents
Approval of the merger requires the approval of the holders on the record
date, of each of (i) a majority of the outstanding shares of Auco common stock,
voting as a separate class, and (ii) a majority of the shares of Auco preferred
stock, voting together as a separate class.
Auco's Series A and Series B preferred stock have certain preferences over
Auco common stock. In particular, upon a liquidation, holders of Auco preferred
stock would be entitled to be paid the original issue price of their shares
($1.00 per share for the Series A and $2.50 per share for the Series B) and any
declared, but unpaid, dividends (of which there have been none). After payment
of this liquidation preference, all remaining assets would be distributed to
only the holders of Auco common stock. The term "liquidation" includes a sale,
lease or other disposition of all or substantially all of the assets of Auco as
well as certain consolidations and mergers. The merger would be a liquidation
for these purposes.
The holders of Auco preferred stock would normally have the right to retain
their Auco preferred shares and receive their specified liquidation preference,
or to convert their Auco preferred stock to Auco common stock prior to any
transaction that would be deemed to be a liquidation if that would be
advantageous for them. The ability of the holders of Auco preferred shares to
retain them and receive the liquidation preference does not apply to the merger
which requires that all holders of Auco preferred stock agree to convert their
shares of Auco preferred stock to Auco common stock prior to the merger.
Accordingly, holders of Auco preferred stock should understand that in giving
their consent to the merger and the merger agreement and converting their
shares of Auco preferred stock to Auco common stock, they may be giving up
certain rights that they would otherwise have as holders of Auco preferred
stock.
As of April 13, 1999, directors and executive officers of Auco and their
affiliates were beneficial owners of an aggregate of (i) 763,000 shares of Auco
preferred stock, or approximately 16.4% of the 4,641,000 shares of Auco
preferred stock that were issued and outstanding as of such date, and (ii)
3,000,000 shares of Auco common stock or 88.5% of such shares that were
authorized, issued and outstanding as of such date.
Auco shareholders should read and carefully consider the information
presented in this document, and complete, date, sign and promptly return the
enclosed Auco written consent in the enclosed postage-paid envelope. Failure to
return the Auco written consent will have the practical effect of voting
against the merger.
23
<PAGE>
PEERLESS SPECIAL MEETING
Purpose
At the Peerless special meeting, Peerless shareholders will be asked to
consider and vote upon the proposal to approve the issuance of Peerless common
shares to be delivered in connection with the merger.
The board of director of Peerless has determined that this proposal is in
the best interests of Peerless and its shareholders and unanimously recommends
that Peerless shareholders vote "FOR" approval of this proposal. See
"Recommendation of the Board of Directors of Peerless; Reasons of Peerless for
the Merger" beginning on page 29 and "Interests of Certain Persons in the
Merger" beginning on page 33.
Solicitation of Proxies
The solicitation of the enclosed proxies from Peerless shareholders is made
on behalf of the board of directors of Peerless. A blue proxy card is enclosed
with this document. You are requested to complete and return this blue form of
proxy as soon as possible. In order to be valid, the blue proxy card for the
Peerless special meeting must be completed in accordance with the instructions
on it.
The expenses of the solicitation of proxies, including preparing, handling,
printing and mailing the proxy soliciting material, will be borne by Peerless.
Solicitation will be made primarily through the mail but may also be made, if
necessary, by advertising, electronic telecommunications and in person.
Peerless has retained the services of Mackenzie Partners to assist with the
soliciting of proxies for a fee estimated at $10,000 plus out-of-pocket
expenses. Peerless management may also use the services of its directors,
officers and employees in soliciting proxies, who will not receive any
additional compensation therefor, but who will be reimbursed for their out-of-
pocket expenses. Peerless will reimburse banks, brokers, nominees, custodians
and fiduciaries for their expenses in forwarding copies of the proxy soliciting
material to the beneficial owners of the shares held by such persons and in
requesting authority for the execution of proxies.
Record Date; Voting Rights; Proxies
Only holders of record of shares of Peerless common stock on May 11, 1999
are entitled to notice of and to vote at the Peerless special meeting.
As of May 11, 1999, there were approximately 11,204,099 issued and
outstanding Peerless common shares held by approximately 145 holders of record.
Holders of record of Peerless common shares on the date of the Peerless special
meeting will be entitled to attend and vote at the meeting and, on a poll, each
such share will be entitled to one vote per share. All Peerless common shares
represented by properly executed proxies will be voted on a poll in accordance
with the instructions indicated in such proxies, unless such proxies have been
previously revoked, or the secretary of Peerless has received written
instructions altering the way in which the proxy is to vote, in which case the
proxy will vote in accordance with the instructions as altered. If no
instructions are given, such Peerless common shares will be voted in favor of
the proposals submitted to the Peerless special meeting. Peerless does not know
of any matters other than the matters set forth in this document that are to
come before the Peerless special meeting. If any other matter or matters are
properly presented for action at the Peerless special meeting, the persons
named in the enclosed form of proxy will have the discretion to vote on such
matters in accordance with their best judgment, unless such authorization is
withheld. A shareholder who has given a proxy may revoke it at any time prior
to its exercise by giving written notice of revocation to the secretary by
signing and returning a later dated proxy, or by voting in person at the
Peerless special meeting. However, mere attendance at the Peerless special
meeting will not, in and of itself, have the effect of revoking a proxy.
24
<PAGE>
Shares represented by "broker non-votes" (i.e., shares held by brokers or
nominees which are represented at a meeting but with respect to which the
broker or nominee is not empowered to vote on a particular proposal) will be
counted for purposes of determining whether there is a quorum at the special
meeting, but will be considered to be voted only as to those matters actually
voted on. In accordance with Nasdaq rules, brokers and nominees are precluded
from exercising their voting discretion with respect to the approval and
adoption of non-routine matters such as the proposal to approve the issuance of
Peerless common shares to be exchanged in the merger.
Quorum
At the Peerless special meeting holders of a majority of the Peerless common
shares present in person or by proxy shall form a quorum for the transaction of
business, and if a quorum does not assemble within half an hour after the time
appointed for the Peerless special meeting, the Peerless special meeting shall
be adjourned to a future date as determined by the directors of Peerless. A
properly executed proxy for the Peerless special meeting marked "ABSTAIN" and
broker non-votes on any matter will be counted for purposes of determining
whether there is a quorum but will not otherwise be voted on such matter.
Required Vote
The approval of the issuance of the Peerless common shares as set forth in
this document to the affirmative vote of the holders of a majority of the
outstanding Peerless common shares voting on at the Peerless special meeting to
approve of the issuance of the Peerless common shares to be delivered in
connection with the merger.
On May 6, 1999, the last practicable date prior to the mailing of this
document, the executive officers and directors of Peerless, including their
affiliates, had voting power with respect to an aggregate of 703,744 Peerless
common shares or approximately 6.2% of the Peerless common shares then
outstanding. Peerless currently expects that such directors and officers will
vote all of such shares in favor of the issuance of the Peerless common shares
to be issued in connection with the merger.
The issuance of the Peerless common shares to be issued in connection with
the merger is of great importance to the shareholders of Peerless. Accordingly,
you are urged to read and carefully consider the information presented in this
document, and to sign, date and promptly return your proxy in the enclosed
postage paid envelope.
25
<PAGE>
THE MERGER
This section of this document as well as the next sections entitled "The
Exchange Ratio and its Effect on Auco Securities and Stock Option Plans" and
"The Merger Agreement" describe certain aspects of the proposed merger. These
discussions are qualified in their entirety by reference to the merger
agreement, which is attached as an Annex to this document, and to the other
agreements and documents that are discussed in this document and that are filed
as exhibits to the Registration Statement of which this document forms a part.
You should read the merger agreement in its entirety as it is the legal
document that governs the merger.
Background of the Merger
In early September 1998, Ron Davis of Peerless met with representatives from
Auco at an industry tradeshow. The representatives talked generally about their
respective businesses and engaged in exploratory discussions regarding the ways
in which the companies' respective technologies might be combined to work
together in the future. On September 15, 1998, Peerless executed a non-
disclosure agreement with Auco to enable the two companies to further discuss a
potential licensing agreement.
During mid-September and October 1998, Alan Curtis of Peerless and Howard
Sidorsky of Auco held various discussions regarding a potential licensing
arrangement. Concurrently with these discussions with Auco, representatives of
Peerless held discussions with other companies in regards to the licensing of
network technology. On October 1, 1998, Tom Ruffolo of Peerless, Mr. Curtis,
Mr. Sidorsky and Adam Au of Auco met at Auco's offices to discuss technology
and licensing opportunities. In late October, Peerless received a licensing
arrangement proposal from Auco as well as proposals from other network
companies. From November to early January 1999, Peerless held various internal
meetings to discuss potential licensing arrangements and the potential market
opportunities associated with Auco's business. In mid-January, senior
management at Peerless met internally to evaluate the opportunity with Auco. As
a result of this internal meeting, senior management at Peerless decided to
explore the possibility of an investment in or acquisition of Auco.
In late January 1999, Peerless retained Dain Rauscher Wessels ("DRW") to act
as its financial advisor to assist Peerless in its consideration of a possible
business combination with Auco. On January 25, 1999, representatives of
Peerless and DRW met with Mr. Au and Mannan Latif of Auco to discuss the
general terms of a possible acquisition of Auco by Peerless, including but not
limited to, the valuation of Auco and the timing and structure of a possible
transaction. In late January, Auco indicated its willingness to continue
discussions regarding a possible transaction although the parties agreed that
further discussions regarding the valuation of Auco were required.
On February 22, 1999 after various internal discussions and consultation
with its legal counsel, Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden,
Arps") and DRW, Peerless presented a revised offer to exchange all of the
outstanding shares of Auco for 2.5 million shares of Peerless in a pooling of
interests transaction. At the time of the proposal, Peerless common stock was
trading at approximately $10 per share, giving the offer a $25 million
valuation.
Negotiations continued through late February and early March to resolve
various issues associated with the transaction including, but limited to,
registration rights for the stock to be issued in the transaction and the terms
of the definitive agreement. At the same time, each party was involved in
performing business and legal due diligence and exploring the business
opportunities available to the combined company.
On March 9, 1999, Peerless' board of directors met to review the preliminary
terms of a potential transaction. While generally in favor of the strategic
merits of the transaction, the board of directors asked Peerless management and
its financial advisors to perform further due diligence work on Auco,
specifically as it related to Auco's research & development efforts and its
financial performance. In addition, the board of
26
<PAGE>
directors asked members of Peerless' management and its independent
accountants, PricewaterhouseCoopers LLP to evaluate whether the transaction
would be accounted for as a pooling of interests. On March 26, 1999, Peerless
management and its advisors held a conference call with the Peerless board of
directors to provide an update on the due diligence efforts. Following
discussions, the Peerless board of directors authorized members of senior
management and its financial and legal advisors to continue negotiation of the
terms of the transaction with Auco within specified parameters.
Between March 26, 1999 and April 5, 1999, representatives of Peerless and
Auco, as well as their respective counsels and financial advisors, negotiated
the terms of the merger agreement, the shareholder agreement and the other
ancillary documents.
On April 5, 1999, the Peerless board of directors held a special meeting to
discuss the status of discussions between the companies and to review the final
terms and conditions of the proposed transaction with Auco. At that meeting,
Skadden, Arps advised the directors on the terms of the definitive agreements
and the responsibilities of the Peerless board of directors. DRW then made a
financial presentation in respect of the proposed merger and rendered to the
Peerless board of directors its oral opinion (which was subsequently confirmed
in writing by delivery of a written opinion dated April 5, 1999) to the effect
that the exchange ratio was fair, from a financial point of view, to Peerless.
See "Opinion of Peerless' Financial Advisor." After discussion, the Peerless
board of directors unanimously approved the terms of the merger agreement, the
shareholder agreement and other ancillary agreements, and directed appropriate
officers of Peerless to finalize and execute these agreements.
On April 6, 1999 the parties reviewed the final terms of the definitive
agreements and executed the same shortly thereafter. Peerless issued a press
release announcing the merger before the commencement of the business day on
April 7, 1999.
Recommendation of the Board of Directors of Auco; Reasons of Auco for the
Merger
At a meeting of the Auco board held on April 5, 1999, after careful
consideration, the Auco board unanimously:
. approved the merger and the merger agreement;
. determined that the merger is in the best interests of Auco and fair to
its shareholders; and
. recommended that holders of shares of Auco common and preferred stock
vote FOR approval and adoption of the merger agreement.
In reaching its decision to approve the merger and the merger agreement and
to recommend approval and adoption of the merger agreement by the holders of
Auco's common stock, Auco's board of directors consulted with Auco's
management, as well as its legal counsel, and considered the following material
factors:
1. information concerning the financial condition, results of operations,
prospects and businesses of Auco and Peerless, including:
. the revenues of the companies, their complementary businesses and
the potential for synergies, the recent stock price performance of
Peerless common stock; and
. the percentage of the combined company Auco's shareholders would own
following the merger;
2. the opportunity that the merger affords Auco's shareholders to reduce
their exposure to the risks inherent in Auco's reliance on a limited
number of products, and the difficulties in competing against larger
companies with greater financial resources, and the fact that the
consideration per share of Auco common stock in the merger appropriately
recognizes the significant value of Auco's business;
3. the possible opportunity for Auco to gain greater market strength by
combining with a large company, thereby realizing economies of scale
with respect to financial resources, product distribution channels, a
larger installed base of customers and marketing visibility, and the
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<PAGE>
opportunity for Auco as a result of the merger to offer its products as
part of a broader range of products;
4. the fact that Peerless' greater financial resources and marketing and
distribution capabilities reduce the risk associated with developing a
new generation of embedded networking technologies to take advantage of
the significant potential for growth in this market;
5. the ability the merger affords Auco to utilize the resources of the
combined company, to develop additional products and new applications
for existing products for customers and to develop those products more
rapidly;
6. the fact that the merger would allow holders of Auco common stock to
retain a significant equity interest of in the combined company and to
achieve greater liquidity than could be achieved by continuing to hold
Auco common stock;
7. the likelihood of consummation of the merger, including the terms and
conditions of the merger agreement, and the conditions to the
consummation of the merger;
8. the expectation that the merger will be nontaxable to Auco shareholders
for federal income tax purposes;
9. the opportunity for Auco shareholders to vote on whether to adopt the
merger agreement; and
10. the fact that certain employees may perceive the combined company, with
its greater financial resources and diversity of products, as providing
greater stability as well as greater ability to provide financial
incentives in order to recruit and retain employees.
The Auco board of directors also considered negative factors relating to the
merger, including:
. the risk that the merger would not be consummated;
. the substantial management time and effort that will be required to
consummate the merger and integrate the operations of the two companies;
. the possibility that certain provisions of the merger agreement
(including the no solicitation provision, the termination fee
provisions, and certain other provisions in the merger agreement) might
have the effect of discouraging other persons potentially interested in
merging with or acquiring Auco from pursuing such an opportunity or, if
pursued, from consummating such a transaction prior to September 30,
1999;
. the fact that Peerless common stock had traded as high as $24 3/8 during
the twelve month period preceding April 5, 1999; and
. other matters described under "Risk Factors."
The Auco board of directors believed that these risks were outweighed by the
potential benefits to be gained by the merger.
This discussion of the information and factors considered by Auco's board is
not intended to be exhaustive. In view of the variety of factors considered in
connection with its evaluation of the merger, Auco's board did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of Auco's board of directors may have given different
weights to different factors.
The Auco board of directors has unanimously approved the merger agreement,
believes that the terms of the merger agreement are fair to and in the best
interests of Auco shareholders, and unanimously recommends that Auco
shareholders vote "FOR" approval of the merger by executing and returning Auco
written consents.
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<PAGE>
Recommendation of the Board of Directors of Peerless; Reasons of Peerless for
the Merger.
At a meeting of the Peerless board held on April 5, 1999, after careful
consideration, the Peerless board unanimously:
. determined that the issuance of Peerless common shares to be delivered
to Auco's shareholders in the merger was fair to and in the best
interests of Peerless and its shareholders; and
. recommended that holders of Peerless common shares vote "FOR" approval
of the issuance of Peerless common shares to be delivered in connection
with the merger.
In reaching its decision to approve, and to recommend that Peerless
shareholders approve, the issuance of Peerless common shares to be delivered in
connection with the merger, the Peerless board of directors consulted with its
legal counsel and financial advisors, and considered the following material
factors:
1. the terms and structure of the merger;
2. the results of Peerless' due diligence investigation of Auco and other
information concerning the business, assets, capital structure,
financial performance and prospects of Peerless and Auco;
3. current and historical market prices and trading information with
respect to the Peerless common stock;
4. Peerless' corporate strategy of complementing its internal growth with
acquisitions that are likely to benefit from cost reductions and
synergies when combined with Peerless' existing operations and that are
expected to be accretive to earnings per share;
5. the combination of the product lines manufactured by Auco with
complementary products manufactured by Peerless, enabling Peerless to
broaden substantially the line of products offered to its customers;
6. the prospect of utilization of Auco as a platform for further growth in
the markets served by Auco;
7. the preliminary, oral opinion of DRW rendered on April 5, 1999 (which
opinion was subsequently confirmed by delivery of a written opinion on
April 5, 1999), to the Peerless board to the effect that, as of the date
of such opinion and based upon the assumptions made, matters considered
and limits of review set forth in its written opinion, the exchange
ratio was fair to Peerless from a financial point of view (see "Opinion
of Peerless Financial Advisor");
8. the expectation that the merger will generally be nontaxable to both
Peerless and Auco shareholders under the tax laws of the United States;
and
9. the anticipated treatment of the merger as a pooling of interests for
financial accounting purposes.
This discussion of the information and factors considered and weight given
to such factors by Peerless board of directors is not intended to be
exhaustive. In view of the variety of factors considered in connection with its
evaluation of the merger, Peerless board did not find it practicable to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of
Peerless board may have given different weights to different factors.
The Peerless board of directors has unanimously determined that the issuance
of shares of Peerless common stock to be delivered in connection with the
merger is fair to and in the best interests of Peerless and its shareholders,
has approved the merger and the merger agreement, and unanimously recommends
that holders of Peerless common shares vote for approval of the issuance of
Peerless common shares to be delivered in connection with the merger.
Opinion of Peerless' Financial Advisor
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, was
retained, pursuant to an engagement letter dated March 4, 1999, to furnish an
opinion as to the fairness, from a financial point of view, to Peerless of the
exchange ratio pursuant to the merger agreement.
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<PAGE>
On April 5, 1999 DRW rendered its opinion to the Peerless board of directors
that, as of such date and based on the procedures followed, factors considered
and assumptions made by DRW and certain other limitations, all as set forth
therein, the exchange ratio pursuant to the Merger Agreement was fair to
Peerless from a financial point of view. A copy of the DRW opinion is attached
as Annex C to this document. Peerless stockholders are urged to read the DRW
opinion in its entirety. The summary of the opinion set forth herein is
qualified in its entirety by reference to the full text of DRW's opinion.
DRW's opinion applies only to the fairness to Peerless, from a financial
point of view, of the exchange ratio pursuant to the merger agreement. DRW's
opinion was provided for the information and assistance of the Peerless board
of directors in connection with its consideration of the merger. DRW's opinion
was not prepared on behalf of, and was not intended to confer rights or
remedies upon, Peerless, Auco or any stockholder of Peerless or Auco, or any
persons other than the Peerless board. The opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the merger. The Peerless board did not impose any limitations on the
scope of the investigation of DRW with respect to rendering its opinion.
In rendering its opinion, DRW assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided by Peerless and Auco (including without limitation the financial
statements and related notes of Peerless and Auco). DRW did not assume
responsibility for independently verifying and did not independently verify
such information.
Additionally, DRW was not asked and did not consider the possible effects of
any litigation, other legal claims or any other contingent matters. DRW did not
assume responsibility for and did not perform any independent evaluation or
appraisal of any of the respective assets or liabilities of Peerless or Auco,
nor was DRW furnished with any such evaluations or appraisals. DRW did not
assume any obligation to conduct, and did not conduct, any physical inspection
of the property or facilities of Peerless or Auco. DRW assumed that the merger
will be treated as a pooling of interests under applicable accounting
principles. DRW's opinion is based on the conditions as they existed and the
information supplied to DRW as of the date of its opinion. Events occurring
after the date of DRW's opinion may materially affect the assumptions used in
preparing the opinion.
In connection with its review of the merger, and in arriving at its opinion,
DRW:
. reviewed and analyzed the financial terms of the merger agreement
. reviewed and analyzed certain publicly available financial and other
data with respect to Peerless and Auco made available to DRW from
internal records of Peerless and Auco
. conducted discussions with members of the senior management of Peerless
and Auco with respect to the business and prospects of Auco
. reviewed the reported prices and trading activity of Peerless common
stock and similar information for certain other companies deemed by DRW
to be comparable to Auco
. compared the financial performance of Auco with that of certain other
publicly traded companies deemed by DRW to be comparable to Auco
. reviewed the financial terms, to the extent publicly available, of
certain comparable merger transactions.
In addition, DRW has conducted other analyses and examinations and
considered other financial, economic and market criteria as it deemed necessary
in arriving at its opinion.
The following is a summary of the financial analyses performed by DRW in
connection with the delivery of its opinion. These summaries of financial
analyses include information presented in tabular format. In order
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<PAGE>
to fully understand the financial analyses used by DRW, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the financial analysis.
Comparable Company Analysis. DRW used a comparable company analysis to
analyze Auco's operating performance relative to a group of publicly traded
companies that DRW deemed for purposes of its analysis to be comparable to
Auco. In such analysis, DRW compared the value of Auco implied by the exchange
ratio pursuant to the merger agreement based on closing prices for the
comparable companies on April 1, 1999, expressed as a multiple of certain
operating data, to the market trading values of the comparable companies
expressed as a multiple of the same operating data.
DRW compared multiples of selected financial data for Auco with those of the
following publicly traded companies:
. Electronics for Imaging, Inc.
. Integrated Systems, Inc.
. Peerless Systems Corp.
. Wind River Systems, Inc.
. Xionics Document Technologies, Inc.
Although such companies were considered comparable to Auco for the purpose
of this analysis based on certain characteristics of their respective
businesses, none of such companies possesses characteristics identical to those
of Auco.
DRW calculated the following valuation multiples based on an implied value
of $21.3 million for Auco based on Peerless' closing price on April 1, 1999 and
the exchange ratio specified in the merger agreement and, as to the comparable
companies, on market prices and other information available as of the same
date. Multiples of future revenue and earnings for Auco were based on projected
revenue and earnings as estimated by Auco's management and for the comparable
companies on publicly available estimates.
The following table presents as of April 1, 1999 the mean and median
multiples of equity value to calendar year 1999 and calendar year 2000
estimated net income for Auco (as implied by the exchange ratio) and the
comparable companies.
<TABLE>
<CAPTION>
Comparable
Companies
------------ Multiples implied
Mean Median by the exchange ratio
----- ------ ---------------------
<S> <C> <C> <C>
Equity value as a ratio of:
Projected Calendar Year 1999 net income.... 19.8x 17.5x 13.0x
Projected Calendar Year 2000 net income.... 15.4x 13.5x 7.1x
</TABLE>
The following table presents as of April 1, 1999 the mean and median
multiples of enterprise value to calendar year 1999 and calendar year 2000
estimated revenue for Auco (as implied by the exchange ratio) and the
comparable companies. Enterprise value is defined as market capitalization (or
equity value) plus debt less cash (and cash equivalents).
<TABLE>
<CAPTION>
Comparable
Companies
----------- Multiples implied
Mean Median by the exchange ratio
---- ------ ---------------------
<S> <C> <C> <C>
Enterprise value as a ratio of:
Projected Calendar Year 1999 Revenue........ 2.4x 1.9x 2.4x
Projected Calendar Year 2000 Revenue........ 1.9x 1.4x 1.4x
</TABLE>
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<PAGE>
Comparable Transactions. DRW compared multiples of selected financial data
relating to the merger with multiples paid in selected merger and acquisition
transactions since 1997 of software companies with aggregate transaction values
between $10 million and $100 million. In each of these transactions the target
companies were either public or private with latest 12-month revenues of at
least $1 million. DRW noted that none of the target companies involved in these
transactions had a business that was directly comparable to Auco. DRW also
noted that because Auco and many of the companies examined in this analysis
were small, rapidly growing companies, the multiples of operating income tended
to vary greatly and were therefore deemed less meaningful than similar
multiples for more mature businesses. DRW also analyzed the latest 12-month net
revenues and operating income of Auco with and without the expense incurred in
its software testing business which was closed in 1998.
The following table presents multiples of transaction value to latest 12-
month revenues and operating incomes for Auco and the comparable transactions.
<TABLE>
<CAPTION>
Comparable
Transaction Multiples implied by the exchange ratio
------------ --------------------------------------------
Mean Median (with Test Business) (without Test Business)
----- ------ -------------------- -----------------------
<S> <C> <C> <C> <C>
Transaction value as a
ratio of:
Latest 12-month
revenues............. 6.0x 4.5x 5.1x 5.1x
Latest 12-month
operating incomes.... 53.9x 32.8x Not Meaningful 66.6x
</TABLE>
Discounted Cash Flow Analysis. DRW estimated the present values of Auco
through a discounted cash flow analysis using projections of future operations.
DRW calculated present values of projected operating cash flows through January
2004 using a discount rate of 16.4% (as derived from the Capital Asset Pricing
Model). DRW estimated a terminal value of 9.1x Auco's projected fiscal year
2004 operating income. DRW determined this multiple by analyzing the median
multiple of operating income for comparable public companies and applying this
multiple to a projected operating income in fiscal year 2004. The terminal
value was discounted to present value using the same discount rate as for the
cash flows. DRW calculated an implied valuation of Auco by adding the present
value of the cash flows and the terminal value. The implied value of Auco based
on this analysis was $45.5 million.
DRW also performed sensitivity analysis on the discount rate and terminal
multiple. Using a range of 15.0% to 25.0% for the discount rate and 8.0x to
10.0x for the terminal value, the value of Auco implied by the discounted cash
flow analysis was the following.
<TABLE>
<CAPTION>
Terminal Operating
Income Multiples
--------------------
8.0x 9.0x 10.0x
------ ------ ------
(Dollars in
millions)
<S> <C> <C> <C>
Discount Rate
15.0%.............................................. $ 43.0 $ 47.3 $ 51.5
20.0%...............................................$.36.4.$ 39.9 $ 43.4
25.0%.............................................. $ 31.0 $ 34.0 $ 36.9
</TABLE>
DRW noted that for a small, rapidly growing technology firm like Auco, it is
often appropriate to look at higher discount rates than those implied by a
Capital Asset Pricing Model-based analysis, which uses public companies (in
this case, the comparable companies discussed above) to derive a cost of
capital. DRW also noted that the implied valuations of Auco at the higher
discount rates (20%-25%) were still greater than the value implied by the
Exchange Ratio pursuant to the merger agreement.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. DRW
believes that its analyses must be considered as a whole and that selecting
portions of the analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete or misleading
view of the processes underlying its opinion. In arriving at
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<PAGE>
its fairness determination, DRW considered the results of all such analyses. In
view of the wide variety of factors considered in connection with its
evaluation of the fairness of the exchange ratio, DRW did not find it
practicable to assign relative weights to the factors considered in reaching
its opinion. No single company or transaction used in the above analyses as a
comparison is identical to Peerless or Auco or the proposed merger. The
analyses were prepared solely for purposes of DRW providing its opinion as to
the fairness to Peerless of the exchange ratio pursuant to the merger agreement
and do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses. As
described above, DRW's opinion and presentation to the Peerless board were one
of the many factors taken into consideration by the Peerless board in making
its determination to approve the Merger Agreement.
DRW is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, corporate restructurings negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Peerless selected DRW to
render its opinion based on DRW's historical investment banking relationship
with Peerless, its knowledge of the technology industry and its experience in
mergers and acquisitions and in securities valuation generally. DRW's
predecessor acted as a managing underwriter of Peerless' initial public
offering.
In the ordinary course of its business, DRW acts as a market maker and
broker in the publicly traded securities of Peerless and receives customary
compensation in connection therewith, and also provides research coverage of
Peerless. In the ordinary course of business, DRW actively trades in the
publicly traded securities of Peerless for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short
position in such securities which positions, on occasion, may be material in
size relative to the volume of trading activity.
Pursuant to an engagement letter, Peerless paid DRW a nonrefundable fee of
$200,000 upon the rendering of its opinion. Payment of this fee to DRW was not
contingent upon the closing of the merger. Pursuant to the engagement letter,
Peerless has agreed to pay DRW a total transaction fee of $500,000 (including
the nonrefundable fee of $200,000) upon the closing of the merger, less amounts
previously paid. Peerless has also agreed to reimburse DRW for its reasonable
out-of-pocket expenses and to indemnify DRW against certain liabilities
relating to or arising out of services performed by DRW in connection with the
merger. The terms of the engagement letter, which Peerless believes are
customary for transactions of this nature, were negotiated at arms' length
between Peerless and DRW, and the Peerless board was aware of such fee
arrangement at the time of its approval of the merger agreement.
Interests of Certain Persons in the Merger
General. Certain Auco executive officers and certain members of the Auco
board, in their capacities as such, may be deemed to have interests in the
merger that are in addition to or different from their interests as
shareholders of Auco generally. These include, among other things, provisions
in the merger agreement relating to indemnification and the acceleration of
stock option vesting. The Auco board was aware of these interests and
considered them, among other matters, in approving the merger agreement and the
transactions contemplated
Auco Stock Options. The conversion of Auco stock options into Peerless stock
options pursuant to the merger agreement is described below in "Treatment of
Auco Stock Options."
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<PAGE>
Auco's executive officers hold, as of the date hereof, Auco stock options in
the following aggregate amounts and at the following weighted average per share
exercise prices:
<TABLE>
<CAPTION>
Shares Weighted Average
Underlying Per Share
Name Options Exercise Price
---- ---------- ----------------
<S> <C> <C>
Adam Au........................................ 12,963 $0.25
Howard Sidorsky................................ 262,704 0.16
Mannan Latif................................... 216,759 0.25
-------
Total........................................ 492,426
=======
</TABLE>
Employment of Adam Au. If the merger is consummated, Mr. Au will serve in
the capacity as a vice president of Peerless. Pursuant to an employment
agreement, Mr. Au will be entitled to receive an annual salary of $175,000 and
an annual bonus of up to $100,000 for a period of two years following the
effective time of the merger, and a grant of options to purchase 100,000 shares
of Peerless common stock, granted as of the effective time of the merger. In
the event that Mr. Au is terminated without cause prior to the second
anniversary of the merger, Mr. Au will be entitled to continue to receive all
compensation that he would have been entitled to receive if he had not been
terminated. Mr. Au and Paul Kwan have also entered into non-competition
agreements with Peerless.
Certain United States Federal Income Tax Consequences of the Merger
The Merger.
The following is a summary of certain United States federal income tax
consequences of the merger to a holder of common stock ("an Auco shareholder")
that exchange such stock for Peerless common stock pursuant to the merger. This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations promulgated thereunder, administrative rulings and
pronouncements and judicial decisions as of the date hereof, all of which are
subject to change, possibly with retroactive effect. This summary does not
discuss all aspects of United States federal income taxation which may be
important to particular Auco shareholders in light of their individual
investment circumstances, such as Auco shareholders, if any, who are subject to
special tax rules (e.g., insurance companies, tax-exempt organizations,
financial institutions and broker-dealers) or to persons who do not hold Auco
common stock as a capital asset, individuals who received Auco common stock
pursuant to the exercise of employee stock options or otherwise as
compensation, non-United States persons, and persons who hold Auco common stock
as part of a "straddle," "hedge," or conversion transaction, all of whom may be
subject to special rules not discussed below. In addition, this summary does
not address any state, local or foreign tax law effects of the merger. Auco
shareholders are urged to consult their tax advisors regarding the United
States federal, state, local, and foreign income and other tax considerations
of the merger.
Consummation of the merger is conditioned upon the receipt by Peerless of an
opinion from Skadden, Arps, special counsel to Peerless, and by Auco of an
opinion from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel to Auco, dated as of the effective time of the merger, to the effect
that the merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Code for United States federal income tax purposes. Such
opinions of counsel will be based on certain representations as to factual
matters made by Peerless and Auco. Such representations, if incorrect in
certain material respects, could jeopardize the conclusions reached in the
opinions. Neither Peerless nor Auco is currently aware of any facts or
circumstances which would cause any such representations made to counsel to be
untrue or incorrect in any material respect. An opinion of counsel is not
binding on the Internal Revenue Service (the "IRS") or the courts.
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<PAGE>
An Auco shareholder will not recognize any income, gain or loss as a result
of the receipt of Peerless common stock pursuant to the merger, except to the
extent of any cash received in lieu of fractional shares of Peerless common
stock. An Auco shareholder's tax basis for the Peerless common stock received
pursuant to the merger, including any fractional share interest in Peerless
common stock for which cash is received, will equal such Auco shareholder's tax
basis in the Auco common stock exchanged therefor. An Auco shareholder's
holding period for the Peerless common stock received pursuant to the merger
will include the holding period of the Auco common stock surrendered in
exchange therefor. An Auco shareholder that receives cash in lieu of a
fractional share interest in Peerless common stock pursuant to the merger will
be treated as having received such cash in exchange for such fractional share
interest and generally will recognize capital gain or loss on such deemed
exchange in an amount equal to the difference between the amount of cash
received and the basis of the Auco common stock allocable to such fractional
share.
Dissenting Shareholders of Auco Common Stock.
An Auco shareholder that receives solely cash in exchange for such stock in
the merger pursuant to the exercise of dissenter's rights under California
General Corporation Law will generally recognize capital gain or loss at the
time of the consummation of the merger equal to the difference between the tax
basis of the Auco common stock surrendered and the amount of the cash received
therefor. Such capital gain or loss will constitute long-term capital gain or
loss if such Auco common stock has been held for more than one year at the time
of the consummation of the merger. Generally, capital gain on assets held by
individuals for more than 12 months will be subject to Federal income tax at a
rate not to exceed 20%.
Taxation of the Escrowed Shares.
Ten percent of the aggregate shares of Peerless common stock to be received
by each Auco shareholder in the merger will be held in escrow to satisfy claims
of indemnity, if any, from Peerless, subject to limitations discussed in the
merger agreement and the escrow fund agreement. Each former Auco shareholder
will be treated for Federal income tax purposes as the owner of the escrowed
portion of such shareholder's merger consideration. A former Auco shareholder
recognizes no gain or loss on the return of such Peerless shares upon the
termination of the escrow.
If the escrow agent is required to pay, on behalf of Auco shareholders,
escrowed shares to Peerless to indemnify Peerless, an Auco shareholder will
recognize gain or loss equal to the difference between the fair market value of
such shareholder's portion of the escrowed shares paid to Peerless and such
shareholder's tax basis in the escrowed shares. Each Auco shareholder will
increase the tax basis in his remaining Peerless shares, if any, by an amount
equal to the fair market value of such shareholder's portion of the escrowed
shares paid over to Peerless. If such Auco shareholder holds no Peerless
shares, at the time that such escrowed shares are paid to Peerless, then such
Auco shareholder should be entitled to a loss equal to his remaining basis in
such escrowed shares. Such loss would generally be a capital loss.
Accounting Treatment of the Merger
We intend to account for the merger as a "pooling of interests" business
combination. It is a condition to completion of the merger that Peerless be
advised by PricewaterhouseCoopers LLP that they concur with the parties'
conclusion that the transactions contemplated by the merger agreement can
properly be accounted for as a "pooling of interests" business combination.
Under the "pooling of interests" method of accounting, each of our historical
recorded assets and liabilities will be carried forward to the combined company
at their recorded amounts. In addition, the operating results of the combined
company will include our operating results for the entire fiscal year in which
the merger is completed and our historical reported operating results for prior
periods will be combined and restated as the operating results of the combined
company.
U.S. Federal Securities Law Consequences
Recipients of Peerless common shares issued in connection with the merger
can freely transfer such shares under the U.S. Securities Act of 1933, as
amended, except that persons who are deemed to be "affiliates" (as
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<PAGE>
such term is defined under the Securities Act) of Auco prior to the merger may
only sell shares they receive in the merger in transactions permitted by the
resale provisions of Rule 145 under the Securities Act, or as otherwise
permitted under the Securities Act. Individuals or entities that control, are
controlled by, or are under common control with, Auco, including directors and
certain officers of Auco, are typically considered to be affiliates.
In general, under Rule 145, for one year following the consummation of the
merger, an Auco affiliate (together with certain related persons) could sell
publicly Peerless common shares acquired in connection with the merger only
through unsolicited "broker transactions" or in transactions directly with a
"market maker," as such terms are defined in Rule 144 under the Securities Act.
Additionally, the number of shares an affiliate may sell (together with certain
related persons and certain persons acting in concert) within any three-month
period for purposes of Rule 145 may not exceed the greater of 1% of the
outstanding Peerless common shares or the average weekly trading volume of such
stock during the four calendar weeks preceding such sale. An affiliate could
only avail himself of Rule 145, however, if Peerless remained current with its
informational filings with the SEC under the Exchange Act. After the end of one
year from the consummation of the merger, an Auco affiliate may sell Peerless
common shares received in the merger without such manner of sale or volume
limitations provided that Peerless is current with its Exchange Act
informational filings and such affiliate is not then an affiliate of Peerless.
Two years after the consummation of the merger, an affiliate of Auco may sell
such Peerless common shares without any restrictions so long as such affiliate
has not been an affiliate of Peerless for at least three months prior thereto.
THE EXCHANGE RATIO AND ITS EFFECT ON AUCO SECURITIES AND STOCK OPTION PLANS
General
As a result of the merger, all outstanding shares of Auco common stock will
be converted into Peerless common shares in accordance with the terms of the
merger agreement, and all outstanding stock option plan awards under Auco's
benefit plans will be assumed by Peerless and appropriately adjusted to reflect
the merger in accordance with the merger agreement. The following is a summary
of these effects of the merger and is qualified in its entirety by the full
description set forth in the merger agreement attached as Annex A to this
document.
The Exchange Ratio
The exchange ratio is the fraction of a Peerless common share that Auco
shareholders will receive in the merger for each share of Auco common stock.
The exchange ratio is fixed at .2585 of a share of Peerless common stock for
each Auco common share. Holders of shares of Auco preferred stock will convert
their shares into shares of Auco common stock prior to the merger, and these
shares of common stock will convert into shares of Peerless common stock at the
exchange ratio. A condition to the completion of the merger is the conversion
of all outstanding shares of Auco preferred stock into shares of Auco common
stock.
Fractional Shares
In the merger, Auco shareholders will be entitled to receive only whole
numbers of shares of Peerless common stock for their shares of Auco common
stock. If applying the exchange ratio would entitle a shareholder to receive a
fraction of a Peerless common share, such shareholder will be paid cash
(without interest) in an amount equal to the fraction of a Peerless common
share to which he or she is entitled multiplied by the ten day average closing
sale price of the Peerless common stock as reported on the Nasdaq National
Market System for the period ending three days prior to the date that the
merger closes. For example, assuming that the average closing price for the
relevant 10-day period of a Peerless common share is $10, an Auco shareholder
that owned 100 shares of Auco common stock immediately before the merger will
own 25 Peerless common shares immediately after the merger and receive a check
for $8.50.
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Treatment of Auco Stock Options
The merger agreement provides that each outstanding option to purchase Auco
common stock will be assumed by Peerless and appropriately adjusted to reflect
the conversion of the Auco common stock into shares of Peerless common based on
the exchange ratio. Each Auco stock option outstanding at the time the merger
is consummated will constitute an option to acquire the number of Peerless
common shares equal to the product of: (x) the number of shares of Auco common
stock subject to such option immediately prior to the merger, and (y) the
exchange ratio, at an exercise price per share of Peerless common stock equal
to the quotient obtained by dividing the exercise price per share of the
original Auco option by the exchange ratio, rounded up to the nearest cent. For
example, using the exchange ratio of .2585, if someone owns an option to
purchase 100 shares of Auco common stock at an exercise price of $0.25 per
share, after the merger that person will own an option to purchase 26 Peerless
common shares at a per share exercise price of $0.97.
The other terms of each Auco stock option, and the plans under which they
were issued, will continue to apply. As soon as practicable after the merger is
consummated, Peerless will deliver to all holders of outstanding Auco stock
options an appropriate notice which will explain how their stock options are
affected by the merger.
Stock Exchange Listing
It is a condition to the merger that the Nasdaq National Market authorize
for listing the Peerless common shares to be delivered in connection with the
merger.
RIGHTS OF DISSENTING AUCO SHAREHOLDERS
The rights of Auco shareholders who dissent in connection with the merger
are governed by specific legal provisions contained in Chapter 13 of the
California General Corporation Law (the "CGCL"). The following summary of the
provisions of Chapter 13 of the CGCL is not intended to be a complete statement
of such provisions and is qualified in its entirety by reference to the full
text of Chapter 13 of the CGCL, a copy of which is attached as Annex F to this
document, and is incorporated herein by reference.
THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE CGCL MUST BE FOLLOWED
EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
Under Chapter 13 of the CGCL, if the merger is completed, any Auco shares as
to which dissenters' rights are properly exercised will not be converted into
the right to receive shares of Peerless common stock pursuant to the merger
agreement but instead will be converted into the right to receive in cash the
"fair market value" of such shares, determined as of April 5, 1999, the last
trading day before the first announcement of the proposed merger, and excluding
any appreciation or depreciation in consequence of the merger. For Auco common
shares to qualify as dissenting Auco common shares, the holders of such Auco
common shares (i) must not have executed a written consent in respect of such
common shares for approval of the merger agreement; (ii) must have made a
written demand upon Auco for the purchase of dissenting common shares and
payment to such shareholder in cash of their fair market value, and (iii) must
have submitted stock certificates for endorsement (as described below).
If the merger agreement is approved through the execution of sufficient Auco
written consents, Auco will, within ten days after such approval, mail to any
shareholder who may have a right to require Auco to purchase his, her or its
common shares for cash as a result of such shareholder's making a demand to
exercise such right in accordance with Chapter 13 of the CGCL (as described
below), a notice that the required shareholder approval of the merger agreement
was obtained, accompanied by a copy of Chapter 13 of the CGCL. The notice of
approval will set forth the price determined by Auco to represent the "fair
market value" of any dissenting Auco common shares (which shall constitute an
offer by Auco to purchase such dissenting Auco common shares at such stated
price) and will set forth a brief description of the procedures to be followed
by such shareholders who wish to exercise their dissenters' rights.
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Within 30 days after the date on which the notice of approval was mailed,
dissenting Auco shareholders must make a written demand upon Auco for the
purchase of dissenting Auco common shares and payment to such shareholder in
cash of their fair market value, which demand is required by law to contain a
statement concerning the number of Auco common shares held of record by such
dissenting shareholder and the amount which the shareholder claims to be the
fair market value of the dissenting Auco common shares as of the close of
business on April 5, 1999. The statement of fair market value in such demand by
the dissenting shareholder constitutes an offer by the dissenting shareholder
to sell the dissenting Auco common shares at such price. Such demand must be
addressed to Auco, in care of Coblentz, Patch, Duffy & Bass LLP, 222 Kearny
Street, San Francisco, CA 94108 Attention: Paul Escobosa, Esq. A dissenting
shareholder may not withdraw his, her, or its dissent or demand for payment
unless Auco consents to such withdrawal.
Within 30 days after the notice of approval was mailed, the dissenting Auco
shareholder also must submit the certificates representing the dissenting Auco
common shares to Auco at Auco's principal office. The certificates representing
the dissenting Auco common shares will be stamped or endorsed with a statement
that the common shares are dissenting Auco common shares. If the price
contained in the notice of approval is acceptable to the dissenting Auco
shareholder, such shareholder may demand that price. This would constitute an
acceptance of the offer by Auco to purchase the dissenting Auco shareholder's
stock at the price stated in the notice of approval.
If Auco and a dissenting Auco shareholder agree upon the price to be paid
for the dissenting shares, upon the dissenting shareholder's surrender of the
certificates representing the dissenting shares, such price (together with
interest thereon at the legal rate on judgments from the date of the agreement
between Auco and the dissenting shareholder) is required by law to be paid to
the dissenting shareholder within 30 days after such agreement or within 30
days after any statutory or contractual conditions to the merger are satisfied,
whichever is later, subject to the surrender of the Auco stock certificates
therefor.
If Auco and a dissenting Auco shareholder disagree as to the price for such
dissenting Auco common shares or disagree as to whether such Auco common shares
are entitled to be classified as dissenting shares, such holder may, within six
months after the notice of approval is mailed, file a complaint in the Superior
Court of the proper county requesting the court to make such determination or,
alternatively, may intervene in any pending action brought by another
dissenting shareholder. Costs of such an action (including compensation of
appraisers) are required to be assessed as the court considers equitable but
must be assessed against Auco if the appraised value determined by the court
exceeds the price offered by Auco.
The court action to determine the fair market value of the dissenting Auco
common shares will be suspended if litigation is instituted to test the
sufficiency or regularity of the consents of the Auco shareholders in approving
the merger. Furthermore, no Auco shareholder who is entitled to assert
dissenters' rights under Chapter 13 of the CGCL shall have any right to attack
the validity of the merger, or to have the merger set aside or rescinded,
except in an action to test whether the consents required to authorize or
approve the merger have been legally and validly obtained in favor of the
merger.
Dissenting Auco common shares may lose their status and their right to
demand payment will terminate, among other reasons, if:
. the merger is abandoned;
. the common shares are transferred before being submitted for
endorsement;
. the dissenting Auco shareholder and Auco do not agree upon the status of
the common shares as dissenting Auco common shares or upon the price of
such common shares and the dissenting shareholder fails to file suit
against Auco or intervene in a pending action within six months
following the date on which the notice of approval was mailed to the
shareholder; or
. the dissenting shareholder withdraws his or her demand for the purchase
of the dissenting Auco common shares with the consent of Auco.
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THE MERGER AGREEMENT
General
The following section describes certain provisions of the merger agreement,
the escrow fund agreement and the shareholder agreement. This description is
not intended to be complete and is qualified in its entirety by the full texts
of these agreements which are annexed to this document. In addition, important
information about the merger agreement and the merger is provided in the
previous sections entitled "THE MERGER" and "THE EXCHANGE RATIO AND ITS EFFECT
ON AUCO SECURITIES AND STOCK OPTIONS."
The Merger Agreement
Effective Time
Promptly after the satisfaction or waiver of the conditions to the merger
set forth in the merger agreement, Auco will file an agreement of merger with
the Secretary of State of California, as prescribed by California law. The
effect of this filing is that Auco Merger Sub Inc. will merge with and into
Auco, and Auco will become a direct wholly-owned subsidiary of Peerless.
Charter and Bylaws
Immediately after the effective time of the merger, the articles of
incorporation and bylaws of the surviving corporation will be as set forth in
the merger agreement.
Directors and Officers
The directors of Auco Merger Sub Inc. immediately prior to the consummation
of the merger will serve as the initial directors of Auco following the merger,
and the officers of Auco immediately prior to the consummation of the merger
will serve as the officers of Auco after the merger.
Conversion of Auco Stock
Each issued and outstanding share of Auco common stock will be converted
into the right to receive .2585 of a share of Peerless common stock. No
fractional shares will be issued; instead, cash will be paid in lieu of
fractional shares.
Exchange Procedures
As soon as reasonably practicable after the consummation of the merger,
Peerless' exchange agent will mail to each holder of record of Auco common
stock a letter of transmittal and instructions as to how to surrender
certificates of Auco common stock in exchange for Peerless common shares and
payment for any fractional shares. Auco shareholders should not return stock
certificates with the enclosed proxy.
After the consummation of the merger, each certificate or other authorized
evidence of ownership that previously represented shares of Auco common stock
will represent only the right to receive the Peerless common shares into which
such Auco shares were converted in the merger and the right to receive cash in
lieu of fractional shares as described above.
Holders of certificates previously representing Auco common stock will not
be paid dividends or distributions on the Peerless common shares and will not
be paid cash in lieu of a fractional Peerless common share until such
certificates are surrendered to the exchange agent. When such certificates are
surrendered, any unpaid dividends declared by Peerless after the consummation
of the merger and any cash in lieu of a fractional Peerless common share will
be paid without interest.
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In the event of a transfer of ownership of shares of Auco common stock which
is not registered in the transfer records of Auco as of the consummation of the
merger, Peerless common shares, cash in respect of fractional shares and any
dividends and distributions may be paid to a transferee if the certificate
evidencing such shares is presented to the exchange agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that
any applicable stock transfer taxes have been paid. Certificates that
represented shares of Auco common stock prior to the consummation of the merger
will represent from and after the consummation of the merger, for all corporate
purposes other than the payment of dividends or other distributions, evidence
of ownership of the number of Peerless common shares and cash in respect of
fractional shares into which such shares of Auco common stock actually
converted in the merger.
The exchange agent, on behalf of Peerless, will mail detailed instructions,
including a transmittal letter, to Auco shareholders soon after the
consummation of the merger as to the method of exchanging certificates formerly
representing shares of Auco common stock. Auco shareholders should not send
certificates representing their shares to the exchange agent until they receive
the transmittal letter.
Representations and Warranties
Peerless and Auco have made various customary mutual representations and
warranties in the merger agreement about themselves and their subsidiaries. The
representations and warranties of Auco relate to corporate and legal matters,
the business and financial condition of Auco, and other issues related to the
merger. The representations and warranties of Peerless relate to corporate and
legal matters, the accuracy of information contained in documents filed by
Peerless with the Securities Exchange Commission, and other issues related to
the merger.
Escrow Fund
Peerless will withhold 10% of the Peerless common stock that is issuable in
the merger. Instead of paying these shares to the Auco shareholders, Peerless
will deposit these shares in an Escrow Fund that will be administered by
Norwest Bank Minnesota, N.A. as the escrow agent. These escrowed shares will be
held for a period that begins on the date that the merger closes and that ends
on the earliest of the date of the issuance of the first independent audit
report of Auco or of Auco consolidated with Peerless, or the date that is one
year following the date that the merger closes. In the event that Peerless
suffers any losses in excess of $250,000 as a result of any breaches by Auco of
the representations, warranties and covenants contained in the merger
agreement, the escrow agent will pay, on behalf of the Auco shareholders,
escrowed shares to Peerless to indemnify Peerless for such losses. Auco
shareholders' indemnification obligations will be limited to the amount of the
escrow fund.
Conduct of Business by Auco
Auco has agreed that, prior to the consummation of the merger, Auco will
conduct its business only in the ordinary course of business and in a manner
consistent with past practice; and Auco will use reasonable commercial efforts
to preserve substantially intact the business organization of Auco, to keep
available the services of the present officers, employees and consultants of
Auco, and to preserve the present relationships of Auco and its subsidiaries
with customers, suppliers and other persons with which Auco has significant
business relations. In particular, unless the merger agreement provides
otherwise or as previously disclosed to Peerless by Auco, Auco has agreed that
it will not, without the prior written consent of Peerless, (subject, in
certain cases, to specified exceptions):
1. propose or adopt any amendment to or otherwise change its charter or
bylaws or other organizational documents;
2. authorize for issuance, sale, pledge, disposition or encumbrance, or
issue, sell, pledge, dispose of or encumber (whether through the
issuance or granting of options, warrants, commitments, subscriptions,
rights to purchase, convertible securities or otherwise), any capital
stock of any class or any other securities of, or any other ownership
interest in Auco;
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3. reclassify, combine, split or subdivide any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, securities or property or any combination thereof) in respect of
any class or series of its capital stock, other than any dividend
declared prior to the date hereof;
4. redeem, purchase or otherwise acquire, or propose or offer to redeem,
purchase or otherwise acquire, any outstanding shares or other
securities of Auco;
5. organize any new subsidiary, acquire any capital stock or equity
securities of any corporation or acquire any equity or ownership
interest (financial or otherwise) in any business;
6. (i) incur, assume or prepay any material liability, or incur any
indebtedness for borrowed money other than in accordance with Auco's
current financing arrangements, (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any third party, (iii) make any
loans, advances or capital contributions to, or investments in, any
third party, (iv) mortgage or pledge any of its material properties or
assets, tangible or intangible, or create or suffer to exist any Lien
thereupon, or (v) authorize any new capital expenditures which,
individually or in the aggregate, are in excess of $25,000;
7. license (except in the ordinary course of business) or otherwise
transfer, dispose of, permit to lapse or otherwise fail to preserve any
of Auco's intellectual property rights, or dispose of or disclose to any
person any trade secret, formula, process or know-how not theretofore a
matter of public knowledge;
8. enter into any agreement, contract, commitment or transaction other than
in the ordinary course of business, consistent with past practices;
9. make any change in the compensation or benefits payable or to become
payable to any of its officers, directors, employees, agents or
consultants (other than general increases in wages to employees who are
not officers or directors or affiliates in the ordinary course
consistent with past practice) or to persons providing management
services;
10. make any loans to any of its officers, directors, employees,
affiliates, agents or consultants or make any change in its existing
borrowing or lending arrangements for or on behalf of any of such
persons, whether pursuant to an Auco benefit plan or otherwise;
11. cancel any debts or waive, release or relinquish any contract rights or
other rights of substantial value other than in the ordinary course of
business, consistent with past practices;
12. authorize, recommend, propose or enter into or announce an intention to
authorize, recommend, propose or enter into a term sheet, letter of
intent, agreement in principle or a definitive agreement with respect
to any merger, consolidation, liquidation, dissolution, or business
combination, any acquisition of a material amount of property or assets
or securities, or any disposition of a material amount of property or
assets or securities;
13. make any change with respect to accounting policies or procedures in
effect as of Auco's fiscal year ended December 31, 1998;
14. pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), including any Indebtedness, other than the payment,
discharge or satisfaction of any such claims, liabilities or
obligations in the ordinary course of business consistent with past
practices, of liabilities reflected or reserved against in Auco's
financial statements or incurred in the ordinary course of business
consistent with past practices since the date thereof;
15. (i) change any of the accounting principles used by it unless required
by GAAP, (ii) take or allow to be taken any action which would
jeopardize the treatment of Peerless' business combination with Auco as
a pooling of interests for financial reporting purposes in accordance
with APB 16 and the related published interpretations of the American
Institute of Certified Public Accountants, the Financial Accounting
Standards Board and the Emerging Issues Task Force and the published
rules
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and regulations of the SEC, or (iii) take or allow to be taken any
action which would jeopardize qualification of the merger as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
16. make any material election relating to taxes, change any material
election relating to taxes already made, adopt any accounting method
relating to taxes, enter into any closing agreement relating to taxes,
settle any claim or assessment relating to taxes or consent to any
claim or assessment relating to taxes or any waiver of the statute of
limitations for any such claim or assessment; or
17. commit or agree (in writing or otherwise) to take any of the foregoing.
No Solicitation
Auco has agreed that it will not solicit or encourage the initiation of any
inquiries or proposals regarding any other concerning any proposal or offer to
acquire all or a substantial part of the business or properties of Auco or any
capital stock of Auco, whether by merger, tender offer, exchange offer, sale of
assets or similar transactions involving Auco, division or operating or
principal business unit of Auco. Any of the foregoing transactions are referred
to in this document as an "Alternative Transaction" and any proposal from a
third party to effect an Alternative Transaction is referred to as an
"Acquisition Proposal."
Until Auco shareholders approve and adopt the merger agreement and if the
Auco board, following consultation with counsel, determines that such action is
reasonably likely to be required to discharge properly its fiduciary duties,
the Auco board is permitted (after notice to Peerless) to furnish information
concerning its business, properties or assets to any corporation, partnership,
person or other entity or group pursuant to appropriate confidentiality
agreements, and may negotiate and participate in discussions and negotiations
with such entity or group concerning an Acquisition Proposal if:
(x) such entity or group has on an unsolicited basis submitted a
bona fide written proposal to Auco's board relating to any such transaction
which the Auco board determines in good faith, represents a superior
transaction to the Merger (a "Competing Proposal") and in the good faith
judgment of Auco board the person or entity making such Competing Proposal
appears to have the financial means or the ability to obtain the necessary
financing to conclude such Competing Proposal; and
(y) in the opinion of Auco's board such action is required to
discharge the fiduciary duties owed by the Auco board to Auco's
shareholders under applicable law following receipt of advice from
independent legal counsel to Auco that the failure to provide such
information or access or to engage in such discussions or negotiations
would result in a reasonable possibility that Auco board would violate its
fiduciary duties to Auco's shareholders under applicable law.
Auco will immediately notify Peerless of the existence of any proposal,
discussion, negotiation or inquiry received by Auco, and Auco will immediately
communicate to Peerless the terms of any proposal, discussion, negotiation or
inquiry which it may receive (and will immediately provide to Peerless copies
of any written materials received by Auco in connection with such proposal,
discussion, negotiation or inquiry) and the identity of the party making such
proposal or inquiry or engaging in such discussion or negotiation. Auco will
promptly provide to Peerless any non-public information concerning Auco
provided to any other party which was not previously provided to Peerless.
Except as set forth below, neither the Auco board nor any committee thereof
shall:
. fail to include, withdraw or modify, or propose to withdraw or modify,
in a manner adverse to Peerless, the approval or recommendation by such
board of directors or any such committee of the merger agreement or the
merger;
. approve or recommend or propose to approve or recommend, any Acquisition
Proposal; or
. enter into any agreement with respect to any Acquisition Proposal.
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Notwithstanding the foregoing, prior to the date of shareholder approval,
the Auco board may not include or may withdraw or modify its approval or
recommendation of the merger agreement or the merger, approve or recommend any
Acquisition Proposal which satisfies the requirements of each of subsection (x)
and subsection (y) above (any such Acquisition Proposal, a "Superior
Proposal"), or enter into an agreement with respect to a Superior Proposal, in
each case at any time after the fifth business day following Peerless' receipt
of written notice from Auco advising Peerless that Auco board has received a
Superior Proposal which it intends to accept, specifying the material terms and
conditions of such Superior Proposal, identifying the person making such
Superior Proposal.
Auco has agreed to cease any discussions or negotiations with any third
party that were ongoing at the time of the execution of the merger agreement.
Auco has also agreed not to release any third party from the confidentiality
and standstill provisions of any agreement to which Auco is a party.
Auco will ensure that the officers and directors of Auco and its
subsidiaries and any investment banker or other advisor or representative
retained by Auco are aware of the no-solicitation restrictions described in the
merger agreement.
Certain Other Covenants
Commercially Reasonable Efforts. Peerless and Auco will each use its
commercially reasonable efforts to obtain all consents, waivers, approvals,
authorizations or orders, and actions required in connection with the
authorization, execution and delivery of the merger agreement and the
consummation by each of them of the transactions contemplated thereby.
Public Announcements. Peerless and Auco will not issue any press release or
make any public written statement with respect to the merger or the merger
agreement without the prior consultation with the other party, except as
required by law or the regulations of the NASD.
Indemnification. Peerless and Auco have agreed that for six years following
consummation of the merger, Peerless will indemnify the directors and officers
of Auco to the extent allowed under California law and under the current
charter documents and indemnification agreements currently in place for such
officers and directors.
Notification of Certain Matters. Peerless and Auco will each give each other
prompt notice of the occurrence or nonoccurrence of any event which would be
reasonably expected to cause any representation or warranty of the notifying
party contained in the merger agreement to be materially untrue or inaccurate,
or any failure of the notifying party materially to comply with any covenant,
condition or agreement in the merger agreement.
Employees. For purposes of employee benefits, Peerless will give former Auco
employees full credit for time served at Auco prior to the merger.
Affiliate Agreements. Affiliates of Peerless and Auco will execute
agreements containing restrictions on certain sales of Peerless common stock by
such affiliates.
Tax Treatment. Peerless and Auco have each agreed to use their reasonable
best efforts to cause the merger to qualify as a reorganization under the
provisions of Section 368 of the U.S. Internal Revenue Code, as specified in
the merger agreement, and will not (both before and after consummation of the
merger) take any actions which to their knowledge could reasonably be expected
to prevent the merger from so qualifying.
Peerless Common Shares. Peerless has agreed to use its reasonable best
efforts to cause the shares of Peerless common shares to be delivered to Auco
shareholders in the merger to be listed on the Nasdaq National Market.
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Consents of Accountants. Peerless and Auco will use reasonable efforts to
cause to be delivered to each other consents of PricewaterhouseCoopers LLP
dated on the date that the registration statement becomes effective, in form
reasonably satisfactory to the recipient and customary in scope and substance
for consents to be delivered by independent public accountants in connection
with registration statements on form S-4 filed under the Securities Act of
1933, as amended.
Convertible Promissory Note. Auco shall, prior to the effective time of the
merger, cause any voting debt to be converted into Auco common stock.
Shareholder Representative. Mannan Latif shall act as the representative of
the Auco shareholders with respect to such shareholders indemnification
obligations pursuant to the merger agreement.
Peerless SEC Documents. Peerless has agreed to furnish Auco copies of
documents that Peerless files under the Securities Exchange Act prior to the
merger.
Conditions to the Merger
Conditions to Obligation of Each Party to Effect The Merger. Each of
Peerless' and Auco's respective obligations to complete the merger are subject
to the satisfaction at or prior to the consummation of the merger of the
following conditions:
1. Shareholder Approval. The Auco shareholders shall have approved and
adopted the merger agreement and Peerless shareholders shall have
approved the issuance of the Peerless common shares to be delivered in
connection with the merger;
2. Illegality. No statute, rule, regulation or order is enacted, entered,
enforced or deemed applicable to the merger which makes the consummation
of the merger illegal;
3. Listing. The Peerless common shares issuable in connection with the
merger shall have been listed on the Nasdaq National Market;
4. Effectiveness of Registration Statement. The SEC shall not have issued
any stop order suspending the effectiveness of the Registration
Statement of which this document is a part, nor shall it have started or
threatened any proceedings for that purpose or in respect of this
document;
5. Letter from Accountant. Peerless shall have received a letter from
PricewaterhouseCoopers stating its concurrence with management's
conclusion as to the appropriateness of pooling of interests accounting
treatment for the merger.
Additional Conditions to Obligation of Auco. The obligation of Auco to
complete the merger is also subject to the following conditions:
1. Representations and Warranties. The representations and warranties of
Peerless and Merger Sub contained in the merger agreement shall be true
and correct in all material respects at and as of the consummation of
the merger, with the same force and effect as if made on and as of the
consummation of the merger, and Auco shall have received a certificate
to such effect signed by an officer of Peerless;
2. Agreements and Covenants. Peerless and Merger Sub have performed or
complied in all material respects with all agreements and covenants
required by the merger agreement, and Auco has received a certificate to
such effect signed by an officer of Peerless;
3. No Peerless Adverse Material Effect. Peerless shall not have suffered an
adverse material effect, as defined in the merger agreement; and
4. Opinions. Auco shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP related to corporate matters, and an opinion of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, in form
and substance reasonably satisfactory to it, with respect to the tax-
free nature of the merger, as specified in the merger agreement.
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Additional conditions to Obligation of Peerless. The obligations of Peerless
and Merger Sub to complete the merger are also subject to the following
conditions:
1. Representations and Warranties. Except as would not reasonably be
expected to have a material adverse effect on Auco, the representations
and warranties of Auco in the merger agreement shall be true and correct
in all material respects on and as of the date of the consummation of
the merger, with the same force and effect as if made on and as of the
date of the consummation of the merger, and Peerless shall have received
a certificate to such effect signed by an officer of Auco;
2. Agreements and Covenants. Auco as performed or complied in all material
respects with all agreements and covenants required by the merger
agreement, and Peerless and Merger Sub have received a certificate to
such effect signed by an officer of Auco;
3. No Material Adverse Effect. Auco shall not have suffered a material
adverse effect as such term is defined in the merger agreement;
4. Consents Obtained. Auco has obtained all consents required by the merger
agreement;
5. Additional Agreements. The escrow fund agreement, the shareholder
agreement, each non-competition agreement, the registration rights
agreement, and the Adam Au employment agreement shall have been executed
and delivered by the parties thereto and shall be in full force and
effect;
6. Conversion of Preferred Stock. Each share of Auco preferred stock shall
have been converted into Auco common stock.
7. Opinions. Peerless shall have received an opinion of Coblentz, Patch,
Duffy & Bass, LLP related to corporate matters, and an opinion of
Skadden, Arps, in form and substance reasonably satisfactory to it, with
respect to the tax-free nature of the merger, as specified in the merger
agreement.
Termination
Conditions to Termination. The merger agreement may be terminated at any
time prior to the consummation of the merger, notwithstanding the approval and
adoption by Auco shareholders of the merger agreement and the approval of the
Peerless shareholders of the issuance of the Peerless common shares to be
delivered in connection with the merger:
1. by mutual written consent of Auco and Peerless; or
2. by either Auco or Peerless, if:
(a) any governmental entity shall have issued an order, decree or
ruling or taken any other action (which order, decree, ruling or other
action the parties hereto shall use their reasonable efforts to lift),
which permanently restrains, enjoins or otherwise prohibits the
consummation of the merger and such order, decree, ruling or other
action shall have become final and non-appealable;
(b) if the merger is not approved and adopted by the affirmative vote
of the shareholders of Auco as required by the CGCL and the articles of
incorporation of Auco, or if the issuance of the Peerless common stock
in the merger is not approved and adopted by the stockholders of
Peerless in accordance with the rules of the Nasdaq National Market and
the DGCL;
(c) if the merger shall not have been consummated before September 30,
1999 (unless the failure to consummate the merger by such date shall be
due to the action or failure to act of the party seeking to terminate);
3. by Auco:
(a) in connection with entering into a definitive agreement for an
alternative transaction as permitted above, provided Auco has complied
with all provisions thereof, including the notice provisions therein,
and that Auco makes simultaneous payment to Peerless of the termination
fee and expenses as required by the merger agreement;
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(b) if Peerless shall have breached in any material respect any of its
representations, warranties, covenants or other agreements contained in
the merger agreement, which would cause a failure of the conditions set
forth in Section 8.3(a) and Section 8.3(b) of the merger agreement, and
which breach cannot be or has not been cured within 30 days after the
giving of written notice by Auco to Peerless.
4.by Peerless:
(a) if, prior to the effective time of the merger, the Auco board shall
have: withdrawn, modified or changed in a manner adverse to Peerless
its approval or recommendation of the merger, recommended an
Acquisition Proposal, executed a letter of intent, an agreement in
principle or definitive agreement relating to an Acquisition Proposal
or similar business combination with a person or entity other than
Peerless, or exercised its rights pursuant to Section 6.2 of the merger
agreement with respect to an Acquisition Proposal, and, directly or
through its representatives, continued discussions with any third party
concerning an Acquisition Proposal for more than ten business days
after the date of receipt of such Acquisition Proposal; or
(b) if prior to the effective time, Auco shall have breached in any
material respect any representation, warranty, covenant or other
agreement contained in this Agreement, which would cause a failure of
the conditions set forth in Section 8.2(a) and Section 8.2(b) of the
merger agreement, and which breach cannot be or has not been cured
within 30 days after the giving of written notice to Auco.
Effect of Termination. In the event of the termination of the merger
agreement by any party thereto pursuant to the terms of the merger agreement,
written notice thereof shall forthwith be given to the other party or parties
specifying the provision pursuant to which such termination is made, and there
shall be no liability on the part of Peerless or Auco except: (A) for fraud or
for breach of the merger agreement prior to such termination, and (B) as set
forth in Section 11.2 of the merger agreement.
Fees and Expenses. Except as set forth below, each of Peerless or Auco will
pay its own fees and expenses incurred in connection with the merger agreement
and the merger, whether or not the merger is completed.
Auco will pay Peerless a fee of $1 million, and will pay Peerless'
reasonable out-of-pocket expenses relating to the merger of up to $500,000, if
any of the following occurs:
. If Auco terminates the merger agreement because it does not receive
shareholder approval and if Adam Au is in breach of the shareholder
agreement between him and Peerless;
. If Auco terminates the merger agreement in connection with the execution
of an acquisition agreement with a party other than Peerless;
. If Peerless terminates the merger agreement because the board of
directors has taken certain steps toward the consummation of proposed
acquisition by a company other than Peerless;
. If Peerless terminates the merger agreement because of an uncured
material breach by Auco after Auco has announced or received a proposal
to be acquired by another company other than Peerless; or
. If Peerless terminates the merger agreement following the receipt or
announcement by Auco of a proposal to be acquired by a company other
than Peerless, if Peerless terminates the merger agreement because the
merger has not closed prior to September 30, 1999, and if Auco has
entered into an agreement regarding or has consummated such other
acquisition.
Indemnification and Escrow
Indemnification by Auco and Auco Shareholders. Auco and Mannan Latif, on
behalf of each Auco shareholder and option holder, have agreed to indemnify
Peerless for any losses in excess of $250,000 suffered by Peerless as a result
of any breach of the representations, warranties or covenants of Auco contained
in the merger agreement. Ten percent of the aggregate merger consideration
payable to the Auco shareholders will be withheld and deposited in the escrow
fund to secure these indemnification obligations.
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Limitations on Indemnification. The indemnification obligations contained in
the merger agreement will be satisfied solely from the escrow fund, and shall
last for a period of one year following the earlier of the effective time of
the merger or the date of issuance of the first independent audit report of
Auco or of Auco consolidated with Peerless after the merger. At this time, any
Peerless common shares remaining in the escrow fund will be delivered to the
Auco shareholders.
Amendment and Waiver; Parties in Interest
Peerless and Auco may amend the merger agreement in writing at any time
prior to consummation of the merger, provided, however, that after approval of
the merger by the shareholders of Auco, the merger agreement cannot be amended
without shareholder approval if shareholder approval of such amendment is
required by law.
At any time prior to consummation of the merger, either of Peerless and Auco
may extend the time for the performance of any of the obligations or other acts
by the other, waive any inaccuracies in the representations and warranties
contained in the merger agreement or in any document delivered pursuant to the
merger agreement, or, to the extent allowed by law, waive compliance with any
of the agreements or conditions contained in the merger agreement. Any such
extension or waiver will be valid if set forth in writing by the party or
parties granting such extension or waiver.
The merger agreement is binding upon and inures solely to the benefit of the
parties thereto, and nothing in the merger agreement confers upon any other
person any right, benefit or remedy, other than certain indemnification and
insurance obligations of Peerless and Auco following consummation of the merger
which are intended for the benefit of certain specified officers, directors and
employees of Auco and may be enforced by such individuals, and other than
Auco's obligation to pay fees and expenses to Peerless in certain
circumstances.
Escrow Fund Agreement
Peerless will deposit 10% of the Peerless common shares issued in the merger
into an escrow fund, to be held by Norwest Bank Minnesota, N.A. as the escrow
agent. To the extent that Peerless suffers any losses in excess of $250,000 as
a result of the breach by Auco of Auco's representations, warranties, and
covenants in the merger agreement, and to the extent that the Auco shareholders
must indemnify Peerless as a result of such breach, the Auco shareholders will
satisfy such indemnification obligations by having shares of Peerless common
stock paid by the escrow agent to Peerless. In the event that Peerless common
shares remain in the escrow fund one year after the effective time of the
merger or following the issuance of the first independent audit report of Auco
or of Auco consolidated with Peerless, when the indemnification obligations of
Auco shareholders terminate, such Peerless common shares will be distributed,
pro rata, to former Auco shareholders. In no event will Auco shareholders be
obligated to indemnify Peerless for any losses in excess of the amount of the
escrow fund; the escrow fund shall be the sole source for such indemnification.
After the effective time of the merger, Mannan Latif, the current chief
financial officer of Auco, will serve as the representative of Auco
shareholders' interests for the purposes of the escrow fund agreement and the
merger agreement.
Shareholder Agreement
Adam Au, the president and chief executive officer of Auco, who owns
approximately 16.4% of the shares of Auco preferred stock and 88.5% of the
shares of Auco common stock, has entered into a shareholder agreement, which is
attached as Annex B and incorporated by reference into this document. The
shareholder agreement binds Mr. Au to vote his shares of Auco preferred stock
and common stock in favor of the merger agreement. The voting agreement also
places restrictions on the sale or other transfer of the Auco preferred stock
and common stock covered by the shareholder agreement.
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INFORMATION ABOUT PEERLESS
Peerless 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 and scanners, 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. Peerless' technology and
engineering services provide advanced embedded imaging solutions that enable
the Company's OEM customers to develop digital printers, copiers and MFPs
quickly and cost effectively. Peerless markets its solutions directly to OEM
customers such as Canon, IBM, Minolta and Ricoh. Peerless was incorporated in
California in 1982 and reincorporated in Delaware in September 1996.
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 imaging
products also are becoming common in the home environment. Historically, most
electronic imaging products in the office environment have been stand-alone,
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
has emerged. 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. Peerless estimates the digital
document market, based in part upon data and projections provided by
International Data Corporation ("IDC"), was approximately $35 billion in 1998.
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 1,200 dots per inch
and greater, 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 application 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 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
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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 Reliance on Outsourcing. In addition to the engineering challenges
generated by changing technology, digital document product manufacturers are
continually subject to a variety of market pressures. Competition in the
marketplace, coupled with end-user demand for greater performance at reduced
cost has created a growing need to reduce time-to-market and engineering costs.
This increased competition is forcing digital document product manufacturers 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 MFPs, the demand for color imaging and the increased technical
complexity associated with products meeting these market changes have
accelerated the trend toward 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 the complexity of imaging technology
intensifies, Peerless believes digital document product manufacturers will
realize significant cost and time-to-market advantages by utilizing a single
open embedded imaging system standard across multiple digital document product
market sectors.
Demand for Color Imaging. Although many office computers have color
displays, and the graphical content available to office users via the Internet
and advanced office applications make heavy use of color, most digital document
products found in today's office environment still generate monochrome output.
In the 1990s, color inkjet printers were introduced into the small office/home
office (SOHO) market and color laser printers were introduced into the office
marketplace. In the SOHO market, most color inkjet printers are typically
limited by output speeds of one or fewer pages per minute. In the office
market, color laser printers have been limited by technology and unit costs
that remain significantly higher than monochrome laser printers. In addition,
the printing speeds for color continue to be significantly slower than
monochrome laser printers. Furthermore, digital document product manufacturers
are developing tandem engines, which are comprised of multiple imaging stations
dedicated to individual colors used in the printing process. Although these
products hold the promise of raising desktop office color printing speeds to
monochrome levels of performance, cost effective embedded imaging systems that
can produce high quality output from these tandem engines are limited in the
market. As a result, market pressures for advanced embedding imaging systems
that enable high quality and improved price/performance for both SOHO and
office color products remain high. In addition, new digital appliances such as
digital cameras are creating an intensified need for photoquality color
printing capabilities. Although digital document engine manufacturers have
developed color 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 color output because the simultaneous
implementation of four planes of color coupled with up to 8 bits per pixel at
increased resolution significantly increases the size of the digital document
data stream. As a result, there is a need for embedded imaging systems that can
support the accelerated performance requirements of high-density color output.
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 have now introduced
MFPs, which have required each of them to broaden their 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.
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Increased Role of Networking. Within the office environment, digital
document products increasingly are deployed in a networked configuration.
According to projections by IDC, 74% of laser printers sold in the United
States in 1996 were estimated to have been connected to enterprise networks,
and this percentage is expected to increase to 81% by 2002 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 local area networks, wide area networks and the Internet.
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 when 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 or congested
facilities. In other instances, such as when printing from a graphics
workstation, it can be advantageous to perform most of the image processing at
the printer in order to offload a host computer that is under a heavy workload.
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.
Advent of Digital Photography. The emergence of digital cameras capable of
producing images of near-film quality and the increasing popularity of these
devices has created a need for editing and directly printing these images to a
variety of digital document products without an intermediary computer. Many of
today's digital camera manufacturers are restricted to a single specific
printer to which their camera can print directly. This limitation may restrict
the appeal of their products to potential buyers. The lack of a standard
embedded imaging solution to accomplish these tasks has created new technical
challenges for both digital camera manufacturers and the digital document
product market.
Peerless Products And Solutions
Peerless is a leading provider of embedded imaging systems for the digital
document product market. Peerless' technology and engineering services provides
advanced embedded imaging solutions that enable Peerless' OEM customers to
develop digital printers, copiers and MFPs quickly and cost effectively.
Peerless delivers its products to its OEM customers in multiple ways: 1)
licensing of Peerless' standard imaging technology for the OEM's internal
product development; 2) turnkey product development whereby Peerless provides
the technology and the additional engineering services necessary to integrate
the appropriate technology into a complete embedded imaging system solution
optimized to the OEM's specific requirements or 3) a co-development
relationship that combines the licensing of Peerless technology with joint
Peerless and OEM engineering resources.
Products and Services
Peerless has designed its embedded imaging technology with a modular
architecture that addresses a broad spectrum of digital document product
solutions tailored to an individual OEM's requirements. Peerless offers its
OEMs the flexibility to selectively optimize solutions for monochrome and
color, networking support, languages or multifunction features for their
digital document products. Peerless also offers engineering services to allow
OEMs to outsource the development of the entire embedded imaging system for a
digital document product. Peerless' products include the following technologies
and services:
Object-Based Imaging System. PeerlessPage is a complete object-based imaging
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. The scaleable nature of Peerless' technology enables it to serve
both the low cost and high performance sectors of
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the market. The multitasking operating system enables Peerless to manage
concurrent processing of digital document product tasks for the MFP
marketplace. For added performance and flexibility, Peerless' imaging system
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. Color extensions
to PeerlessPage support the unique requirements of color printers. Extensions
to support MFPs have been developed to provide multitasking capability.
Page Description Languages. Peerless provides OEMs with support for the most
widely used and standard page description languages ("PDLs"), Adobe's
PostScript Software and Hewlett-Packard's Printer Control Language ("PCL").
Peerless offers PeerlessPrint technology, which emulates Hewlett-Packard's PCL.
The complete range of printing language products includes PeerlessPrint5E, 5C
and 6. PeerlessPrint5E provides compatibility with HP's PCL 5e language
utilized in their LaserJet 5P, 5Si, LJ4000 and LJ5000 laser printer products,
as well as enhancements to support higher resolutions and added paper handling
options. PeerlessPrint5C is designed to provide compatibility with HP's PCL 5C
utilized in its Color LaserJet 4500 and high-end inkjet products.
PeerlessPrint6 provides monochrome and color compatibility with HP's latest PCL
6 language. As a third-party co-developer, Peerless provides an optimized, high
performance integration of Adobe PostScript 3 into the PeerlessPage imaging
system for customers desiring to license PostScript from Adobe Systems
Incorporated ("Adobe"). Peerless' WinEXPRESS languages have been designed to
provide host-based printing solution for low cost monochrome and color printers
and MFPs and ACCELEPRINT combines a host-based printing solution with an
industry standard PCL solution to provide a highly optimized method for
printing documents.
PC Software. Peerless provides a complete set of PeerlessPrint drivers that
optimize the printing process in the Windows 3.1, 95, 98 and the NT 4.0
environments. Windows NT 5.0 is currently under development and planned for
future release.
ASICs and Integrated Processors. Peerless designs application specific
integrated circuit ("ASIC") solutions for the office and SOHO sectors of the
digital document product marketplace. These ASICs provide a silicon-based
implementation of key components of its imaging software. Peerless has licensed
these designs to semiconductor manufacturers, such as IBM Microelectronics and
Motorola who, in turn, have the right to manufacture and sell these ASICs
directly to digital document product manufacturers. Peerless' QuickPrint line
of imaging ASIC co-processors and integrated processors incorporate basic
components of the Company's imaging system into a silicon solution to reduce
controller costs and enhance overall performance. For the high performance
sector of the office market, Peerless 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. Peerless currently markets the QP 1700, QP 1800 and QP +401
ASICs. The QP +401 is a "system on a chip" solution which integrates the
processor and co-processor on a single chip. Additionally, Peerless has
introduced the QP 1900 family of ASICs to address the multiple color planes of
high-speed color printing as well as very high-speed monochrome printing.
In addition, Peerless, in partnership with Conexant Systems, Inc.
("Conexant"), formerly Rockwell Semiconductor Systems, Inc., has developed an
integrated processor solution for the multifunction SOHO color inkjet market
which will incorporate Peerless' object-based imaging system and Rockwell's fax
technology into a low cost chipset solution.
Networking Technology. Peerless 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 through third parties. 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, Peerless supplies management
information base ("MIB") tables that may be utilized by open industry-standard
network management systems. Most recently, Peerless has agreed to merge,
subject to final closing, with a networking company that enables Peerless to
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provide cost-effective embedded networking solutions. The embedded network
solution eliminates the need for a network interface card and provides low cost
embedded networking solutions for cost sensitive market segments.
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,
Peerless offers engineering services. This can include controller design and
custom engineering for vendor-specific features that complement Peerless'
standard imaging technology. In addition, during fiscal 1998 Peerless
established the Peerless Development Partner Program to give Peerless and OEM
customers the option of using an independent development partner closely allied
with Peerless for product development and integration services.
Solutions
The Company's technology can be leveraged to provide a wide range of
scaleable solutions:
Monochrome Solution. Peerless' monochrome solution targets low cost,
networkable office laser printers. Peerless' color imaging technology also
provides photographic quality image printing on monochrome products.
Multifunction Solution. Peerless' MFP imaging solutions target lower-cost
color inkjet, fax or laser-based workgroup MFP products and high-speed copier-
based MFP products. The lower-cost inkjet solutions will combine Peerless
imaging technology and Conexant fax technology. The higher-end solutions
combine Peerless' networkable imaging products with MFP-specific extensions to
facilitate printing, copying, faxing and scanning in the same digital document
product. The Company's solutions provide multifunction capability, but Peerless
does not provide stand-alone fax or copier solutions During fiscal 1999,
Peerless, in partnership with Ricoh, announced 35 and 45 PPM copier based MFP
solutions.
Color Solution. Peerless' color imaging solutions target OEM requirements
for a broad range of color imaging devices. Peerless' proprietary object-based
imaging system reduces memory requirements for printing color pages while
simultaneously accelerating the document imaging process and increasing print
quality. During fiscal 1999, Peerless announced eight new color products
shipping in the market with Peerless technology. OEMs shipping these new
products include Minolta, Kyocera and Tektronix.
Technology
Peerless develops unique technologies for the embedded imaging systems
marketplace that provide meaningful improvements in performance, cost and time
to market for Peerless' OEMs. Peerless' proprietary embedded, object-based
imaging system reduces the size of digital document product imaging files with
virtually no noticeable loss of visual quality. This proprietary technology
enables Peerless' OEM customers to reduce memory cost and increase print
quality and speed while eliminating or reducing the need for incremental
compression technology. When optimized, this component of the embedded imaging
system can provide significant cost savings and performance differentiation to
digital document product manufacturers. Peerless 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 other 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.
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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. Peerless' 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.
Peerless holds six patents in the United States protecting the intellectual
property within certain aspects of its object-based imaging approach.
Systems Architecture. Peerless has developed standardized interfaces for
Peerless' family of products that enable 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. The PeerlessPage object-based imaging system is both
platform- and device-independent and is able to accommodate a variety of print
engines and controller architectures. Peerless has also developed an
applications interface that enables the support of features such as spooling,
stored macros, stored forms, electronic collation and stapling.
Technology Partners. Peerless 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 Peerless'
products to be used with Adobe's PostScript Software. Peerless' relationship
with Adobe permits Peerless to offer a convenient and optimized Adobe
PostScript-enabled solution. In addition, Peerless incorporates font
rasterizers into its imaging solution to enable its OEMs to license font
technology from providers such as Agfa and Bitstream. Peerless has also
established semiconductor agreements with leading developers and manufacturers
of RISC microprocessors in order to offer integrated processor and co-processor
solutions. The integrated processors combine Peerless' basic imaging sending
functionality with an industry-standard microprocessor.
In October 1996, the Company entered into an agreement with Conexant, a
major developer and manufacturer of communication chips, relating to the
licensing of Peerless technologies and engagement of Peerless technical
personnel for engineering development services. The agreement covers a joint
development effort between Conexant and Peerless to specify, design and produce
an integrated semiconductor solution for multifunction products that combines
Conexant's fax technology and Peerless' embedded imaging technology. The
combined technology has been embedded into an OEM's SOHO MFP product that is
expected to be shipping in the marketplace by the second quarter of calendar
year 1999.
Digital Device Technology. Peerless is in the early stages of core
technology development for a digital device and is focusing primarily on
digital photography. Future revenue associated with this digital device
technology will depend on the success of Peerless' underlying development and
marketing efforts.
Customers and Markets
Customers
Peerless markets its imaging technology 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. In addition, Peerless markets its imaging technology to technology
partners, which
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incorporate certain components of Peerless' technology into integrated product
offerings that are ultimately marketed to digital document OEMs. With the
exception of technology partners such as Adobe and Conexant, Peerless has
derived substantially all of its revenues in recent years from direct sales to
digital document product OEMs.
Peerless' customers that individually comprised more than 10% of Peerless'
total revenues for fiscal 1999 were Adobe, Canon, Conexant, IBM, Minolta,
Ricoh. Revenues from Peerless' top four customers accounted for 58%, 60% and
60% of Peerless' total revenues for fiscal years 1999, 1998 and 1997,
respectively. Peerless anticipates that its future revenues will be similarly
concentrated with a limited number of customers. Peerless' largest 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 Peerless' customers 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.
Markets
Enterprise Office Market. The office 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. Peerless' major customers in the office market in the fiscal
year ended January 31, 1999 included Adobe, Canon, IBM, Minolta and Ricoh.
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. For the SOHO
market, Peerless has entered into a joint development agreement with Conexant
to produce a chipset that integrates components of Peerless' imaging software
and Rockwell's fax technology into semiconductor firmware. Peerless has
licensed its technology to Conexant, which has the rights to manufacture and
sell this chipset directly to digital document product manufacturers. Conexant
is presently Peerless' primary customer in the SOHO market.
International Markets. Revenues from customers outside the United States
accounted for 61%, 46% and 38% of Peerless' total revenues for fiscal years
1999, 1998 and 1997, respectively. Further, Peerless expects that sales to
customers located outside the United States may increase in absolute dollars in
the future. Peerless' international customers are comprised primarily of
companies headquartered in Japan. These Japanese customers sell products
containing Peerless' technology primarily in the North America and European
marketplaces. Despite a continued downturn in the Asian economy, Peerless has
not experienced a decrease in its sales to Asian customers.
All of Peerless' contracts with international customers are, and Peerless
expects that in the future will be, denominated in U.S dollars. As a result,
Peerless is currently not subject to foreign currency transaction and
translation gains and losses.
Seasonality
Peerless believes that its business may be subject to seasonal trends.
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Sales and Marketing
Peerless markets its products to the leading OEMs that sell digital document
products into the worldwide market. Peerless directs most of its sales efforts
through its headquarters in California and its subsidiary in Japan. Sales to
European digital document product manufacturers are conducted out of Peerless'
California headquarters.
Peerless markets directly to OEMs and through focused public relations and
branding programs. Direct OEM marketing consists of focused public relations
activities and the development of sales collateral, mailers, trade show
attendance and sales support. Peerless focuses its public relations effort on
media read by OEM customers. Peerless directs its branding programs toward
building Peerless' brand awareness. These programs consist of public relations
and Peerless product branding on its silicon and software products.
Product Development and Engineering Services
Peerless' product development activities are located at Peerless'
headquarters in El Segundo, California. These activities primarily consist of
new product development, enhancement of existing products, product testing and
technical documentation development. Accordingly, Peerless' engineering
personnel are divided into two primary development areas: research and
development, which focuses on development and enhancement of Peerless' core
technologies; and engineering services, which focuses on customized customer
design activities.
Peerless' engineering services personnel work closely with OEMs that desire
a turnkey solution, developing customized interfaces and applications specific
to individual OEMs. Peerless typically receives a fee for such engineering
services. As part of its corporate strategy, Peerless leverages its engineering
services capability to penetrate emerging market sectors where applications and
interfaces have not fully evolved.
Intellectual Property and Proprietary Rights
Peerless' success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, Peerless relies on a combination of patent,
copyright, trade secret and trademark laws as well as nondisclosure and other
contractual restrictions. Peerless holds six 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 Peerless for generating output
for continuous synchronous raster output devices, such as laser printers.
Peerless has four applications pending in Japan, three applications pending in
the European Patent Office and three applications pending in the United States.
There can be no assurance that patents held by Peerless will not be challenged
or invalidated, that patents will issue from any of Peerless' 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 Peerless' technology may be sold) to provide meaningful
protection or any commercial advantage to Peerless. 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 Peerless' technology.
As part of its confidentiality procedures, Peerless 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, Peerless may be unable to
effectively protect its proprietary rights and, in any event, enforcement of
Peerless' proprietary rights may be expensive. Peerless' source code also is
protected as a trade secret. However, Peerless from time to time licenses its
source code to OEMs, which subjects Peerless 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 Peerless'
products or to reverse engineer or obtain and use Peerless' proprietary
information.
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As the number of patents, copyrights, trademarks and other intellectual
property rights in Peerless' industry increases, products based on its
technology increasingly may become the subjects of infringement claims. There
can be no assurance that third parties will not assert infringement claims
against Peerless in the future. Any such claims, regardless of merit, could be
time consuming, result in costly litigation, cause product shipment delays or
require Peerless to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Peerless, or at all, which could have a material adverse affect on Peerless'
operating results. In addition, Peerless may initiate claims or litigation
against third parties for infringement of Peerless' proprietary rights or to
establish the validity of Peerless' proprietary rights. Litigation to determine
the validity of any claims, whether or not such litigation is determined in
favor of Peerless, could result in significant expense to Peerless and divert
the efforts of Peerless' technical and management personnel from productive
tasks. In addition, Peerless may lack sufficient resources to initiate a
meritorious claim. In the event of an adverse ruling in any litigation
regarding intellectual property, Peerless 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 Peerless to develop, or
license on acceptable terms, a substitute technology if required could have a
material adverse effect on Peerless' operating results.
Competition
The market for embedded imaging systems for digital document products is
highly competitive and characterized by continuous pressure to enhance
performance, add functionality, reduce costs and accelerate the release of new
products. Peerless competes on the basis of technology expertise, product
functionality, development time and price. Peerless' technology and services
primarily compete with solutions developed internally by OEMs. Virtually all of
Peerless' 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 Peerless' current or proposed technologies,
eliminating a need for Peerless' services and products and limiting future
opportunities for Peerless. Peerless 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. Peerless also competes with
software and engineering services provided in the digital document product
marketplace by other systems suppliers to OEMs. In this regard, Peerless
competes with, among others, Electronics for Imaging and Xionics Document
Technologies.
As the industry continues to develop, Peerless expects that competition and
pricing pressures will increase from OEMs, existing competitors and other
companies may enter Peerless' existing or future markets with similar or
substitute solutions that may be less costly or provide better performance or
functionality. Peerless anticipates increasing competition for its color and
multifunction products, particularly as new competitors develop and enter
products in this emerging market. Some of Peerless' existing competitors, many
of its potential competitors and virtually all of Peerless' OEMs have
substantially greater financial, technical, marketing and sales resources than
Peerless. In the event that price competition increases, competitive pressures
could cause Peerless 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 Peerless 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
Peerless' operating results.
Employees
As of January 31, 1999, Peerless had a total of approximately 170 employees
and independent contractors. None of Peerless' employees is represented by a
labor union, and Peerless has never experienced any work stoppage. Peerless
considers its relations with its employees to be good.
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INFORMATION ABOUT AUCO
Overview
Auco is a computer software company whose focus is on providing networking
for common office equipment, such as printers, copiers and facsimile machines.
Auco has developed a close relationship with Novell, Inc. and all of Auco's
products are compatible with that company's software, particularly Novell's
Embedded Systems Technology ("NEST") and Novell Distributed Print Services
("NDPS").
Auco develops software products that are designed to be directly
incorporated into the software contained within common office equipment
("firmware"), and these products are marketed as software development kits
("SDKs") directly to the OEMs of office equipment or to their suppliers of
major components.
Adam Au founded Auco in 1994 with the initial goal of developing an
automated test tool for developers of networked applications. Shortly after
Auco began business, it was approached by Novell to assist in the testing of a
NEST product, which was targeted at the OEMs of common office equipment.
Through this association, Auco has developed a business with customers of NEST
products and has introduced several complementary products in its own right.
Auco terminated the automated test tool development in 1998 to concentrate on
its expanding office equipment networking business.
Industry Background
The first office equipment devices to be networked were printers. With the
advent of computer networks came the ability to easily share a printer among a
number of users.
The problem this created was that either the printer had to be located near
a network server or a user's computer needed to be specially configured to act
as a printer host. This problem was solved by the introduction of the print
server card, a small device that was either inserted into the printer (an
"internal print server card") or was connected to the printer by means of a
parallel or serial cable (an "external print server"). With these print servers
it was now possible to locate the printer close to users, rather than close to
a network server.
Initially, print servers were only fitted to high-end printers, as these
were the devices suitable for use by multiple users due to their high print
quality and speed of operation. Over time this technology has filtered down to
mid- and low-end printers, and this in turn has led to growth in the print
server market. With market growth comes competitive pressure, and thus the need
to reduce costs.
Printer manufacturers have taken two routes to providing networked printers:
. Third party print server manufacturers
. In-house design
The first case relieves the need for printer manufacturers to become
proficient in computer networking, allowing them to concentrate on the printer
itself. However, this is the more expensive option, as the manufacturer is
purchasing a finished product from a third party. As long as networking was
deployed in a small percentage of printers, this was an attractive option for
printer manufacturers and it became the common route chosen by many.
The second case requires printer manufacturers to acquire in-house expertise
in computer networking, or to purchase a packaged networking SDK from a third
party. This option gives the printer manufacturer an advantage in flexibility
of design: the print server function may be designed as a separate card (if
networking is offered as an option) or networking may be integrated into the
design of the printer, thus sharing components inside the printer and therefore
reducing costs. The integrated networking approach is becoming more common as
networking is becoming a standard feature for many printers.
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Auco Technologies and Products
Auco's business is targeted at the in-house design model described above.
Auco's goal is to provide all of the networking software that is contained on a
typical print server, but to provide it in such a form that it is suitable for
use by printer manufacturers to incorporate directly into the printer's
firmware. Auco's software solutions have a number of key attributes:
. They are designed to be used either independently or can be integrated
with other existing products. This allows companies to easily deploy
products containing Auco's software as well as products from other
vendors that work together.
. They are designed to support popular hardware and software platforms,
including network platforms from Novell, Microsoft, Apple and other UNIX
providers.
. They are scalable, meaning the same software works on small or large
office equipment. As the OEM customers need different ranges of office
equipment, Auco's software can easily provide the same functionality
across a broad range of office equipment.
Auco Modular Software Architecture
The Auco modular software architecture provides a variety of advanced
technologies, integrated together to provide maximum functionality. The
software layers consist of:
. Local area network topology driver--Auco supports industrial standard
Ethernet and token ring drivers. The drivers can integrate with
commercially available embedded operating systems (for example, VxWorks
from WindRiver), or with proprietary embedded operating systems of the
customers.
. Embedded operating system--Auco does not provide the embedded operating
system. Each software module is designed to run on different embedded
operating systems. Auco chose VxWorks from WindRiver as the primary
operating system on which to build its networking software.
. Network protocols--Auco supports Novell network on both the Novell
Bindery service and Novell Directory Service (NDS); UNIX printing and
Internet printing; Microsoft Server Message Block (SMB) protocol and
Apple protocol.
. Application Driver Interface--This layer makes the software device
independent. Applications like Printer and Scanner can use this
interface to interact with various network protocols.
[FIGURE OF APPLICATION DRIVER INTERFACE]
The figure above illustrates Auco's Modular Architecture.
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There are currently three products available from Auco:
. Auco Print Services
This was Auco's first product, developed during 1995 and 1996, and is
currently under exclusive license to Novell. Novell markets Auco Print
Services ("APS") integrally incorporated into a product sold as the NEST
Office SDK 1.0.
APS is a set of software modules that is functionally equivalent to
Novell's print server software, which forms part of the software suite sold as
NetWare. The major differences between APS and Novell's software are that
Auco's product may be incorporated directly into the firmware of a printer or
copier and the size of Auco APS is significantly smaller than Novell's
products, which creates cost savings for the manufacturers of these devices.
The actual purpose of APS is to provide a printer the ability to function
on a computer network using Novell NetWare and to print jobs submitted by
users of that network without requiring the printer to be physically connected
to a NetWare server.
The shaded portion below shows APS integrated into Novell NetWare to
provide network connectivity.
[FIGURE OF APPLICATION DRIVER INTERFACE]
. Auco Software Print Server
Whereas APS was designed solely to support Novell NetWare, Auco Software
Print Server ("Auco SPS") was designed to simultaneously support network
printing protocols found on the Internet, along with network printing
protocols from all major suppliers of computer network software, including
Microsoft, Novell, Sun Microsystems and Apple.
Auco SPS is designed to be a complementary product to Auco APS and the
Novell NEST Office SDK, with Auco SPS using many of the interfaces and
functions found in these products. Together with a suite of network printing
protocols supporting the computer network vendors described above, Auco SPS
also provides a complete range of industry standard protocols used by network
management applications and end users to allow the printer to be configured or
monitored remotely.
Auco SPS has been available since the beginning of 1998 and has enjoyed
considerable success in the market. It is marketed as an SDK, although Auco
usually provides some customization for each customer.
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The figure below shows all the network printing protocols supported by Auco
SPS.
[FIGURE OF APPLICATION DRIVER INTERFACE]
. APS Scan
APS Scan is a product that allows OEMs to develop network scanner devices,
and is in effect the scanner analog of Auco SPS.
Multifunction Devices ("MFDs") are peripherals or standalone devices that
integrate within a single device more than one of the following functions:
print, scan, copy, fax. MFDs have been available for some time, but initially
they were either low-end devices derived from fax machines, or high-end devices
derived from color copiers. Recently, however, there has been a trend towards
MFDs in the mid-range, fueled by the decrease in cost of color printing
technology, making color copiers more affordable, and also the move away from
analog copiers to digital copiers.
Auco was quick to spot this trend, and realized that, just as the move to
mid-range printers had created the market for networked printers, the same
would be true of mid-range MFDs. The output path to an MFD is the same as a
network printer; the input path is a scanner, and APS Scan addresses this.
APS Scan provides support for the Internet, and for Novell and Microsoft
networks, and is licensed to MFD manufacturers as an SDK.
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The figure below shows the network scan protocols supported by APS Scan.
[FIGURE OF APPLICATION DRIVER INTERFACE]
Maintenance and Technical Support
Auco offers maintenance and technical support, which is generally customized
to a customer's specific needs. This can vary from 'bug fixes' to providing
product enhancements or providing on-site support.
Engineering Services
In addition, Auco provides engineering services related to the
implementation and customization of Auco SPS. Auco provides on-site support as
well as development work for customers. Engineering services include
implementation, planning, project management and product customization.
Engineering services are generally performed on a daily fee-basis or on a
fixed-price project basis. These engineering services are used to leverage
Auco's software products so they can be better integrated into a customers'
products in the shortest possible time, reducing the customer's time to market
and the time when Auco starts receiving royalty revenue. A majority of Auco's
customers purchase its engineering services. Auco believes that engineering
services will always be a significant part of its business.
. NDPS Gateway
Auco also provides engineering services for NDPS gateway, which complements
its SPS and APS Scan, products.
This engineering service is unique among Auco's offerings in that it is not
an SDK and is not designed for use within a printer.
Novell introduced NDPS in 1998 as a new printing technology for NetWare. The
technology was designed to be partly integrated into new printer designs; the
existing base of printers ("legacy printers") could use a proxy software
component, the NDPS gateway.
An NDPS gateway is a proxy agent for legacy printers in that it presents the
printer to an end user as if it were an NDPS printer, while the printer
communicates with the NDPS gateway using a network printing protocol already in
its firmware. Thus, legacy printers may act as NDPS printers without any
firmware changes.
Novell has provided a generic gateway in NetWare 5, its latest release of
NetWare, although printer manufacturers have been encouraged by Novell to
produce gateways themselves, taking advantage of the specific features of their
printer range. Auco was one of the first companies to develop capabilities to
provide OEMs with custom gateways for NDPS. Auco has been providing regular
enhancements to its NDPS gateway offering.
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The NDPS gateway is provided to printer manufacturers as a complete package,
together with a gateway configuration program and installation script.
Market
The market for Auco's products is highly vertical and includes the
following:
. Printer OEMs
These are the companies developing network printers, and are a target
customer class for Auco SPS and the NDPS gateway.
Companies in this class include: Hewlett Packard, Lexmark, Canon, Seiko
Epson Corporation, Kyocera, Okidata and Ricoh.
. MFD manufacturers
Manufacturers developing network MFDs are a target customer class for Auco
SPS, the NDPS gateway and, where the MFD includes a scanning function, APS
Scan.
Companies in this class include: Xerox, Toshiba, Brother Industries, Seiko
Epson Corporation, Panasonic and Sharp.
. Digital copier manufacturers
This class of customer is distinct from the traditional MFD manufacturer as
they have traditionally been developing an analog solution and have only
recently started to make the move to digital devices. Typically this class of
customer will want to expose the printing function of the digital copier as a
network device, and may also be interested in offering the scanning function as
a network device to add value to the digital copier.
This would be a target customer class for Auco SPS, the NDPS gateway and APS
Scan.
Companies in this class include: Xerox, Sharp, Minolta, Mita, Kodak, Konica
and Toshiba.
. Print controller manufacturers
Print controllers are subsystems that exist in printing devices which take
data from a user in the form of a page description language (PDL) generated by
a client-based printer driver, or some other form of image encoding, and
convert that into a rasterized image suitable for sending to the printer
engine. This process is sometimes described as RIPping, where RIP stands for
"Raster Image Processor".
Just as printer manufacturers face a build or buy decision with network
connectivity, they also face the same decision for the print controller
function. There are a number of third party companies offering these print
controller subsystems. These companies are a target customer class for Auco SPS
and the NDPS gateway.
Companies in this class include: Peerless Systems Corporation, ITEC, Splash,
ColorBus, and Texas Instruments (which offers a digital signal processor (DSP)
chip-based solution)
. Print server manufacturers
With network printing protocols changing frequently, it is uneconomical for
print server manufacturers to develop all new protocols in-house. Therefore a
third party solution is often sought. These are a target customer class for
Auco SPS and the NDPS gateway.
Customers in this class include: Hewlett Packard, Intel, Emulex, Extended
Systems, Axis, Osicom/DPI, XCD, HMB, Digi International and Komatsu.
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Customers
Auco's customers include many of the major office equipment manufacturers.
Auco has supplied products and services to many of the major printer OEMs.
Auco's customers include: Xerox, Lexmark, Toshiba, Texas Instruments,
Tektronix, Canon, Seiko Epson Corporation and Ricoh. In addition, a major
customer for Auco's technology and engineering services continues to be
Novell.
Business Model
License Fee. For the Auco SDK, customers pay Auco a one-time non-recurring
license fee for the use of the SDK. When the customer starts shipping
products, it also pays Auco a per-product shipped recurring royalty for the
use of the Auco software embedded into the firmware of a printer or MFD. There
is a lead time between when a customer commences work with the Auco SDK and
actually ships product utilizing the software contained in it. The SDK license
fee helps bridge this time lag and also contributes towards support costs
incurred during the customer's development cycle.
Engineering Services. One major advantage provided by Auco's SDKs is time-
to-market, and it is for this reason that customers use Auco's engineering
services. Customers are offered a customization service to implement the Auco
SDK on the customers' chosen hardware and software platform as well as to
develop new features. Auco generally retains intellectual property rights on
new features developed for specific customers and incorporates them into a
later release of the SDK. To date, all customers for Auco SPS and APS Scan
have chosen the customization option.
Customers are also offered an ongoing support and maintenance option to
ensure the latest version of the SDK is made available to them.
The NDPS gateway is provided as a complete turnkey service with a one time
engineering services fee.
Alliances
. Novell
Auco has a long history of partnership with Novell. The relationship
started in September, 1994. Novell has licensed Auco's APS technology and
incorporated it in Novell's NEST Office SDK. In addition, Auco is co-
developing with Novell two additional SDKs, the Embedded NDPS SDK which is the
next generation of network printing for Novell NetWare and the NEST Server SDK
which provides networking for office storage devices such as CD-ROMs, disk
drives etc.
. WindRiver
Auco has been a Development Partner of WindRiver Inc. since 1996, under its
Wind Trade Partner Program. Auco has developed its networking software modules
on the WindRiver operating system.
Sales and Marketing
Auco is targeting customers that are manufacturing or will manufacture
printers, MFPs, copiers and print servers. Typical target customers are large
and medium-sized office equipment manufacturers that are doing their product
development on commercially available embedded operating systems such as Wind
River's (VxWorks), Microsoft's (CE) and Integrated Systems' (pSOS). Auco
licenses its software and services directly to its customers through its sales
organization complemented by other sales channels including print controller
and chip manufacturers and other network vendors.
Auco also has marketing programs intended to position, promote and license
its family of embedded networking products. Marketing personnel engage in a
variety of activities in support of the sales organization, including public
relations and product seminars, trade shows, direct mailings, preparing
marketing materials and coordinating Auco's participation in industry programs
and forums.
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Competition
Print Server Manufacturers. Traditional print server manufacturers have
until recently been the main competitors to Auco's print and scan SDKs.
However, manufacturers usually make an early choice between a traditional print
server and an in-house design and this determines whether Auco or a print
server manufacturer will gain the business. More printer and MFD manufacturers
are making the decision to create an in-house design, which is creating
competitive pressures on print server manufacturers. Companies in the print
server business include: Axis Communications, Intel, Osicom/DPI, Emulex, HBM,
Hewlett Packard, Japan Computer Industries and Komatsu.
Print Server on a Chip. This class of competition incorporates all print
server functionality into a single integrated circuit device, frequently an
application specific integrated circuit (ASIC), allowing printer OEMs to
incorporate a print server into their printer hardware design without the
additional cost of a plug-in card. Only one company is known to be in this
business: the print server manufacturer DPI recently started a print server on
a chip business called NetSilicon. The print server on a chip reduces costs for
print server manufacturers and offers printer manufacturers an alternative to
the software-only approach taken by Auco.
Other Software Print Servers. Recently, a number of print server companies
have begun positioning themselves as software companies, thus becoming direct
competitors to Auco. None are known to offer SDKs containing full source code,
which allows Auco a competitive edge in this market. Only one company, XCD, is
currently known to be offering a software print server.
Employees
As of March 31, 1999, Auco had 28 employees of which 18 were engaged in
engineering and technical documentation activities, 4 were in sales and
marketing, and 6 were in general and administration. Auco also uses independent
contractors from time to time.
Legal Proceedings
Auco is not a party to any material legal proceedings.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF AUCO
The following table sets forth, as of April 13, 1999, the beneficial
ownership of Auco shares by (i) those persons who own beneficially more than 5%
of Auco's outstanding common or preferred shares; (ii) each of the current
directors of Auco (only one of whom owns shares); (iii) each of the executive
officers of Auco (only one of whom owns shares); and (iv) all directors and
executive officers of Auco as a group.
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number of Percent of
Name and Address of Beneficial Owner Shares Owned Class
- ------------------------------------ ------------ ----------
<S> <C> <C>
Adam Au................................................. 3,000,000 88.5%
(Executive Officer and Director)
386 Main Street
Redwood City, California 94063
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock
-----------------------
Number of Percent of
Name and Address of Beneficial Owner Shares Owned Class
- ------------------------------------ ------------ ----------
<S> <C> <C>
Adam Au................................................ 763,000 16.4%
(Executive Officer and Director)
386 Main Street
Redwood City, California 94063
Tit Wing Poon.......................................... 2,360,000 50.9%
Flying Dragon
Flat 13, 17/F,
Fo Tan Industrial Centre
26-28 Au Pui Wan Street, Fo Tan
Shatin, N.T.
Hong Kong
Matthew Tong........................................... 600,000 12.9%
House 2, Harmony Lodge --------- ----
5 Hang Lok Lane,
Tung Lo Wan
Shatin, N.T.
Hong Kong
All directors and officers as a group (1 person)....... 3,763,000 46.9%
========= ====
</TABLE>
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COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the merger, Auco shareholders will become shareholders
of Peerless whose rights will (i) cease to be defined and governed by
California Law and will be defined and governed by Delaware law and (ii) cease
to be defined and governed by the articles of incorporation and bylaws of Auco
and will be defined and governed by the Peerless certificate of incorporation
and the Peerless bylaws. Certain provisions of the Peerless certificate of
incorporation and the Peerless bylaws alter the rights of shareholders from
those that Auco shareholders presently have and also alter certain powers of
management. These provisions are summarized below. This summary is qualified in
its entirety by reference to the Peerless certificate of incorporation, the
Peerless bylaws, the Auco articles of incorporation, the Auco bylaws and
applicable law. In addition, Peerless could implement certain other changes by
amending the Peerless certificate of incorporation or the Peerless bylaws. (See
"Where to Find More Information")
Certain Differences Between California and Delaware Corporate Laws
Delaware law governs the rights of Peerless shareholders and will govern the
rights of Auco shareholders who become shareholders of Peerless. California law
and Delaware law differ in many respects. Certain of the significant
differences that could materially affect the rights of Auco shareholders are
discussed below.
Board of Directors
Auco. The Auco bylaws provide for the board of directors of Auco to consist
of not more than five persons and not less than three persons. The Auco board
of directors has by resolution acted and set the number at three. The Auco
board of directors is not divided into classes and all directors are elected at
each annual meeting.
Peerless. The Peerless certificate of incorporation provides that the number
of directors shall be fixed exclusively by one or more resolutions adopted by
the board of directors. The board of directors of Peerless has adopted
resolutions that fix the number of directors at five.
Monetary Liability of Directors
The Auco articles of incorporation provide for the elimination of personal
monetary liability of directors to the fullest extent permissible under
California law. The Peerless certificate of incorporation provides for the
elimination of personal monetary liability of directors to the fullest extent
permissible under Delaware law.
Voting Power
Upon consummation of the merger, based upon the capitalization of Auco on
April 13, 1999, Auco shareholders will hold approximately 2,500,000 shares of
Peerless common stock constituting approximately 18.5% of Peerless' voting
power. Following the Merger, Auco's shareholders will not possess the same
relative voting power in matters put to a vote of shareholders of Peerless as
they possessed prior to the Merger.
Removal of Directors
Auco. California law provides that any director or the entire board of
directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote, provided, that no
individual director may be removed (unless the entire board is removed) if the
number of votes cast against such removal would be sufficient to elect a
director under cumulative voting.
Peerless. The Peerless certificate of incorporation provides that, subject
to the rights of the holders of any series of preferred stock, the board of
directors or any individual director may be removed from office at any time (i)
with cause by the affirmative vote of the holders of a majority of the voting
power of all the then-outstanding shares of voting stock of Peerless, entitled
to vote at an election of directors (the "Voting Stock") or (ii) without cause
by the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of all the then-outstanding shares of the
Voting Stock.
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Amendment of the Corporate Charter Document
Auco. California law provides for the vote of a majority of outstanding
shares to amend the articles.
Peerless. Delaware law provides that approval of a majority of the shares
entitled to vote thereon is required to amend the Peerless certificate of
incorporation.
Cumulative Voting
Generally, under California law, if any shareholder has given notice of his
or her intention to cumulate votes for the election of directors, any other
shareholder of the corporation is also entitled to cumulate his or her votes at
such election. Under Delaware law, cumulative voting in the election of
directors is not mandatory. The Peerless certificate of incorporation and the
Peerless bylaws do not provide for cumulative voting, and therefore, the
shareholders of Auco will no longer have cumulative voting rights. The lack of
cumulative voting may limit the ability of minority shareholders to obtain
representation on the Peerless board of directors.
Classified Board of Directors
A classified board is one for which a certain number, but not all, of the
directors are elected on a rotating basis each year. California law does not
permit Auco to provide for a classified board of directors. Delaware law
permits, but does not require, a classified board of directors, divided into as
many as three classes with no requirement that the classes be as even in size
as possible. The Peerless certificate of incorporation and the Peerless bylaws
do not presently provide for a classified board but could, in the future, be
amended to provide for a classified board. A classified board makes changes in
the composition of the board of directors more difficult, and thus a potential
change in control of a corporation a lengthier and more difficult process.
Power to Call Special Meetings of Shareholders
Under California law, a special meeting of shareholders may be called by the
board of directors, the chairman of the board, the president, the holders of
shares entitled to cast not less than ten percent of the votes at such meeting
or such additional persons as are authorized by the articles of incorporation
or the bylaws. Under Delaware law, a special meeting of shareholders may be
called by the board of directors or by any other person authorized to do so in
the certificate of incorporation or the bylaws. The Peerless bylaws contain a
provision granting the right to call a special meeting of shareholders to the
board of directors, the chairman of the board, the chief executive officer, and
no other person. Thus, former Auco shareholders, upon becoming Peerless
shareholders, will be unable to call a special meeting of shareholders to vote
on a matter that is opposed by the Peerless board of directors.
Shareholder Approval of Certain Business Combinations
In the last several years, a number of states (but not California) have
adopted special laws designed to make certain kinds of "unfriendly" corporate
takeovers, or other transactions involving a corporation and one or more of its
significant shareholders, more difficult. Section 203 of the Delaware General
Corporation Law ("Section 203") prohibits a Delaware corporation from engaging
in a "business combination" with an "interested shareholder" for three years
following the date that such person becomes an interested shareholder. With
certain exceptions, an interested shareholder is a person or entity who or
which owns 15% or more of the corporation's outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner of 15% or
more of such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers of the corporation or a subsidiary with or caused by
the interested shareholder; sales or other dispositions to the
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interested shareholder (except proportionately with the corporation's other
shareholders) of assets of the corporation or a subsidiary equal to ten percent
or more of the aggregate market value of the corporation's consolidated assets
or its outstanding stock; the issuance or transfer by the corporation or a
subsidiary of stock of the corporation or such subsidiary to the interested
shareholder (except for certain transfers in a conversion or exchange or a pro
rata distribution or certain other transactions, none of which increase the
interested shareholder's proportionate ownership of any class or series of the
corporation's or such subsidiary's stock); or receipt by the interested
shareholder (except proportionately as a shareholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date at which such shareholder becomes an
interested shareholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested shareholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested shareholder (excluding from the number of shares
outstanding those shares owned by directors who are also officers of the target
corporation and shares held by employee stock plans which do not permit
employees to decide confidentially whether to accept a tender or exchange
offer); or (iii) on or after the date such person becomes an interested
shareholder, the board approves the business combination and it is also
approved at a shareholder meeting by sixty-six and two-thirds percent (66
2/3%) of the voting stock not owned by the interested shareholder. Section 203
does not apply if the business combination is proposed prior to the
consummation or abandonment of and subsequent to the earlier of the public
announcement or a 20-day notice required under Section 203 of the proposed
transaction which (i) constitutes certain (x) mergers or consolidations, (y)
sales or other transfers of assets having an aggregate market value equal to
50% or more of the aggregate market value of all of the assets of the
corporation determined on a consolidated basis or the aggregate market value of
all the outstanding stock of the corporation or (z) proposed tender or exchange
offers for 50% or more of the corporation's outstanding voting stock; (ii) is
with or by a person who was either not an interested shareholder during the
last three years or who became an interested shareholder with the approval of
the corporation's board of directors; and (iii) is approved or not opposed by a
majority of the board members elected prior to any person becoming an
interested shareholder during the previous three years (or their chosen
successors).
A Delaware corporation may elect not to be governed by Section 203 by a
provision of its original certificate of incorporation or an amendment thereto
or to the bylaws, which amendment must be approved by a majority of the shares
entitled to vote and may not be further amended by the board of directors. Such
an amendment is not effective until 12 months following its adoption. Peerless
has not opted out of Section 203; therefore, Section 203 applies to Peerless.
Peerless believes Section 203 will encourage any potential acquirer to
negotiate with Peerless' board of directors. Section 203 may have the effect of
limiting the ability of a potential acquirer to make a two-tiered bid for
Peerless in which all shareholders would not be treated equally. Section 203
may also discourage certain potential acquirers unwilling to comply with its
provisions.
Removal of Directors
Under California law, any director or the entire board of directors may be
removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote; however, no individual director may be
removed (unless the entire board is removed) if the number of votes cast
against such removal would be sufficient to elect the director under cumulative
voting. Under Delaware law, a director of a corporation may be removed, with or
without cause, unless the certificate of incorporation otherwise provides.
Vacancies on Board of Directors
Under California law, the board may fill any vacancy on the board of
directors other than one created by removal of a director. If the number of
directors in office is less than a quorum, a vacancy may be filled by the
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unanimous written consent of the directors then in office, by the affirmative
vote of a majority of the directors at a properly noticed meeting or by a sole
remaining director. The board may fill a vacancy created by removal of a
director only if so authorized by a corporation's articles of incorporation or
by a bylaw approved by a corporation's shareholders. The Auco bylaws permit
directors to fill vacancies created by removal of a director. California law
further provides that if, after the filling of any vacancy by the directors,
the directors then in office who have been elected by the shareholders are less
than a majority of the directors, then a holder or holders of five percent or
more of the outstanding shares may call a special meeting of shareholders or
cause a court to order such a meeting to elect the entire board.
Under Delaware law, vacancies may be filled by a majority of the directors
then in office (even though less than a quorum) unless otherwise provided in
the certificate of incorporation or bylaws.
Indemnification of Officers and Directors
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. There are
nonetheless certain differences between the laws of the two states respecting
indemnification. California law permits indemnification of expenses incurred in
derivative or third-party actions, except that with respect to derivative
actions (a) no indemnification may be made when a person is adjudged liable to
the corporation in the performance of that person's duty to the corporation and
its shareholders, unless a court determines such person is entitled to
indemnity for expenses, and then such indemnification may be made only to the
extent that such court shall determine, and (b) no indemnification may be made
without court approval in respect of amounts paid in settling or otherwise
disposing of an action or expenses incurred in defending an action which is
settled or otherwise disposed of without court approval.
Indemnification is permitted by California law only for acts taken by the
person seeking indemnification in good faith and believed to be in the best
interests of the corporation and its shareholders and with respect to a
criminal proceeding, which such person had no reasonable cause to believe his
conduct was unlawful, as determined by a majority vote of a quorum of
disinterested directors, independent legal counsel (if a quorum of
disinterested directors is not obtainable), a majority vote of a quorum of the
shareholders (excluding shares owned by the indemnified party), or the court
handling the action. Under California law indemnification is required when the
individual has successfully defended the action on the merits. California
corporations may include in their articles of incorporation a provision which
extends the scope of indemnification through agreements, bylaws or other
corporate action beyond that specifically authorized by California law. The
Auco articles of incorporation include such a provision.
Delaware law generally permits indemnification of expenses incurred in the
defense or settlement of a derivative or third-party action, provided there is
a determination by a disinterested quorum of the directors, by independent
legal counsel or by the shareholders that the person seeking indemnification
acted in good faith and in a manner reasonably believed to be in or (in
contrast to California law) not opposed to the best interests of the
corporation and, with respect to a criminal proceeding, which such person had
no reasonable cause to believe his conduct was unlawful. Without court
approval, however, no indemnification may be made in respect of any derivative
action in which such person is adjudged liable to the corporation. Delaware law
requires indemnification of expenses when the individual being indemnified has
successfully defended the action on the merits or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Peerless,
Peerless has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by peerless of
expenses incurred or paid by a director, officer or controlling person of the
registrant in a successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Peerless 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 of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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Limitations on Liability of Officers and Directors
The laws of both California and Delaware permit corporations to adopt a
provision in their articles of incorporation eliminating, with certain
exceptions, the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of the director's fiduciary duty
as a director. The Auco articles of incorporation eliminate the liability of
directors to the corporation to the fullest extent permissible under California
law. California law does not permit the elimination of monetary liability where
such liability is based on: (a) intentional misconduct or knowing and culpable
violation of law; (b) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders, or that involve
the absence of good faith on the part of the director; (c) receipt of an
improper personal benefit; (d) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should have
been aware of a risk of serious injury to the corporation or its shareholders;
(e) acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) interested mergers between the corporation and a director in
which a director has a material financial interest; and (g) liability for
improper distributions, loans or guarantees.
Under Delaware law, Peerless may not eliminate or limit director monetary
liability for (a) breaches of the director's duty of loyalty to the corporation
or its shareholders; (b) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law; (c) unlawful dividends,
stock repurchases or redemptions; or (d) mergers from which the director
received an improper personal benefit. Such limitation of liability provision
also may not limit a director's liability for violation of, or otherwise
relieve Peerless or its directors from the necessity of complying with federal
or state securities laws, or affect the availability of non-monetary remedies
such as injunctive relief or rescission.
Inspection of Shareholder Information
Both California and Delaware law generally provide any shareholder, upon
written demand, the right to inspect and copy the corporation's shareholder
list for a purpose related to such person's interest as a shareholder. In
addition, California law provides persons holding an aggregate of 5% or more of
a corporation's outstanding voting shares an absolute right to inspect and copy
the corporation's shareholder list. Since Delaware law does not provide a
similar absolute right of inspection for specified shareholders, certain Auco
shareholders who become Peerless shareholders will no longer have access to the
shareholder list for purposes unrelated to their interest as a shareholder.
This could result in impairment of such shareholder's ability to coordinate
opposition to management proposals, including proposals with respect to a
change in control of Peerless.
Dividends and Repurchases of Shares
California law dispenses with the concepts of par value of shares as well as
statutory definitions of capital and surplus. The concepts of par value,
capital and surplus are retained under Delaware law.
Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases or redemptions of
its shares) unless either the corporation's retained earnings immediately prior
to the proposed distribution equal or exceed the amount of the proposed
distribution or, immediately after giving effect to such distribution, the
corporation's assets (exclusive of goodwill, capitalized research and
development expenses and deferred charges) would be at least equal to 1.25
times its liabilities (not including deferred taxes, deferred income and other
deferred credits), and the corporation's current assets would be at least equal
to its current liabilities (or 1.25 times its current liabilities if the
average earnings before interest and taxes for the preceding two fiscal years
was less than the average interest expense for such years).
Delaware law permits a corporation to declare and pay dividends out of
statutory surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or for the preceding fiscal
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year as long as the amount of capital of the corporation following the
declaration and payment of the dividend is not less than the aggregate amount
of the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
corporation.
Shareholder Voting
Both California and Delaware law generally require that a majority of the
shareholders of both acquiring and target corporations approve statutory
mergers. Delaware law does not require a shareholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if (a) the Merger agreement does not amend the
existing certificate of incorporation, (b) each share of stock of the surviving
corporation outstanding before the Merger is an identical outstanding or
treasury share after the Merger, and (c) the number of shares to be issued by
the surviving corporation in the Merger does not exceed 20% of the shares
outstanding immediately prior to the Merger. California law contains a similar
exception to its voting requirements for reorganizations where shareholders or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power (assuming the conversion of convertible
equity securities) of the surviving or acquiring corporation or its parent
entity.
Both California and Delaware law also generally require that a sale of all
or substantially all of the assets of a corporation be approved by a majority
of the voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, and similar mergers be approved by a majority vote of each
class of shares outstanding. In contrast, Delaware law generally does not
require class voting, except for amendments to the certificate of incorporation
that change the number of authorized shares or the par value of shares of a
specific class or that adversely affect such class of shares. Should Peerless
authorize and issue shares of a new class of capital stock, the holders thereof
would vote with the holders of the Peerless common stock on proposals not
adversely affecting either the new class of capital stock or the Peerless
common stock. In such event the holders of Peerless common stock, if in the
minority, would be unable to control the outcome of a vote, and, if in the
majority, would be able to control the outcome of such a vote.
California law also generally requires that holders of nonredeemable common
stock receive nonredeemable common stock in a merger of the corporation where
one of the constituent corporations or its parent owns more than 50 percent of
the voting power of the other constituent corporation unless all of the holders
of such common stock consent to the merger. This provision of California law
may have the effect of making a "cash-out" merger by a majority shareholder
(owning less than 90% of the outstanding shares of each class) more difficult
to accomplish. Although Delaware law does not parallel California law in this
respect, under some circumstances Section 203 does provide similar protection
against coercive two-tiered bids for a corporation in which the shareholders
are not treated equally.
Interested Director Transactions
Under both California and Delaware law, contracts or transactions between a
corporation and one or more of its directors or between a corporation and any
other entity in which one or more of its directors are directors or have a
financial interest, are not void or voidable because of such interest or
because such director is present at a meeting of the board which authorizes or
approves the contract or transaction, provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under California and Delaware law. Under California and Delaware law,
either (a) the shareholders or the board of directors must approve any such
contract or transaction in good faith after full disclosure of the material
facts (and, in the case of board approval other than for a common directorship,
California law requires that the contract or transaction must
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also be "just and reasonable" to the corporation), or (b) the contract or
transaction must have been "fair" (in Delaware) or, in the case of a common
directorship (in California), "just and reasonable" as to the corporation at
the time it was approved. California law explicitly places the burden of proof
of the just and reasonable nature of the contract or transaction on the
interested director. Under California law, if shareholder approval is sought,
the interested director is not entitled to vote his shares at a shareholder
meeting with respect to any action regarding such contract or transaction. If
board approval is sought, the contract or transaction must be approved by a
majority vote of a quorum of the directors, without counting the vote of any
interested directors (except that interested directors may be counted for
purposes of establishing a quorum). Under Delaware law, if board approval is
sought, the contract or transaction must be approved by a majority of the
disinterested directors (even though less than a majority of a quorum).
Therefore, certain transactions that the board of directors of Auco might not
be able to approve because the number of interested directors prevents the
existence of a disinterested quorum could be approved by a majority of the
disinterested directors of Peerless, although less than a majority of a quorum.
Shareholder Derivative Lawsuits
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain criteria are met. Under Delaware
law, a person may only bring a derivative action on behalf of the corporation
if the person was a shareholder of the corporation at the time of the
transaction in question or his or her stock thereafter devolved upon him or her
by operation of law. California law also provides that the corporation or the
defendant in a derivative suit may, under certain circumstances, make a motion
to the court for an order requiring the plaintiff shareholder to furnish a
security bond. Delaware does not have a similar bonding requirement.
Dissenters' Rights
Under both California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to dissenters' or appraisal rights pursuant to which
such shareholder may receive cash in the amount of the fair market value of his
or her shares in lieu of the consideration he or she would otherwise receive in
the transaction. Under Delaware law, such appraisal rights are not available
(a) with respect to the sale, lease or exchange of all or substantially all of
the assets of a corporation, (b) with respect to a merger or consolidation by a
corporation the shares of which are either listed on a national securities
exchange or are held of record by more than 2,000 holders if such shareholders
receive only shares of the surviving corporation or shares of any other
corporation which are either listed on a national securities exchange or held
of record by more than 2,000 holders, plus cash in lieu of fractional shares,
or (c) to shareholders of a corporation surviving a merger if no vote of the
shareholders of the surviving corporation is required to approve the Merger
because the Merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
Merger is an identical outstanding or treasury share after the Merger, and the
number of shares to be issued in the Merger does not exceed 20% of the shares
of the surviving corporation outstanding immediately prior to the Merger and if
certain other conditions are met.
The limitations on the availability of dissenters' rights under California
law are different from those under Delaware law. For a more complete discussion
of the relevant issues related to dissenters' rights under California law, see
"Dissenters' Rights of Auco Shareholders."
Dissolution
Under California law, shareholders holding 50% or more of the total voting
power may authorize a corporation's dissolution, with or without the approval
of the corporation's board of directors. The board may cause the corporation to
dissolve if (a) an order for relief under Chapter 7 of the Federal bankruptcy
law has been entered, (b) no shares have been issued or (c) the corporation has
disposed of all of its assets and has not
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conducted any business for a period of five years preceding the adoption of a
resolution to dissolve. Under Delaware law, if the board of directors initiates
the dissolution holders of a majority of the corporation's shares may approve
it. If the board of directors does not approve the proposal to dissolve, the
dissolution must be consented to in writing by all shareholders entitled to
vote thereon.
Stockholder Rights Plan
Under Delaware law, every corporation may create and issue rights entitling
the holders of such rights to purchase from the corporation shares of its
capital stock of any class or classes, subject to any provisions in its
certificate of incorporation. The price and terms of such shares must be stated
in the certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
On October 6, 1998, the Peerless board of directors adopted a stockholder
rights plan, as set forth in a rights agreement, between Peerless and Norwest
Bank Minnesota, N.A. As with most stockholder rights agreements, the terms of
our rights agreements are complex and not easily summarized, particularly as
they relate to the acquisition of our common stocks and to exercisability. This
summary may not contain all of the information that is important to you.
Accordingly, you should carefully read the rights agreements, which is
incorporated by reference into this Proxy-Statement/Prospectus/Information
Statement, in its entirety. (See "Where to Find More Information")
Peerless' rights agreement provides that each share of Peerless common stock
outstanding will have the right to purchase one one-thousandth of a preferred
share of Peerless attached to it. The purchase price per one-thousandth
Peerless preferred share under the stockholder rights agreement is $35.50,
subject to adjustment. Each share of Peerless common stock issued in the merger
will have one right attached.
Initially, the rights under Peerless' rights agreement are attached to
outstanding certificates representing Peerless common stock, and no separate
certificates representing the rights will be distributed. The rights will
separate from Peerless common stock, and be represented by separate
certificates approximately 10 days after someone acquires or commences a tender
offer for 15% of the outstanding Peerless common stock. The Peerless rights
will not separate from the Peerless common stock or become exercisable as a
result of the merger.
After the rights separate from the Peerless common stock, certificates
representing the rights will be mailed to record holders of the Peerless common
stock. Once distributed, the rights certificates alone will represent the
rights.
All shares of Peerless common stock issued prior to the date the rights
separate from the common stock will be issued with the rights attached. The
rights are not exercisable until the date the rights separate from the common
stock. The Peerless rights will expire, unless earlier redeemed or extended, on
October 15, 2008.
If an acquirer obtains or has the right to obtain 15% or more of Peerless
common stock, then each right will entitle the holder to purchase a number of
shares of Peerless common stock with a then current market value of $71.00 for
$35.50, subject to adjustment.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquirer having a then current market value of twice the purchase
price if an acquirer obtains 15% or more of Peerless common stock and any of
the following occurs:
. Peerless merges into another entity
. an acquiring entity merges into Peerless
. Peerless sells more than 50% of its assets or earning power
Under Peerless' rights agreement, any rights that are or were owned by an
acquirer of more than 15% of Peerless' outstanding common stock will be null
and void.
73
<PAGE>
Peerless' rights agreement contains exchange provisions which provide that
after an acquirer obtains 15% or more, but less than 50% of Peerless'
outstanding common stock, the Peerless board of directors may, at its option,
exchange all or part of the then outstanding and exercisable rights for common
shares. In such an event, the exchange ratio is one common share per right,
adjusted to reflect any stock split, stock dividend or similar transaction.
The Peerless board of directors may, at its option, redeem all of the
outstanding rights under the rights agreement prior to the earlier of (1) the
time that an acquirer obtains 15% or more of its respective outstanding common
stock or (2) the final expiration date of the rights agreement. The redemption
price under the rights agreements is $.01 per right, subject to adjustment. The
right to exercise the rights will terminate upon the action of the board of
directors ordering the redemption of the rights and the only right of the
holders of the rights will be to receive the redemption price.
Holders of rights will have no rights as shareholders of Peerless, including
the right to vote or receive dividends, simply by virtue of holding the rights.
The rights agreement provides that the provisions of the rights agreement
may be amended by the board of directors prior to the date any person acquires
15% of the Peerless common stock without the approval of the holders of the
rights. However, after the date any person acquires 15% of the Peerless common
stock, the rights agreement may not be amended in any manner which would
adversely effect the interests of the holders of the rights, excluding the
interests of any acquirer.
The rights agreement contains rights that have anti-takeover effects. The
rights may cause substantial dilution to a person or group that attempts to
acquire Peerless without conditioning the offer on a substantial number of
rights being acquired. Accordingly, the existence of the rights may deter
acquirers from making takeover proposals or tender offers for Peerless.
However, the rights are not intended to prevent a takeover, but rather are
designed to enhance the ability of the Peerless board of directors to negotiate
with an acquirer on behalf of all of the Peerless shareholders. In addition,
the rights should not interfere with a proxy contest.
74
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect
to the combination of Peerless and Auco on a pooling of interests basis. The
unaudited pro forma combined balance sheet assumes the merger took place on
January 31, 1999 and combines Peerless' historical balance sheet at that date
with Auco's historical balance sheet at December 31, 1998. The unaudited pro
forma combined statements of operations assume that the merger took place as of
the beginning of each of the periods presented and combine Peerless' historical
statements of income for the three fiscal years ended January 31, 1999, 1998
and 1997 and Auco's historical statements of operations for the years ended
December 31, 1998, 1997 and 1996.
The unaudited pro forma combined statements of operations are not
necessarily indicative of operating results which would have been achieved had
the merger been consummated as of the beginning of such periods and should not
be construed as representative of future operations.
Peerless has never paid any cash dividends on its common stock and currently
intends to retain any earnings for future growth and therefore does not
anticipate paying any cash dividends on its common stock in the foreseeable
future.
These unaudited pro forma combined financial statements should be read in
conjunction with the respective audited historical financial statements and the
notes thereto of Peerless which are incorporated herein by reference and Auco
which are included elsewhere in this document.
Following the merger, the Company will have cash, cash equivalents, and
investments based on the pro forma combined balance sheets of Peerless and Auco
as at January 31, 1999. Peerless believes that existing cash and cash from
operations will be sufficient to meet present and anticipated working capital
requirements and other cash needs of the Company for the next twelve months.
75
<PAGE>
PEERLESS SYSTEMS CORPORATION
UNAUDITED PRO FORMA COMBINED
BALANCE SHEETS
AS OF JANUARY 31, 1999
<TABLE>
<CAPTION>
Historical Pro forma(1)
----------------- --------------------
Peerless Auco Notes Adjustments Combined
-------- ------- ------ ----------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 5,250 $ 494 (2),(5) $(1,931) $ 3,813
Short term investments........ 16,158 16,158
Trade accounts receivable,
net.......................... 9,186 754 9,940
Unbilled receivables.......... 2,994 2,994
Deferred tax asset............ 2,615 2,615
Prepaid expenses and other
current assets............... 631 1 632
------- ------- ------- -------
Total current assets........ 36,834 1,249 (1,931) 36,152
Investments..................... 4,605 4,605
Property and equipment, net..... 5,186 188 5,374
Deferred tax asset..............
Other assets.................... 549 51 600
------- ------- ------- -------
Total assets................ $47,174 $ 1,488 $(1,931) $46,731
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 672 $ 221 $ 893
Accrued wages................. 1,557 1,557
Accrued compensated absences.. 672 672
Other current liabilities..... 867 112 979
Income taxes payable.......... 788 788
Deferred rent, current
portion...................... 76 76
Deferred revenue, current
portion...................... 1,118 415 1,533
Notes payable to stockholder.. 350 (3) (50) 300
------- ------- ------- -------
Total current liabilities... 5,750 1,098 (50) 6,798
Deferred tax liability.......... 394 394
Deferred rent................... 431 431
Deferred revenue................ 800 800
------- ------- ------- -------
Total liabilities........... 7,375 1,098 (50) 8,423
------- ------- ------- -------
Commitments and contingencies
Stockholders' equity:
Common stock.................... 11 56 (3) (53) 14
Preferred A stock............... 3,217 (3) (3,217)
Preferred B stock............... 3,520 (3) (3,520)
Additional paid-in capital...... 39,293 (3) 6,840 46,133
Deferred compensation........... (188) (188)
Retained earnings (deficit)..... 683 (6,403) (2),(5) (1,931) (7,651)
------- ------- ------- -------
Total stockholders' equity.. 39,799 390 (1,881) 38,308
------- ------- ------- -------
Total liabilities and
stockholders' equity....... $47,174 $ 1,488 $(1,931) $46,731
======= ======= ======= =======
</TABLE>
76
<PAGE>
PEERLESS SYSTEMS CORPORATION
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
Historical Pro forma(1)
--------------- --------------------
Peerless Auco Notes Adjustments Combined
-------- ------ ----- ----------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product licensing............... $20,882 $ 220 $21,102
Engineering services and
maintenance.................... 11,701 3,922 15,623
------- ------ ------ -------
Total revenues................ 32,583 4,142 -- 36,725
------- ------ ------ -------
Cost of revenues:
Product licensing............... 139 -- 139
Engineering services and
maintenance.................... 10,526 2,562 13,088
------- ------ ------ -------
Total cost of revenues........ 10,665 2,562 -- 13,227
------- ------ ------ -------
Gross margin.................. 21,918 1,580 -- 23,498
------- ------ ------ -------
Operating expenses:
Research and development........ 7,220 1,254 8,474
Sales and marketing............. 4,212 331 4,543
General and administrative...... 4,797 844 5,641
------- ------ ------ -------
Total operating expenses...... 16,229 2,429 -- 18,658
------- ------ ------ -------
Income (loss) from operations..... 5,689 (849) -- 4,840
Interest income (expense), net.... 1,333 (14) (5) $ 5 1,324
------- ------ ------ -------
Income (loss) before income
taxes............................ 7,022 (863) 5 6,164
Provision for income taxes........ 2,458 1 2,459
------- ------ ------ -------
Net income (loss)............. $ 4,564 $ (864) $ 5 $ 3,705
======= ====== ====== =======
Net income (loss) per common
share............................ $ 0.42 $(0.27) (4) $ 0.29
======= ====== =======
Net income (loss) per common
share, assuming dilution......... $ 0.39 $(0.27) (4) $ 0.26
======= ====== =======
Weighted average common shares
outstanding...................... 10,958 3,228 (4) (1,239) 12,947
======= ====== ====== =======
Weighted average common shares
outstanding and dilutive shares.. 11,821 3,228 (4) (752) 14,297
======= ====== ====== =======
</TABLE>
77
<PAGE>
PEERLESS SYSTEMS CORPORATION
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
Historical Pro forma(1)
---------------- --------------------
Peerless Auco Notes Adjustments Combined
-------- ------- ----- ----------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product licensing.............. $15,806 $ 30 $15,836
Engineering services and
maintenance................... 9,557 1,848 11,405
------- ------- ------ -------
Total revenues............... 25,363 1,878 -- 27,241
------- ------- ------ -------
Cost of revenues:
Product licensing.............. 141 -- 141
Engineering services and
maintenance................... 7,974 1,601 9,575
------- ------- ------ -------
Total cost of revenues....... 8,115 1,601 -- 9,716
------- ------- ------ -------
Gross margin................. 17,248 277 -- 17,525
------- ------- ------ -------
Operating expenses:
Research and development....... 4,604 1,331 5,935
Sales and marketing............ 3,732 446 4,178
General and administrative..... 2,915 879 3,794
------- ------- ------ -------
Total operating expenses..... 11,251 2,656 -- 13,907
------- ------- ------ -------
Income (loss) from operations.... 5,997 (2,379) -- 3,618
Interest income (expense), net... 1,391 (161) (5) $184 1,414
------- ------- ------ -------
Income (loss) before income
taxes........................... 7,388 (2,540) 184 5,032
Provision for income taxes....... 2,444 1 2,445
------- ------- ------ -------
Net income (loss)............ $ 4,944 $(2,541) $184 $ 2,587
======= ======= ====== =======
Net income (loss) per common
share........................... $ 0.47 $ (0.80) (4) $ 0.21
======= ======= =======
Net income (loss) per common
share, assuming dilution........ $ 0.42 $ (0.80) (4) $ 0.19
======= ======= =======
Weighted average common shares
outstanding..................... 10,608 3,164 (4) (1,310) 12,462
======= ======= ====== =======
Weighted average common shares
outstanding and dilutive
shares.......................... 11,652 3,164 (4) (873) 13,943
======= ======= ====== =======
</TABLE>
78
<PAGE>
PEERLESS SYSTEMS CORPORATION
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997
<TABLE>
<CAPTION>
Historical Pro forma(1)
----------------- --------------------
Peerless Auco Notes Adjustments Combined
-------- ------- ----- ----------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product licensing............. $ 8,322 $ -- $ 8,322
Engineering services and
maintenance.................. 7,699 368 8,067
------- ------- ------ -------
Total revenues.............. 16,021 368 -- 16,389
------- ------- ------ -------
Cost of revenues:
Product licensing............. 144 -- 144
Engineering services and
maintenance.................. 6,123 189 6,312
------- ------- ------ -------
Total cost of revenues...... 6,267 189 -- 6,456
------- ------- ------ -------
Gross margin................ 9,754 179 -- 9,933
------- ------- ------ -------
Operating expenses:
Research and development...... 2,701 832 3,533
Sales and marketing........... 2,746 207 2,953
General and administrative.... 2,546 555 3,101
------- ------- ------ -------
Total operating expenses.... 7,993 1,594 -- 9,587
------- ------- ------ -------
Income (loss) from operations... 1,761 (1,415) -- 346
Interest income (expense), net.. 186 (167) (5) $ 180 199
------- ------- ------ -------
Income (loss) before income
taxes.......................... 1,947 (1,582) 180 545
Provision for income taxes...... (2,500) 1 (2,499)
------- ------- ------ -------
Net income (loss)........... $ 4,447 $(1,583) $ 180 $ 3,044
======= ======= ====== =======
Net income (loss) per common
share.......................... $ 0.90 $ (0.50) (4) $ 0.47
======= ======= =======
Net income (loss) per common
share, assuming dilution....... $ 0.46 $ (0.50) (4) $ 0.26
======= ======= =======
Weighted average common shares
outstanding.................... 4,964 3,154 (4) (1,670) 6,448
======= ======= ====== =======
Weighted average common shares
outstanding and dilutive
shares......................... 9,893 3,154 (4) (1,419) 11,628
======= ======= ====== =======
</TABLE>
79
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
(1) The unaudited pro forma combined financials statements for Peerless and
Auco give retroactive effect to the proposed Auco acquisition which will be
accounted for as a pooling of interests and, as a result, such statements
are presented as if the companies had been combined for all periods
presented. There were no material differences between the accounting
policies of Peerless and Auco. Certain amounts have been reclassified to
conform to the pro forma presentation.
(2) Transaction costs expected to be incurred to complete the merger
approximate $2.3 million and consist primarily of investment banking,
legal, accounting and consulting fees, and printing, mailing and
registration expenses. Due to the non-recurring nature of these costs, they
have not been reflected in the pro forma statements of operations.
(3) These pro forma adjustments reflect the assumed exchange of all outstanding
shares of Auco capital stock assuming dilution and the conversion of the
convertible note payable for an aggregate of approximately 2.5 million
shares of Peerless common stock to effect the Auco acquisition.
(4) Pro forma share and per share amounts are based upon weighted average
options, using the treasury stock method, and shares outstanding during the
period. As a result of the merger, each outstanding share of Auco common
stock, preferred stock, outstanding options to purchase Auco common stock
and the convertible note payable will be converted into the right to
receive .2585 shares of Peerless common stock.
(5) Interest expense on the convertible notes payable have been excluded from
pro forma net income.
80
<PAGE>
OTHER MATTERS
It is not expected that any matters other than those described in this
document will be brought before the special meeting. If any other matters are
presented, however, it is the intention of the persons named in the appropriate
proxy to vote the proxy in accordance with the discretion of the persons named
in such proxy.
LEGAL MATTERS
The validity of the Peerless common shares to be issued to Auco shareholders
pursuant to the merger will be passed upon by Skadden, Arps, Slate, Meagher &
Flom LLP, Palo Alto, California. Certain legal matters in connection with the
merger will be passed upon for Auco by Gunderson, Dettmer, Stough, Villeneuve,
Franklin & Hachigian, LLP, Menlo Park, California and Coblentz, Patch, Duffy &
Bass, LLP, San Francisco, California.
EXPERTS
The balance sheets of Peerless as of January 31, 1999 and 1998 and the
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1999, and financial statement
schedule (included in Peerless' Annual Report on Form 10-K for the fiscal year
ended January 31, 1999) incorporated by reference in this Proxy
Statement/Prospectus/Information Statement have been incorporated by reference
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given upon the authority of such firm as experts in accounting and
auditing.
The balance sheets of Auco as of December 31, 1998 and 1997, and the
statements of operations, shareholders' equity and cash flows for the year
ended December 31, 1998 included in this Proxy Statement/Prospectus/Information
Statement have been audited by PricewaterhouseCoopers LLP, independent
accountants, as set forth in their report included herein, and have been so
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
81
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants........... F-2
Balance Sheets ......................................................... F-3
Statements of Operations ............................................... F-4
Statements of Cash Flows ............................................... F-5
Statements of Shareholders' Equity ..................................... F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of AUCO, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity, and cash flows present fairly, in all
material respects, the financial position of AUCO, Inc. (the "Company") at
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Woodland Hills, California
April 2, 1999, except for
Note 10 as to which
the date is April 6, 1999
F-2
<PAGE>
AUCO, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 494 $ 391
<CAPTION>
Accounts receivable.......................................... 754 431
Prepaid expenses and other current assets.................... 1 2
<S> <C> <C>
------- -------
Total current assets....................................... 1,249 824
Property and equipment, net.................................... 188 239
Other assets................................................... 51 74
------- -------
Total assets................................................. $ 1,488 $ 1,137
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
<CAPTION>
Accounts payable............................................. $ 221 $ 225
Accrued expenses............................................. 112 125
Deferred revenue............................................. 415 15
<S> <C> <C>
Notes payable to stockholder................................. 350 350
------- -------
Total current liabilities.................................. 1,098 715
------- -------
Commitments and Contingencies (Note 4)
Shareholders' equity:
Common stock, no par value, 35,000 shares authorized, 3,341
and 3,182 shares issued and outstanding at December 31, 1998
and 1997, respectively...................................... 56 44
Convertible preferred stock Series A, no par value, 3,250
shares authorized, 3,228 shares issued and outstanding at
December 31, 1998 and 1997, respectively.................... 3,217 3,217
Convertible preferred stock Series B, no par value, 3,000
shares authorized, 1,413 and 1,085 shares issued and
outstanding at December 31, 1998 and 1997, respectively..... 3,520 2,700
Accumulated deficit.......................................... (6,403) (5,539)
------- -------
Total shareholders' equity................................. 390 422
------- -------
Total liabilities and shareholders' equity................... $ 1,488 $ 1,137
======= =======
</TABLE>
The following notes are an integral part of these financial statements.
F-3
<PAGE>
AUCO, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1998 1997 1996
------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net revenues:
Product licensing........................... $ 220 $ 30 $ --
Engineering services and maintenance........ 3,922 1,848 368
------ ------- -------
Total revenues............................ 4,142 1,878 368
------ ------- -------
Cost of revenues:
Product licensing........................... -- -- --
Engineering services and maintenance........ 2,562 1,601 189
------ ------- -------
Total cost of revenues.................... 2,562 1,601 189
------ ------- -------
Gross margin.............................. 1,580 277 179
------ ------- -------
Operating expenses:
Research and development.................... 1,254 1,331 832
Sales and marketing......................... 331 446 207
General and administrative.................. 844 879 555
------ ------- -------
Total operating expenses.................. 2,429 2,656 1,594
------ ------- -------
Loss from operations.......................... (849) (2,379) (1,415)
Interest expense, net......................... (14) (161) (167)
------ ------- -------
Loss before income taxes...................... (863) (2,540) (1,582)
Provision for income taxes.................... 1 1 1
------ ------- -------
Net loss.................................. $ (864) $(2,541) $(1,583)
====== ======= =======
Net loss per common share (basic and
diluted)..................................... $(0.27) $ (0.80) $ (0.50)
====== ======= =======
Weighted average common shares used to compute
net loss per share........................... 3,228 3,164 3,154
====== ======= =======
</TABLE>
The following notes are an integral part of these financial statements.
F-4
<PAGE>
AUCO, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
----- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(864) $(2,541) $(1,583)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 96 81 62
Net loss on disposal of property and
equipment.................................. -- 7 --
Interest expense associated with convertible
notes payable.............................. -- 363 --
Changes in operating assets and liabilities:
Trade accounts receivable................. (323) (292) (139)
Prepaid expenses and other current
assets................................... -- 17 (6)
Other assets.............................. 22 (63) 5
Accounts payable.......................... (4) 211 13
Accrued expenses.......................... (13) (104) 208
Deferred revenue.......................... 400 15 --
----- ------- -------
Net cash used in operating activities... (686) (2,306) (1,440)
----- ------- -------
Cash flows from investing activities:
Purchases of property and equipment........... (45) (139) (66)
Proceeds from disposal of property and
equipment.................................... 2 2 --
----- ------- -------
Net cash used in investing activities... (43) (137) (66)
----- ------- -------
Cash flows from financing activities:
Proceeds from issuance of notes payable....... 200 300 --
Proceeds from issuance of convertible notes
payable...................................... -- 450 900
Repayments of notes payable................... (200) -- --
Proceeds from issuance of Series A preferred
stock........................................ -- -- 1,500
Deferred financing cost from issuance of
Series A preferred stock..................... -- -- (10)
Proceeds from issuance of Series B preferred
stock........................................ 820 1,000 --
Proceeds from exercise of common stock
options...................................... 12 2 --
----- ------- -------
Net cash provided by financing
activities............................. 832 1,752 2,390
----- ------- -------
Net increase (decrease) in cash and cash
equivalents............................ 103 (691) 884
Cash and cash equivalents, beginning of year.... 391 1,082 198
----- ------- -------
Cash and cash equivalents, end of year.......... $ 494 $ 391 $ 1,082
===== ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes................................ $ 1 $ 1 $ 1
===== ======= =======
Interest.................................... $ 34 $ 1 --
===== ======= =======
Supplemental schedule of noncash investing and
finance activities:
Conversion of convertible notes payable to
shares of Series A and B preferred stock,
less unamortized issuance costs of $10....... -- $ 2,427 --
===== ======= =======
</TABLE>
The following notes are an integral part of these financial statements.
F-5
<PAGE>
AUCO, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A Series B
Preferred Preferred
Common Stock Stock Stock Total
------------- ------------- ------------- Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount (Deficit) Equity (Deficit)
------ ------ ------ ------ ------ ------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 (unaudited)....... 3,125 $41 1,000 $ 997 -- -- $(1,415) $ (377)
Issuance of Series A
preferred stock for
cash (unaudited)....... 1,500 1,493 1,493
Exercise of stock
options (unaudited).... 37 1 1
Net loss (unaudited).... (1,583) (1,583)
----- --- ----- ------ ----- ------ ------- -------
Balance at December 31,
1996 (unaudited)....... 3,162 42 2,500 2,490 -- -- (2,998) (466)
Issuance of Series B
preferred stock for
cash (unaudited)....... 400 $1,000 1,000
Conversion of
convertible notes
payable to Series A
preferred stock
(unaudited)............ 728 727 727
Conversion of
convertible notes
payable to Series B
preferred stock
(unaudited)............ 685 1,700 1,700
Exercise of stock
options (unaudited).... 20 2 2
Net loss (unaudited).... (2,541) (2,541)
----- --- ----- ------ ----- ------ ------- -------
Balance at December 31,
1997................... 3,182 44 3,228 3,217 1,085 2,700 (5,539) 422
Issuance of Series B
preferred stock for
cash................... 328 820 820
Exercise of stock
options................ 159 12 12
Net loss................ (864) (864)
----- --- ----- ------ ----- ------ ------- -------
Balance at December 31,
1998................... 3,341 $56 3,228 $3,217 1,413 $3,520 $(6,403) $ 390
===== === ===== ====== ===== ====== ======= =======
</TABLE>
The following notes are an integral part of these financial statements.
F-6
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. Organization and Summary of Significant Accounting Policies:
Organization:
AUCO, Inc. ("Auco" or the "Company") was incorporated in the State of
California in May 1994. Auco develops and licenses embedded networking software
and provides custom engineering services to Original Equipment Manufacturers
("OEMs"), located primarily in the United States and Japan. These OEMs sell
printers, as well as multifunction products, which combine printer, fax, copier
and scanner capabilities.
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 periods. Actual results could differ from those estimates.
Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation of property and equipment is calculated using the
straight-line method over estimated useful lives of 3-7 years. 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.
Long-Lived Assets:
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets may be impaired. To
date, no such impairment has been recorded.
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:
Development license revenue from the licensing of source code for the
Company's standard products is recognized upon shipment and customer acceptance
of the source code if no significant modification or customization of the
software is required and collection of the resulting receivable is probable. If
modification or customization is essential to the functionality of the
software, revenue is recognized over the course of the modification work or
deferred until the modification is complete. Recurring licensing revenue is
recognized when due from the Company's customers based on the number of
products shipped incorporating the Company's technology. In certain cases, the
fixed or determinable portion of the recurring licensing fee is recognized as
revenue upon delivery and customer acceptance of the underlying technology.
The Company also enters into engineering services contracts with OEMs to
adapt the Company's software to specific OEM 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.
Maintenance revenues are recognized ratably over the term of the maintenance
contract.
F-7
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
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 billing due to timing differences related to
billing milestones as specified in the contract.
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 ("SFAS") 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 provision (benefit) is the tax payable for
the period and the change during the period in deferred income tax assets and
liabilities.
Common Stock Options:
During 1998, the Company implemented the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation." This statement sets forth
alternative standards of recognition of the cost of stock-based compensation
and requires that the Company's financial statements include certain
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. As permitted by this statement, the
Company continues to apply Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
recording compensation costs related to its plans. The supplemental disclosure
requirements and further information related to the Company's stock option
plans are presented in Note 7 to the Company's financial statements.
Segment Reporting:
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" for the year ended December 31, 1998. SFAS
No. 131 requires that companies report financial and descriptive information
about operating segments and establishes disclosures about products and
services, geographic areas, and major customers. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. The Company
believes that it operates in only one reportable business segment, the
development and licensing of embedded imaging software and related services.
The Company's adoption of SFAS No. 131 did not affect the results nor
disclosure of segment information as the Company's management financial
information provides for only one segment.
Comprehensive Income:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement established
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income generally represents all changes in shareholders' deficit during the
period except those resulting from investments by, or distributions to,
shareholders. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, and requires restatement of earlier periods presented.
SFAS No. 130 defines comprehensive income as net income plus
F-8
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
all other changes in equity from nonowner sources. The Company has no other
comprehensive income items and accordingly net income equals comprehensive
income for all periods presented.
Earnings Per Share:
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS)
which specifies the computation, presentation and disclosure requirements for
earnings per share of entities with publicly held common stock or potential
common stock. SFAS No. 128 is effective for financial statements for both
interim and annual periods ended after December 15, 1997. The statement
defines two earnings per share calculations, basic and diluted. Basic EPS is
computed by dividing income available to common stock by the weighted average
number of common shares outstanding; diluted EPS is computed by giving effect
to all dilutive potential common shares that were outstanding during the
period. The calculation of diluted EPS is similar to basic EPS except both the
numerator and denominator are increased for the conversion of potential common
shares. Dilutive common share equivalents include stock options, warrants, and
convertible notes and preferred stock.
The calculations of diluted net loss per share do not include the exercise
of stock options, conversion of preferred stock or the convertible notes as
the effect on diluted net loss per share would have been antidilutive.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less
when purchased to be cash equivalents.
Future Developments:
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions ("SOP 98-9"). SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple-
element arrangements by means of the provisions of SOP 98-9 that extend the
deferral of certain passages of SOP 97-2 became effective December 15, 1998.
All other provisions of SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999. Retroactive
application of the provisions of SOP 98-9 is prohibited. The adoption of SOP
98-9 is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.
2. Property and Equipment:
Property and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Computers and other equipment................................ $ 436 $ 393
Furniture.................................................... 21 21
----- -----
457 414
Less, accumulated depreciation............................... (269) (175)
----- -----
Net property and equipment................................. $ 188 $ 239
===== =====
</TABLE>
Depreciation for the years ended December 31, 1998, 1997 and 1996 was $96,
$81 and $62, respectively.
F-9
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
3. Notes Payable:
From June 1994 through December 1994, the Company issued 10% Convertible
Promissory Notes ("Convertible Notes") with an aggregate principal amount of
$763 to a shareholder. The Convertible Notes were convertible, at the option of
the holder, to shares of Company stock at a specified conversion price of one
dollar ($1.00) of principal amount per share of Company stock. In November
1997, the principal amount plus all accrued interest was converted into 598
shares of the Company's Series A Preferred Stock and into 165 shares of the
Company's Series B Preferred Stock.
From December 1996 through February 1997, the Company issued 10% Convertible
Promissory Notes ("Convertible Notes") with an aggregate principal amount of
$1,300 to shareholders. The Convertible Notes had a maturity date of December
31, 1999 and were convertible, at the option of the holder, to shares of
Company stock at a specified conversion price of two dollars ($2.00) of
principal amount per share of Company stock. In November 1997, the principal
amount plus all accrued interest was converted into 130 shares of the Company's
Series A Preferred Stock and into 520 shares of the Company's Series B
Preferred Stock.
In December 1997, the Company issued a 10% Convertible Promissory Note
("Convertible Note") with an aggregate principal amount of $50 to a
shareholder. The Convertible Note had a maturity date of December 31, 1998 and
was convertible, at the option of the holder, to shares of Company stock at a
specified conversion price of two dollars and fifty cents ($2.50) of principal
amount per share of Company stock. As of December 31, 1998 and 1997, $50 in
principal amount of this Convertible Note was outstanding.
In December 1997, the Company issued 10% Promissory Notes ("Notes") with an
aggregate principal amount of $300 to shareholders. A repayment of $200 was
made on the Notes in 1998. In June 1998, the Company issued 10% Promissory
Notes ("Notes") with an aggregate principal amount of $200 to a shareholder. As
of December 31, 1998 and 1997, $300 in principal amount of the Notes was
outstanding.
4. Commitments and Contingencies:
Operating Leases:
The Company leases its offices under an operating lease that expires in
2004. The lease agreement contains provisions for escalated rent based on
annual increases in the consumer price index.
Future minimum rental payments under this operating lease are as follows:
<TABLE>
<CAPTION>
For the Years Ending December 31,
<S> <C>
1999............................................................... $124
2000............................................................... 128
2001............................................................... 132
2002............................................................... 136
2003............................................................... 140
Thereafter......................................................... 59
----
Total............................................................ $719
====
</TABLE>
Total rental expense was $121, $119 and $122 for the years ended December
31, 1998, 1997 and 1996, respectively.
Concentration of Credit Risk:
At December 31, 1998 and 1997, the Company had cash on deposit at banks and
in money market mutual funds that were in excess of federally-insured limits.
The aggregate excess amounts were $394 and $291, respectively.
F-10
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
The Company's credit risk in accounts receivable, which are generally not
collateralized, is concentrated with customers which are OEMs of printers and
multi-function products. The financial loss, should a customer be unable to
meet its obligation to the Company, would be equal to the recorded accounts
receivable. At December 31, 1998 and 1997, three customers represented 93% and
one customer represented 98% of total accounts receivable, respectively. For
the years ended December 31, 1998 and 1997, three customers represented 89% and
95% of total revenues, respectively.
Legal Proceedings:
The Company is not a party to any pending legal proceedings which management
believes will have a material adverse effect on the financial position, results
of operations or cash flows of the Company.
5. Income Taxes:
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current:
Federal.................................................. $ -- $ -- $ --
State.................................................... 1 1 1
----- ----- -----
1 1 1
----- ----- -----
Deferred:
Federal.................................................. -- -- --
State.................................................... -- -- --
----- ----- -----
-- -- --
----- ----- -----
$ 1 $ 1 $ 1
===== ===== =====
</TABLE>
Temporary differences at December 31 which give rise to deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accrual to cash adjustment.............................. $ 3 $ (65)
Related party interest.................................. 99 99
Tax credit carryforwards 278 175
Net operating loss carryforwards........................ 2,033 1,801
------- -------
Total deferred tax assets............................. 2,413 2,010
------- -------
Deferred tax liabilities:
Property and equipment ................................. (16) (15)
------- -------
Total deferred tax liabilities........................ (16) (15)
------- -------
Subtotal................................................ 2,397 1,995
Valuation allowance....................................... (2,397) (1,995)
------- -------
Net deferred income tax asset......................... $ -- $ --
======= =======
</TABLE>
F-11
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
The Company has placed a valuation allowance against its net deferred tax
assets due to the uncertainty surrounding the realization of such assets.
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income
tax rate................. (34.0)% (34.0)% (34.0)%
Research and development
credit................... (8.8) (2.7) (1.9)
Nondeductible expenses.... 3.4 1.0 0.7
Change in valuation
allowance................ 39.9 34.5 35.2
Other..................... (0.5) 1.2 --
----- ----- -----
Provision for income
taxes.................. -- % -- % -- %
===== ===== =====
</TABLE>
At December 31, 1998, the Company had Federal and state net operating loss
carryforwards of approximately $5,319 and $3,843, respectively, available to
offset future regular and alternative minimum taxable income. The Company's
federal and state net operating loss carryforwards expire in 2000 through 2018,
if not utilized.
At December 31, 1998, the Company had Federal and state research and
development and other credits of approximately $197 and $123, respectively. The
research and development credit carryforwards expire in 2010 through 2018, if
not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carryforwards could be restricted.
6. Convertible Preferred Stock:
As of December 31, 1998 and 1997, the Company had authorized 10,000 shares
of Preferred Stock, of which 3,250 were designated as Series A Preferred Stock,
3,000 were designated as Series B Preferred Stock and 3,750 were undesignated.
During 1998, the Company issued 328 shares of Series B Preferred Stock at a
price of $2.50 per share in exchange for $820 of cash. During 1997, the Company
issued 400 shares of Series B Preferred Stock at a price of $2.50 per share in
exchange for $1,000 of cash.
Shares of Series A and Series B Preferred Stock are convertible into the
Company's common stock at a rate of $1.00 and $2.50 per share respectively of
common stock, subject to anti-dilution adjustments. Conversion into the
Company's common stock can occur at any time at the holder's option, but would
automatically occur upon the effective date of a registration statement
relating to a public offering of the Company's common stock under the
Securities Act of 1933.
Holders of Series A and Series B Preferred Stock are entitled to
noncumulative annual dividends, payable only when and as declared by the Board
of Directors out of legally available funds.
F-12
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
7. Stock Options:
Stock Option Plans:
During 1994, the Board of Directors authorized the 1994 Stock Option Plan
(the "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
is granted pursuant to the Plan's provisions. Options are exercisable
immediately subject to repurchase rights held by the Company. Options to
purchase a total of 3,000 shares of common stock have been authorized by the
Board under this plan.
The Plan provides for the grant of incentive stock options to employees and
nonstatutory stock options to employees, directors and consultants. The terms
of stock options granted under the Plan generally may not exceed 10 years. The
exercise price of options granted under the 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 Plan vest at the rate
specified in each optionee's option agreement.
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Oustanding at December 31, 1996..................... 1,498 $0.07
Granted........................................... 667 $0.25
Exercised......................................... (20) $0.10
Cancelled......................................... (376) $0.07
-----
Oustanding at December 31, 1997..................... 1,769 $0.07
Granted........................................... 484 $0.25
Exercised......................................... (160) $0.05
Cancelled......................................... (464) $0.12
-----
Oustanding at December 31, 1998..................... 1,629 $0.12
=====
Options exercisable at year-end................. 1,559
Options available for future grant.............. 1,515
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------
Weighted
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ----------- ---------
<S> <C> <C> <C>
$0.01-$0.10................................ 626 6.83 $0.07
$0.25...................................... 1,003 7.83 $0.25
-----
1,629
=====
</TABLE>
The Company has adopted the disclosure-only provision under SFAS No. 123,
"Accounting for Stock-Based Compensation." Pro forma information is required by
SFAS No. 123, and has been determined as if the Company accounted for the plans
under the fair value method as prescribed in the statement. The Company
computed the compensation expense of the options granted after December 31,
1996 using the methodology prescribed in SFAS No. 123 and determined the result
to be immaterial. The effects of applying SFAS No. 123 are not indicative of
future amounts, and additional awards in future years are anticipated.
F-13
<PAGE>
AUCO, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
8. Employee Benefit Plan:
The Company maintains an employee savings plan that qualifies under Section
401(k) of the Internal Revenue Code (the "Code") for all of its full-time
employees. The plan allows employees to make specified percentage pretax
contributions up to the maximum dollar limitation prescribed by the Code. The
Company has the option to contribute to the plan. No Company contributions to
the plan have been made to date.
9. Related Parties:
The Company has entered into an agreement with Auco Asia, Ltd. ("Auco Asia")
whereby Auco Asia, provides engineering consulting services to the Company. The
majority shareholder of Auco Asia, is also a shareholder of the Company. During
the years ended December 31, 1998, 1997 and 1996, the Company incurred expenses
of $446, $226 and $0 respectively for the services of Auco Asia. At December
31, 1998 and 1997, the Company had $107 and $33, respectively in amounts
payable to Auco Asia for services rendered.
10. Subsequent Event:
On April 6, 1999, the Company entered into an Agreement and Plan of
Reorganization and Merger with Peerless Systems Corporation ("Peerless"). The
transaction is structured as a merger in which the Company will exchange all of
its currently outstanding shares on a fully diluted basis, and the convertible
note payable, in exchange for 2.5 million shares of Peerless common stock. It
is expected that the merger will be accounted for as a pooling of interests.
Consummation of the merger is subject to terms and conditions customary for
a transaction of this type, including approval of certain matters by the
shareholders of the Company and Peerless.
F-14
<PAGE>
EXHIBIT A TO MERGER AGREEMENT
FORM OF SHAREHOLDER AGREEMENT
(SEE ANNEX B)
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
BY AND AMONG
PEERLESS SYSTEMS CORPORATION,
AUCO MERGER SUB, AND
AUCO, INC.
Dated as of April 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER............................................ A-1
ARTICLE I
THE MERGER................................................................................. A-1
Section 1.1 The Merger............................................................... A-1
Section 1.2 Closing.................................................................. A-2
Section 1.3 Effective Time........................................................... A-2
Section 1.4 Effects of the Merger.................................................... A-2
Section 1.5 Charter and By Laws...................................................... A-2
Section 1.6 Directors................................................................ A-2
Section 1.7 Officers................................................................. A-2
ARTICLE II
SHAREHOLDER APPROVAL....................................................................... A-3
Section 2.1 Stockholders' Meeting.................................................... A-3
Section 2.2 Consent Solicitation..................................................... A-3
Section 2.3 Proxy Statement/Prospectus/Consent Solicitation; Registration Statement.. A-3
ARTICLE III
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES............................................. A-4
Section 3.1 Effect on Company Common Stock........................................... A-4
Section 3.2 Exchange of Shares and Certificates...................................... A-5
Section 3.3 Escrow Fund.............................................................. A-7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY.................................................. A-8
Section 4.1 Organization............................................................. A-8
Section 4.2 Capitalization........................................................... A-8
Section 4.3 Authority Relative to this Agreement..................................... A-9
Section 4.4 Consents and Approvals; No Violations.................................... A-10
Section 4.5 Financial Statements..................................................... A-10
Section 4.6 Absence of Certain Changes............................................... A-10
Section 4.7 No Undisclosed Liabilities............................................... A-11
Section 4.8 No Default............................................................... A-11
Section 4.9 Litigation............................................................... A-12
Section 4.10 Compliance with Laws..................................................... A-12
Section 4.11 Taxes.................................................................... A-12
Section 4.12 ERISA.................................................................... A-14
Section 4.13 Change in Control........................................................ A-15
Section 4.14 Intellectual Property.................................................... A-15
Section 4.15 Proprietary Information and Inventions Agreements........................ A-17
Section 4.16 Contracts and Commitments................................................ A-17
Section 4.17 Labor Matters............................................................ A-18
Section 4.18 Personnel................................................................ A-18
Section 4.19 Environmental Matters.................................................... A-18
Section 4.20 Insurance................................................................ A-19
Section 4.21 Customers................................................................ A-20
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 4.22 Title to Properties; Encumbrances................. A-20
Section 4.23 Equipment......................................... A-20
Section 4.24 Leases............................................ A-20
Section 4.25 Receivables....................................... A-20
Section 4.26 Related Party Transactions........................ A-20
Section 4.27 Absence of Certain Payments....................... A-21
Section 4.28 Brokers or Finders................................ A-21
Section 4.29 Books and Records................................. A-21
Section 4.30 Accounting Matters; Reorganization................ A-21
Section 4.31 Pooling Letter.................................... A-21
Information in Proxy Statement/Prospectus/Consent
Section 4.32 Solicitation...................................... A-21
Section 4.33 Full Disclosure................................... A-22
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..................... A-22
</TABLE>
<TABLE>
<C> <S> <C>
Section 5.1 Organization...................................... A-22
Section 5.2 Authority Relative to this Agreement.............. A-22
Section 5.3 Consents and Approvals; No Violations............. A-22
Section 5.4 Pooling Letter.................................... A-23
Section 5.5 Accounting Matters; Reorganization................ A-23
Section 5.6 Brokers or Finders................................ A-23
Information in Proxy
Section 5.7 Statement/Prospectus/Consent Solicitation......... A-23
Section 5.8 SEC Documents; Parent Financial Statements........ A-24
Section 5.9 Employee Benefit Matters.......................... A-24
ARTICLE VI
COVENANTS OF THE COMPANY............................................. A-24
</TABLE>
<TABLE>
<C> <S> <C>
Section 6.1 Conduct of Business Pending Merger................ A-24
Section 6.2 No Solicitation of Competing Transaction.......... A-26
Section 6.3 Shareholder Approval.............................. A-27
Section 6.4 Further Information............................... A-27
Section 6.5 Access; Confidentiality........................... A-27
ARTICLE VII
OTHER COVENANTS...................................................... A-28
Section 7.1 Commercially Reasonable Efforts................... A-28
Section 7.2 Publicity......................................... A-28
Directors' and Officers' Insurance and
Section 7.3 Indemnification................................... A-28
Section 7.4 Notification of Certain Matters................... A-29
Section 7.5 Employees......................................... A-29
Section 7.6 Affiliate Agreements.............................. A-29
Tax-free Reorganization Treatment; Accounting
Section 7.7 Treatment......................................... A-29
Section 7.8 Nasdaq Qualification.............................. A-29
Section 7.9 Consents of Accountants........................... A-29
Section 7.10 Convertible Promissory Note....................... A-30
Section 7.11 Shareholder Representative........................ A-30
Section 7.12 Parent SEC Documents.............................. A-30
Section 7.13 Non Competition Agreements........................ A-30
Section 7.14 Registration Rights Agreement..................... A-30
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE VIII
<S> <C> <C>
CONDITIONS...................................................................... A-30
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger...... A-30
Section 8.2 Conditions of Obligations of the Company........................ A-31
Section 8.3 Conditions of Obligations of Parent and Sub..................... A-32
ARTICLE IX
TERMINATION AND AMENDMENT....................................................... A-33
Section 9.1 Termination..................................................... A-33
Section 9.2 Effect of Termination........................................... A-33
ARTICLE X
INDEMNIFICATION AND ESCROW...................................................... A-34
Section 10.1 Indemnification by the Company and the Shareholder Indemnitors.. A-34
Section 10.2 Procedure for Third Party Claims................................ A-34
Section 10.3 Indemnity Period................................................ A-35
Section 10.4 Satisfaction of Indemnification Claim........................... A-35
ARTICLE XI
MISCELLANEOUS................................................................... A-35
Section 11.1 Survival of Representations and Warranties...................... A-35
Section 11.2 Fees and Expenses............................................... A-35
Section 11.3 Amendment....................................................... A-36
Section 11.4 Extension; Waiver............................................... A-36
Section 11.5 Notices......................................................... A-36
Section 11.6 Descriptive Headings............................................ A-37
Section 11.7 Counterparts.................................................... A-37
Section 11.8 Entire Agreement; Assignment.................................... A-37
Section 11.9 Governing Law................................................... A-37
Section 11.10 Specific Performance............................................ A-37
Section 11.11 Parties in Interest............................................. A-37
EXHIBITS
Exhibit A Form of Shareholder Agreement................................... A-39
Exhibit B Form of California Agreement of Merger.......................... A-40
Exhibit C Form of Articles of Incorporation of the Surviving Corporation.. A-44
Exhibit D Form of Bylaws of the Surviving Corporation..................... A-45
Exhibit E From of Escrow Fund Agreement................................... A-61
Exhibit F-1 Form of Non-Competition Agreement............................... A-69
Exhibit F-2 Form of Company Affiliate Letter................................ A-73
Exhibit G Form of Parent Affiliate Letter................................. A-75
Exhibit H Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP..... A-80
Exhibit I Form of Employment Agreement.................................... A-81
Exhibit J Form of Opinion of Coblentz, Patch, Duffy & Bass, LLP........... A-86
</TABLE>
-iii-
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Section
-------------
<S> <C>
Acquisition Proposal............................................ 6.2(a)
Affected Employee............................................... 7.5
Affiliate....................................................... 6.2(a)
Agreement....................................................... Preamble
APB 16.......................................................... 4.30
Audits.......................................................... 4.11(e)
Balance Sheet................................................... 4.5
Certificates.................................................... 3.2(b)
CGCL............................................................ Recitals
Closing Date.................................................... 1.2
Closing Price................................................... 3.2(c)(ii)
Closing......................................................... 1.2
Code............................................................ Recitals
Company......................................................... Preamble
Company Disclosure Schedule..................................... Article IV
Company Benefit Plans........................................... 4.12(a)
Company Board................................................... 1.6
Company Common Stock............................................ 3.1(b)
Company Financial Statements.................................... 4.5
Company Indemnified Party....................................... 7.3(a)
Company Material Adverse Effect................................. 4.1
Company Option.................................................. 3.1(d)(i)
Company Stock Plan.............................................. 3.1(d)(i)
Competing Proposal.............................................. 6.2(a)(x)
Consent Solicitation............................................ 2.2
Consents........................................................ 2.2
Damages......................................................... 10.1
DGCL............................................................ 1.3
Dissenting Shares............................................... 3.1(c)
Effective Time.................................................. 1.3
Environmental Claim............................................. 4.19(e)(i)
Environmental Laws.............................................. 4.19(e)(ii)
ERISA........................................................... 4.12(a)
Escrow Shares................................................... 3.3
Escrow Fund Agreement........................................... 3.3
Exchange Agent.................................................. 3.2(a)
Exchange Fund................................................... 3.2(a)
Exchange Ratio.................................................. 3.1(b)
Exchange Act.................................................... 2.1
Governmental Entity............................................. 4.4
Indebtedness.................................................... 4.2(f)
Indemnified Parties............................................. 10.1
Intellectual Property........................................... 4.14
License Agreements.............................................. 4.14(a)
Licensed Software............................................... 4.14(j)
Lien............................................................ 4.4
Materials of Environmental Concern.............................. 4.19(e)(iii)
Merger Agreement................................................ 1.3
Merger.......................................................... Recitals
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section
--------
<S> <C>
Millennial Date Data................................................. 4.14(j)
Parent Financial Statement........................................... 5.8
Parent Common Stock.................................................. 3.1(b)
Parent Material Adverse Effect....................................... 5.1
Parent............................................................... Preamble
Proxy Statement/Prospectus/Consent Solicitation...................... 2.3
Registration Statement............................................... 2.3
SEC.................................................................. 2.3
SEC Documents........................................................ 5.8
Securities Act....................................................... 2.3
Shareholder Approval Date............................................ 6.2(a)
Shareholder Indemnitors.............................................. Preamble
Shareholder Agreement................................................ Recitals
Shareholder Representative........................................... Preamble
Software............................................................. 4.14(i)
Special Meeting...................................................... 2.1
Sub.................................................................. Preamble
Subsidiary........................................................... 4.1
Superior Proposal.................................................... 6.2(b)
Surviving Corporation................................................ 1.1
System............................................................... 4.14(k)
Tax Return........................................................... 4.11(q)
Tax.................................................................. 4.11(q)
Taxes................................................................ 4.11(q)
Termination Fee...................................................... 11.2
Third Party Claim.................................................... 10.2
Trade Secrets........................................................ 4.14
Trademarks........................................................... 4.14
US GAAP.............................................................. 4.5
Voting Debt.......................................................... 4.2(c)
Third Party Claim.................................................... 10.2
Trade Secrets........................................................ 4.14
Trademarks........................................................... 4.14
US GAAP.............................................................. 4.5
Voting Debt.......................................................... 4.2(c)
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (this "Agreement"),
dated as of April 6, 1999, by and among Peerless Systems Corporation, a
Delaware corporation ("Parent"), Auco Merger Sub, Inc. ("Sub"), AUCO, Inc., a
California corporation (the "Company"), and, for purposes of Article X and
Article XI only, Mannan Latif (the "Shareholder Representative").
WITNESSETH:
WHEREAS, the Board of Directors of Parent has approved, and deems it
advisable and in the best interests of its shareholders to consummate, the
merger (the "Merger") of a wholly owned subsidiary of Parent with and into the
Company, upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company, having carefully considered
the long term prospects and interests of the Company and its shareholders, has
approved the transactions contemplated hereby and has resolved to recommend to
the shareholders of the Company the approval and adoption of this Agreement and
the consummation of the transactions contemplated hereby upon the terms and
subject to the conditions set forth herein;
WHEREAS, as a condition and inducement to Parent to enter into this
Agreement and incur the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, a holder of outstanding shares of
Common Stock of the Company has concurrently herewith entered into a
Shareholder Agreement in the form of Exhibit A attached hereto (the
"Shareholder Agreement"), pursuant to which, among other things, such
shareholder has agreed (i) to vote shares of Common Stock and/or Preferred
Stock of the Company held by him in favor of approval and adoption of this
Agreement, and (ii) to convert any shares of Preferred Stock held by such
shareholder into shares of Common Stock of the Company immediately prior to
consummation of the transactions contemplated hereby;
WHEREAS, the Board of Directors of each of Parent and the Company has
approved this Agreement and the transactions contemplated hereby in accordance
with the provisions of the California General Corporation Law (the "CGCL");
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger (as defined herein) qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger be
accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with sections 1110 et seq. of the
CGCL, Sub shall be merged with and into the Company at the Effective Time of
the Merger (as defined in Section 1.3 hereof). Following the Merger, the
separate corporate existence of Sub shall cease and the Company shall continue
as the surviving corporation (the "Surviving Corporation") and shall succeed to
and assume all the rights, properties, liabilities and obligations of Sub in
accordance with the CGCL.
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Section 1.2 Closing. The closing of the Merger (the "Closing") shall take
place at 10:00 a.m., San Francisco time, on a date to be specified by the
parties, which shall be no later than the second business day after
satisfaction or waiver of all of the conditions set forth in Article VIII (the
"Closing Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP,
525 University Avenue, Suite 220, Palo Alto, California 94301, unless another
time, date or place is agreed to in writing by the parties hereto.
Section 1.3 Effective Time. Upon the terms and subject to the conditions set
forth in Article VIII of this Agreement and the Agreement of Merger between Sub
and the Company together with the related officers' certificates required by
section 1103 of the CGCL, in the form attached to this Agreement as Exhibit B
(the "Merger Agreement"), the parties hereto shall file the Merger Agreement
with the Secretary of State of the State of California, whereupon Sub shall be
merged with and into the Company pursuant to sections 1100 et seq. of the CGCL.
Concurrently with the filing of the Merger Agreement with the Secretary of
State of the State of California and upon the terms and subject to the
conditions set forth in Article VIII of this Agreement, the parties hereto
shall file a Certificate of Merger with the Secretary of State of Delaware in
accordance with the relevant provisions of the Delaware General Corporation Law
(the "DGCL"). The parties hereto shall make all other filings, recordings or
publications required by the CGCL and the DGCL in connection with the Merger.
The Merger shall become effective at the time specified in the Merger Agreement
or Certificate of Merger, as the case may be, which specified time shall be the
same in each of the Merger Agreement and Certificate of Merger (the time at
which the Merger becomes effective being the "Effective Time" of the Merger).
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in section 1107 of the CGCL and section 259 of the DGCL.
Section 1.5 Charter and By Laws. (a) Immediately after the Effective Time of
the Merger, the articles of incorporation of the Surviving Corporation shall be
as set forth in Exhibit C to this Agreement, and such articles of incorporation
shall be the articles of incorporation of the Surviving Corporation until
thereafter amended as provided by law and such articles of incorporation of the
Surviving Corporation.
(b) Immediately after the Effective Time of the Merger, the by laws of
Surviving Corporation shall be as set forth in Exhibit D to this Agreement, and
such by laws shall be the by laws of the Surviving Corporation until thereafter
amended as provided by law and such by laws of the Surviving Corporation.
Section 1.6 Directors. The directors of Sub at the Effective Time of the
Merger shall be the directors of the Surviving Corporation until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be. In furtherance thereof, the Company
shall secure, at the Effective Time of the Merger, such resignations of its
incumbent directors as is necessary to enable the designees of Parent to be
elected or appointed to the Board of Directors of the Company (the "Company
Board"), and the Company shall take all actions available to the Company to
cause such designees of Parent to be so elected or appointed at the Effective
Time. Concurrently, the Company, if requested by
Parent, shall also take all action necessary to cause persons designated by
Parent to be appointed to specified committees of the Company Board.
Section 1.7 Officers. Except as provided in this Section 1.7, the officers
of the Company at the Effective Time of the Merger shall be the officers of the
Surviving Corporation until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
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ARTICLE II
SHAREHOLDER APPROVAL
Section 2.1 Stockholders' Meeting. In order to consummate the Merger,
Parent, acting through its board of directors, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting
of its stockholders (the "Special Meeting"), as soon as practicable after the
Registration Statement (as defined in Section 2.3 hereof) is declared
effective, for the purpose of considering and taking action upon this
Agreement. Parent shall include in the Proxy Statement/Prospectus/Consent
Solicitation (as defined in Section 2.3 hereof) the recommendation of the Board
of Directors of Parent that stockholders of Parent vote in favor of the
issuance of shares of Parent Common Stock (as defined in Section 3.1) pursuant
to this Agreement. Nothing contained in the preceding sentence shall prohibit
Parent from taking and disclosing to its shareholders a position contemplated
by Rule 14e-2 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Parent shall use commercially reasonable efforts to
ensure that the solicitation of the approval of its shareholders, by means of
the Proxy Statement/Prospectus/Consent Solicitation, of the issuance of shares
of Parent Common Stock pursuant to this Agreement shall comply as to form in
all material respects with the provisions of the Securities Act, the Exchange
Act, the DGCL and any other applicable laws.
Section 2.2 Consent Solicitation. As soon as practicable after the
Registration Statement is declared effective, in order to consummate the
Merger, the Company shall commence a solicitation of consents (the "Consents")
from the holders of all outstanding shares of the capital stock of the Company
(the "Consent Solicitation") to approve the Merger and the consummation of the
transactions contemplated hereby. The Consent Solicitation shall be included in
the Proxy Statement/Prospectus/Consent Solicitation (as hereinafter defined).
The effectiveness of such approval will be conditioned upon obtaining valid
affirmative consents from holders of not less than a majority of the
outstanding shares of the Company Common Stock and the Company Preferred Stock.
Subject to the fiduciary duties of the Company's board of directors under
applicable law, the Company shall include in the Consent Solicitation, the
recommendation of its board of directors that the shareholders vote in favor of
the Merger and the related transactions. Except as may be required by the
Company's Board of Directors acting in compliance with their fiduciary duties,
the Company shall use its commercially reasonable efforts in the making of the
Consent Solicitation and in causing the approval of the Merger and the related
transactions to become effective as soon as practicable after the Registration
Statement is declared effective. The Company shall deliver to Parent, promptly
after receipt, but in no case, more than two (2) business days after receipt,
notice of receipt of all consents received pursuant to the Consent Solicitation
and filing of such consents with the Secretary of the Company. The Company
shall promptly file with the Secretary of the Company after receipt, but in no
case, more than one (1) business day after receipt, all consents received
pursuant to the Consent Solicitation. The Company shall ensure that the Consent
Solicitation shall comply as to form in all material respects with the
provisions of the Securities Act, the Exchange Act, the CGCL and any other
applicable laws.
Section 2.3 Proxy Statement/Prospectus/Consent Solicitation; Registration
Statement. In connection with the solicitation of approval of this Agreement,
the issuance of Parent Common Stock pursuant to this Agreement and the Merger
by Parent's shareholders, Parent shall prepare and file with the Securities and
Exchange Commission (the "SEC") a preliminary proxy statement relating to the
Merger and this Agreement and use its commercially reasonable efforts to obtain
and furnish the information required to be included by the SEC in the Proxy
Statement/Prospectus/Consent Solicitation and, after consultation with the
Company, to respond promptly to any comments made by the SEC with respect to
the preliminary proxy statement and cause a definitive proxy statement to be
mailed to its shareholders. Parent shall include in the Proxy Statement/
Prospectus/Consent Solicitation the recommendation of the board of directors of
Parent that the shareholders of Parent vote in favor of the issuance of Parent
Common Stock in connection with the Merger. Such definitive proxy statement
shall also constitute (i) a prospectus of Parent with respect to the Parent
Common Stock (as defined in Section 3.1) to be issued in the Merger and to be
filed by Parent with the SEC as part of a registration statement on Form S-4
(the "Registration Statement") filed by Parent with the SEC for the purpose of
registering such shares of Parent Common Stock (as defined in Section 3.1)
under the Securities Act of
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1933, as amended (the "Securities Act"), (ii) the Consent Solicitation of the
Company (such proxy statement, prospectus and Consent Solicitation being
hereinafter referred to as the "Proxy Statement/Prospectus/Consent
Solicitation"), and the definitive proxy statement to be distributed to
Parent's shareholders relating to the approval of the Merger, the issuance of
Parent Common Stock (as defined in Section 3.1) in the Merger, and the
transactions contemplated by this Agreement. The Company and Parent shall
cooperate to promptly file the Registration Statement and shall use their
reasonable efforts to have the Registration Statement declared effective by the
SEC.
ARTICLE III
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
Section 3.1. Effect on Company Common Stock. In accordance with the Merger
Agreement, as of the Effective Time of the Merger, by virtue of the Merger and
without any action on the part of the holders of any shares of Company Common
Stock or any shares of common stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of common
stock, par value $0.01 per share, of Sub shall be converted into one fully paid
and nonassessable share of common stock, par value $0.01 per share, of the
Surviving Corporation.
(b) Conversion of Company Common Stock. Subject to Section 3.1(c) and
Section 3.2(e) hereof, each issued and outstanding share of common stock, no
par value ("Company Common Stock"), of the Company shall be converted into the
right to receive 0.2585 of a fully paid and nonassessable share of common
stock, par value $0.001 per share, of Parent (the "Parent Common Stock") (the
"Exchange Ratio"). As of the Effective Time of the Merger, all such shares
shall no longer be outstanding and shall automatically be cancelled and retired
and shall cease to exist. As of the Effective Time of the Merger, each
certificate theretofore representing shares of Company Common Stock, without
any action on the part of the Company or the holder thereof, shall be deemed to
represent that number of shares of Parent Common Stock determined by
multiplying the shares of Parent Common Stock represented thereby by the
Exchange Ratio. Each holder of a certificate representing any shares of Company
Common Stock shall cease to have any rights with respect thereto, except the
right to receive, upon the surrender of any such certificates, certificates
representing the shares of Parent Common Stock and any cash in lieu of
fractional shares of Parent Common Stock to be issued or paid in consideration
therefor upon surrender of such certificate in accordance with Section 3.3
hereof, without interest.
(c) Appraisal Rights. Holders of all shares of the outstanding capital
stock of the Company for which dissenters' rights, if any, shall have been
perfected under section 1300 et seq. of the CGCL (the "Dissenting Shares")
shall have those rights, but only those rights, of holders of "dissenting
shares" under section 1300 et seq. of the CGCL. The Company shall give Parent
prompt notice of any demand, purported demand or other communication received
by the Company with respect to any Dissenting Shares or shares claimed to be
Dissenting Shares, and Parent shall have the right to participate in all
negotiations and proceedings with respect to such shares.
(d) Assumption and Conversion of Company Options. As of the Effective
Time of the Merger, each outstanding option or warrant to purchase Company
Common Stock (a "Company Option") issued under each stock option or warrant
plan, program, agreement or arrangement of the Company (each a "Company Stock
Plan") shall be assumed by Parent, and shall thereafter entitle the holder
thereof to receive, upon the exercise thereof, that number of shares of Parent
Common Stock equal to the product of: (x) the number of shares of Company
Common Stock subject to such Company Option immediately prior to the Effective
Time of the Merger, and (y) the Exchange Ratio, at an exercise price per share
of Parent Common Stock equal to the quotient obtained by dividing the exercise
price per share of Company Common Stock subject to such Company Option by the
Exchange Ratio, which exercise price per share shall be rounded up to the
nearest two place decimal. The number of shares of Parent Common Stock that may
be purchased by a holder upon the
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exercise of any Company Option shall not include any fractional share of Parent
Common Stock but shall be rounded, in the case of any Company Option other than
an "incentive stock option" (within the meaning of section 422 of the Code), up
and, in the case of any incentive stock option, down, to the nearest whole
share, if necessary.
(ii) As of the Effective Time of the Merger, Parent shall assume in
full each Company Option and all of the other rights and obligations of
the Company under the Company Stock Plans as provided herein. Section
4.2 of the Company Disclosure Schedule sets forth a list summarizing
all Company Options under all Company Stock Plans, including the term
and the exercise price of each Company Option, and specifying which, if
any, of the outstanding Company Options will accelerate or vest as a
result of the transactions contemplated by this Agreement.
The assumption of a Company Option by Parent shall not terminate or modify
(except as required hereunder or as set forth in Section 4.2 of the Company
Disclosure Schedule) any right of first refusal, right of repurchase, vesting
schedule or other restriction on transferability relating to a Company Option.
After such assumption, Parent shall issue, upon any partial or total exercise
of any Company Option, in lieu of shares of Company Common Stock, the number of
shares of Parent Common Stock to which the holder of the Company Option is
entitled pursuant to this Agreement. The assumption by Parent of Company
Options shall not give holders of such Company Options any additional benefits
which they did not have immediately prior to the Effective Time of the Merger.
Nothing contained in this Section 3.1(d) shall require Parent to offer or sell
shares of Parent Common Stock upon the exercise of Company Options assumed by
Parent if, in the reasonable judgment of Parent or its counsel, such offer or
sale would not be in accordance with the applicable federal or state securities
laws or would require registration thereunder other than as contemplated in the
following sentence. Parent shall file with the SEC within two (2) days
following the Effective Time of the Merger a registration statement on Form S-8
under the Securities Act covering, to the extent applicable, the shares of
Parent Common Stock to be issued upon the exercise of Company Options assumed
by Parent. Parent shall use its commercially reasonable efforts to qualify as
soon as practicable after the Effective Time of the Merger under the applicable
state securities laws the issuance of the shares of Parent Common Stock to be
issued upon exercise of such Company Options. Prior to the Effective Time of
the Merger, the Company shall use its commercially reasonable efforts to make
such amendments, if any, to the Company Stock Plans as shall be necessary to
permit such assumption in accordance with this Section 3.1(d).
(iii) Parent and the Company shall use their commercially reasonable
efforts to ensure that any Company Option that constitutes an incentive
stock option immediately prior to the Effective Time of the Merger,
shall continue to qualify as an incentive stock option pursuant to
section 422 of the Code, and that the assumption of Company Options
provided by this Section 3.1(d) shall satisfy the conditions of section
424(a) of the Code.
(iv) Except as may be otherwise agreed to by Parent and the Company
or as otherwise contemplated or required to effectuate this Section
3.1(d), the Company Stock Plans shall terminate as of the Effective
Time to the extent permitted thereunder.
(v) The Company shall use its commercially reasonable efforts to
take all necessary actions to provide that as of the Effective Time no
holder of Company Options under the Option Plans will have any right to
receive shares of common stock of the Surviving Corporation upon
exercise of any such Company Option.
Section 3.2 Exchange of Shares and Certificates. (a) Exchange Agent. As of
the Effective Time of the Merger, Parent shall deposit with American Stock
Transfer & Trust Company or such other bank or trust company as may be
designated by Parent (the "Exchange Agent"), for the benefit of the holders of
shares of Company Common Stock, for exchange in accordance with this Article
III, through the Exchange Agent, certificates representing the shares of Parent
Common Stock (such shares of Parent Common Stock, together with any dividends
or distributions with respect thereto with a record date after the Effective
Time of the Merger, being hereinafter referred to as the "Exchange Fund")
issuable pursuant to Sections 3.1 hereof in exchange for outstanding shares of
Company Common Stock.
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(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time of the Merger but in no event more than five (5) business days
following the later of (x) the Closing Date or (y) the day that the Company
provides to the Exchange Agent all information necessary to allow the Exchange
Agent to make the exchange described in this Section, the Exchange Agent shall
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time of the Merger represented outstanding
shares of Company Common Stock (the "Certificates") whose shares were converted
into the right to receive shares of Parent Common Stock pursuant to Section 3.1
hereof, (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form
and have such other provisions as Parent may reasonably specify), and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Parent Common Stock. Upon surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Parent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the Exchange Agent shall deliver to the holder of such
Certificate in exchange therefor a certificate representing that number of
whole shares of Parent Common Stock which such holder has the right to receive
pursuant to the provisions of this Article III, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock which is not registered in the transfer
records of the Company, as applicable, a certificate representing the proper
number of shares of Parent Common Stock may be issued to a person other than
the person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay any transfer or other
taxes required by reason of the issuance of shares of Parent Common Stock to a
person other than the registered holder of such Certificate or establish to the
satisfaction of Parent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 3.2, each Certificate shall be
deemed at any time after the Effective Time of the Merger to represent only the
right to receive upon such surrender the certificate representing shares of
Parent Common Stock and cash in lieu of any fractional shares of Parent Common
Stock as contemplated by this Section 3.2. No interest shall be paid or accrue
on any cash payable in lieu of any fractional shares of Parent Common Stock.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date
after the Effective Time of the Merger shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent Common Stock
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 3.2(e) hereof, until the surrender
of such Certificate in accordance with this Article III. Subject to the effect
of applicable laws, following surrender of any such Certificate, there shall be
paid to the holder of the certificate representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
Parent Common Stock to which such holder is entitled pursuant to Section 3.2(e)
and the amount of dividends or other distributions with a record date after the
Effective Time of the Merger theretofore paid with respect to such whole shares
of Parent Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time of
the Merger but prior to such surrender and a payment date subsequent to such
surrender payable with respect to such whole shares of Parent Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article III shall be deemed to have been
issued and paid in full satisfaction of all rights pertaining to the shares of
Company Common Stock theretofore represented by such Certificates, subject,
however, to the obligation of the Surviving Corporation to pay any dividends or
make any other distributions with a record date prior to the Effective Time of
the Merger which may have been declared or made by the Company on such shares
of Company Common Stock in accordance with the terms of this Agreement and
which remain unpaid at the Effective Time of the Merger, and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time of the Merger. If, after the Effective
Time of the Merger, Certificates are presented
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<PAGE>
to the Surviving Corporation or the Exchange Agent for any reason, they shall
be cancelled and exchanged as provided in this Article III, except as otherwise
provided by law.
(e) Fractional Shares. No certificates representing fractional shares of
Parent Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests shall not entitle the owner
thereof to vote or to any other rights of a stockholder of Parent.
(ii) Notwithstanding any other provision of this Agreement, each
holder of shares of Company Common Stock converted pursuant to the
Merger who would otherwise have been entitled to receive a fraction of
a share of Parent Common Stock (after taking into account all
Certificates delivered by such holder) shall receive, in lieu thereof,
cash (without interest) in an amount equal to: (i) such fraction
multiplied by (ii) the ten (10) day average closing sale price of the
Parent Common Stock as reported on the NASDAQ National Market System
for the period ending three (3) days prior to the Closing Date (such
closing price being referred to herein as the "Closing Price").
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time of the Merger shall be delivered to Parent, upon demand, and
any holders of the Certificates who have not theretofore complied with this
Article II shall thereafter look only to Parent for payment of their claim for
Parent Common Stock, any cash in lieu of fractional shares of Parent Common
Stock and any dividends or distributions with respect to Parent Common Stock.
(g) No Liability. None of Parent, Sub, the Company or the Exchange Agent
shall be liable to any person in respect of any shares of Parent Common Stock
(or dividends or distributions with respect thereto) or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificates shall not have been
surrendered prior to seven years after the Effective Time of the Merger, or
immediately prior to such earlier date on which any shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock or any
dividends or distributions with respect to Parent Common Stock in respect of
such Certificate would otherwise escheat to or become the property of any
Governmental Entity, any such shares, cash, dividends or distributions in
respect of such Certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation free and clear of all claims
or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by Parent, on a daily basis.
Any interest and other income resulting from such investments shall be paid to
Parent.
Section 3.3 Escrow Fund. At the Effective Time of the Merger or from time to
time thereafter, Parent will deliver to the Escrow Agent (as defined in the
Escrow Fund Agreement (as defined below)) certificates representing ten percent
(10%) of the Parent Common Stock (as defined below) that is to be issued in the
Merger to the shareholders of the Company and to option holders of the Company
upon exercise of their options. Such shares, together with any other securities
of the Company issued by means of dividend, distribution, split up,
recapitalization, combination, exchange of shares or the like upon or with
respect to such shares, being collectively referred to herein as the "Escrow
Shares", shall be held as collateral for the indemnification obligations under
Article X hereof and pursuant to the provisions of an escrow agreement in the
form attached hereto as Exhibit E (the "Escrow Fund Agreement"). The
disposition of the Escrow Shares by the Escrow Agent shall be governed by the
terms of this Agreement and the terms and conditions of the Escrow Fund
Agreement.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in the schedule delivered to Parent prior to the
execution of this Agreement setting forth specific exceptions to the Company's
representations and warranties set forth herein (the "Company Disclosure
Schedule"), the Company represents and warrants to Parent as set forth below:
Section 4.1 Organization. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted
and as proposed to be conducted. The Company is duly qualified or licensed and
in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except in such jurisdictions
where the failure to be so duly qualified or licensed and in good standing
would not have a Company Material Adverse Effect. The Company has no
Subsidiaries. For purposes of this Agreement, (i) "Company Material Adverse
Effect" means, individually or in the aggregate, a material adverse effect on
the business, financial condition, prospects or results of operations of the
Company taken as a whole, but shall not include any of the following in and of
themselves, either alone or in combination: (A) any effect or change occurring
as a result of: (1) general economic or financial conditions, or (2) other
developments which are not unique to the Company but which also affect other
companies that participate or are engaged in the lines of business in which the
Company participates or is engaged, (B) any change or effect on the business or
financial condition or performance of the Company following the date of this
Agreement resulting from a reduction in or cancellation or adverse change in
the terms of any agreement or other transaction with the Company (other than a
reduction in or cancellation or adverse change in the terms of: (i) the
Business Development Agreement No. N A 1 dated September 6, 1996 and the
Statement of Work 1 to BDA No. N A 1 dated September 6, 1986 between the
Company and Novell, (ii) Addendum C and Attachment B to the Software
Development Agreement, dated February 15, 1999, between the Company and Seiko
Epson Corporation, (iii) the Memorandum of Understanding, dated August 17,
1998, entered into between the Company and International Business Machines
Corporation ("IBM") entered into pursuant to the Base Agreement, dated August
14, 1998, between the Company and IBM, and (iv) the Addendum C, dated March 25,
1999, to the Auco Professional Services Agreement, dated September 20, 1996, as
amended, between the Company and Toshiba America Information Services,
attributable to: (1) the announcement of this Agreement or the transactions
contemplated hereby, or (2) Parent's or any affiliate of Parent's announcement
or other communication of its plans or intentions with respect to the conduct
of any business of the Company, and (C) the termination or resignation of any
employee or consultant other than Adam Au, Paul Kwan, Mannan Latif or Howard
Sidorsky, and (ii) "Subsidiary" shall mean, with respect to the Company or
Parent, any corporation or other organization, whether incorporated or
unincorporated, of which (a) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the Board of Directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries, or (b) such party or any other
Subsidiary of such party is a general partner (excluding any such partnership
where such party or any Subsidiary of such party does not have a majority of
the voting interest in such partnership).
Section 4.2 Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of: (i) 35,000,000 shares of Company Common
Stock, of which 3,389,403 shares are issued and outstanding as of the date
hereof, (ii) 10,000,000 shares of Preferred Stock, of which (x) 3,250,000 have
been designated Series A Preferred Stock, 3,228,000 shares of which are issued
and outstanding as of the date hereof, and (y) 3,000,000 have been designated
Series B Preferred Stock, 1,413,000 shares of which are issued and outstanding
as of the date hereof. Not more than $50,000 in aggregate principal amount and
accrued and unpaid interest of Voting Debt (as defined below) is outstanding on
the date hereof or will be outstanding on the Closing Date. As of the date
hereof, (i) no shares of the Company Common Stock are issued and held in the
treasury of the Company, and (ii) 3,144,000 shares of Company Common Stock are
reserved for issuance
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pursuant to outstanding Company Options. All of the outstanding shares of the
Company Capital Stock are, and all such shares which may be issued pursuant to
the exercise of outstanding Company Options will be, when issued in accordance
with the respective terms thereof, duly authorized, validly issued, fully paid
and nonassessable and have been issued in compliance with all applicable state
and federal securities laws. The rights, preferences and privileges of each
series of Company Preferred Stock are as set forth in the Articles of
Incorporation of the Company. Since the date of the filing of the Articles of
Incorporation of the Company, there have not occurred any events that would
cause any adjustment or readjustment in the applicable conversion prices of any
of such series of Company Preferred Stock. Each share of each series of Company
Preferred Stock is convertible into one share of Company Common Stock. The
Voting Debt (as defined below) will convert into not more than 20,000 shares of
Company Common Stock at the Effective Time.
(b) The Company does not own, directly or indirectly, any capital stock
or other equity securities of any corporation or has any direct or indirect
equity or ownership interest (financial or otherwise) in any business,
excluding the ownership, as a passive investor, of less than one percent (1%)
of the outstanding securities of any publicly traded entity.
(c) Except as set forth above, as of the date hereof, (i) there are no
shares of capital stock of the Company authorized, issued or outstanding, (ii)
there are no existing options, warrants, calls, preemptive rights, indebtedness
having general voting rights or debt convertible into securities having such
rights ("Voting Debt") or subscriptions or other rights, agreements,
arrangements or commitments of any character, relating to the issued or
unissued capital stock of the Company, obligating the Company to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Company or
securities convertible into or exchangeable for such shares or equity
interests, or obligating the Company to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment, and (iii) there are no outstanding contractual obligations of the
Company to repurchase, redeem or otherwise acquire any shares of its capital
stock, or to provide funds to make any investment (in the form of a loan,
capital contribution or otherwise) in any other entity.
(d) There are no voting trusts or other agreements or understandings to
which the Company is a party with respect to the voting of the capital stock of
the Company.
(e) Following the Effective Time, no holder of Company Options will have
any right to receive shares of common stock of the Surviving Corporation upon
exercise of Company Options.
(f) No Indebtedness (as defined below) of the Company contains any
restriction upon: (i) the prepayment of any of such Indebtedness, (ii) the
incurrence of Indebtedness by the Company, or (iii) the ability of the Company
to grant any lien on its properties or assets. For purposes of this Agreement,
"Indebtedness" shall mean: (i) all indebtedness for borrowed money or for the
deferred purchase price of property or services (other than current trade
liabilities incurred in the ordinary course of business and payable in
accordance with customary practices), (ii) any other indebtedness that is
evidenced by a note, bond, debenture or similar instrument, (iii) all
obligations under financing leases, (iv) all obligations in respect of
acceptances issued or created, (v) all liabilities secured by any lien on any
property and (vi) all guarantee obligations.
Section 4.3 Authority Relative to this Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized and approved by the Board of Directors of
the Company, and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions so
contemplated, other than, with respect to the Merger, the approval and adoption
of this Agreement by the holders of a majority of the outstanding Company
Common Stock and Company Preferred Stock, voting together as a single class.
This Agreement has been duly executed by the Company, and constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency or other
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similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
Section 4.4 Consents and Approvals; No Violations. Except for the filing and
recordation of an Agreement of Merger and Certificate of Merger in accordance
with the requirements of the CGCL and the DGCL, respectively, and the approval
of the Merger by the shareholders of the Company pursuant to the Consent
Solicitation, no notice to, filing with, and no permit, authorization, consent
or approval of, any arbitrator, court, nation, government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial regulatory or administrative functions of, or pertaining to,
government (a "Governmental Entity"), or any private third party is necessary
for the consummation by the Company of the transactions contemplated by this
Agreement. Neither the execution and delivery of this Agreement by the Company,
the consummation by the Company of the transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will: (i) conflict
with or result in any breach of any provision of the Articles of Incorporation
of the Company or Bylaws or comparable charter documents of the Company,
(ii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration or result in the creation of any
mortgage, pledge, charge, security interest, claim or encumbrance of any kind
(collectively, a "Lien")) under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, license, contract, agreement or other
instrument or obligation to which any of the Company is a party or by which it
or any of its properties or assets may be bound, or (iii) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company
or any of its properties or assets, except with respect to clauses (ii) and
(iii), where such violation, breach, default or creation of a Lien would not
result in a Company Material Adverse Effect.
Section 4.5 Financial Statements. The Company has previously provided Parent
with its unaudited balance sheets as of December 31, 1998, December 31, 1997
and December 31, 1996, its unaudited balance sheet as of January 31, 1999 (the
"Balance Sheet"), and the related statements of results of operations for the
fiscal year and the period then ended, annual (the "Company Financial
Statements"). The Company Financial Statements for the years ended December 31,
1998, December 31, 1997 and December 31, 1996 have not been audited. The
Company's Financial Statements are complete and correct in all material
respects and fairly present, in accordance with United States generally
accepted accounting principles ("US GAAP") consistently applied, the financial
position of the Company as of such dates and its results of operations for such
fiscal periods, except, for normal recurring year end adjustments, which
adjustments will not be material, in the aggregate.
Section 4.6 Absence of Certain Changes.
Except as and to the extent set forth in the Company's Financial Statements,
since December 31, 1998, the Company has not:
(a) suffered any Company Material Adverse Effect;
(b) incurred any liabilities or obligations (absolute, accrued,
contingent or otherwise) except non material items incurred in the ordinary
course of business and consistent with past practice, none of which exceeds
$20,000 (counting obligations or liabilities arising from one transaction or a
series of similar transactions, and all periodic installments or payments under
any lease or other agreement providing for periodic installments or payments,
as a single obligation or liability), or increased, or experienced any change
in any assumptions underlying or methods of calculating, any bad debt,
contingency or other reserves;
(c) paid, discharged or satisfied any claim, liabilities or obligations
(absolute, accrued, contingent or otherwise) other than the payment, discharge
or satisfaction in the ordinary course of business and consistent with past
practice of liabilities and obligations reflected or reserved against in the
Balance Sheet or incurred in the ordinary course of business and consistent
with past practice since December 31, 1998;
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(d) permitted or allowed any of its property or assets (real, personal
or mixed, tangible or intangible) to be subjected to any Liens, except for
Liens for current taxes not yet due or Liens the incurrence of which would not
have a Company Material Adverse Effect;
(e) written down the value of any of its material inventory (including
write downs by reason of shrinkage or mark down) or written off as
uncollectible any notes or accounts receivable, except for immaterial write
downs and write offs in the ordinary course of business and consistent with
past practice;
(f) cancelled any debts or waived any claims or rights of substantial
value;
(g) sold, transferred, or otherwise disposed of any of its properties or
assets (real, personal or mixed, tangible or intangible), except in the
ordinary course of business and consistent with past practice;
(h) granted any increase in the compensation or benefits of any
director, officer, employee or consultant of the Company, (including any such
increase pursuant to any bonus, pension, profit sharing or other plan or
commitment) or any increase in the compensation or benefits payable or to
become payable to any director, officer, employee or consultant of the Company,
and no such increase is customary on a periodic basis or required by agreement
or understanding;
(i) made any change in severance policy or practices;
(j) made any capital expenditure or acquired any property or assets
(other than new materials and supplies) for a cost in excess of $20,000, in the
aggregate;
(k) declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or redeemed, purchased or
otherwise acquired, directly or indirectly, any shares of capital stock or
other securities of the Company;
(l) made any change in any method of tax or financial accounting or
accounting practice or made or changed any material election for Federal,
state, local or foreign income tax purposes;
(m) made any material tax election, settled or compromised any Federal,
state, local or foreign income tax liability, or waived or extended the statute
of limitations in respect of any such taxes;
(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers, directors or shareholders or any affiliate or associate of any of its
officers, directors or shareholders except for directors' fees, and
compensation to officers at rates not exceeding the rates of compensation paid
during the fiscal year ended December 31, 1998;
(o) issued any shares of its capital stock, or issued any options or
warrants to purchase any shares of its capital stock; or
(p) agreed, whether in writing or otherwise, to take any action
described in this Section 4.6.
Section 4.7 No Undisclosed Liabilities. Except as and to the extent provided
in the Balance Sheet, the Company had at December 31, 1998 no material
liabilities (whether contingent or absolute, direct or indirect, known or
unknown to the Company or matured or unmatured) not fully reflected or fully
reserved against in the Balance Sheet or incurred other than in the ordinary
course.
Section 4.8 No Default. The Company is not in default or violation (and no
event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of: (i)
its Articles of Incorporation or Bylaws, or comparable charter documents, (ii)
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, agreement or other
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instrument or obligation to which the Company is a party or by which it or any
of its properties or assets may be bound, or (iii) any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company or any of its
properties or assets, except with respect to clauses (ii) and (iii), where such
violation, breach, default or creation of a Lien would not result in a Company
Material Adverse Effect.
Section 4.9 Litigation. There is no action, suit, proceeding, arbitration,
investigation pending or, to the knowledge of the Company, threatened which
involves the Company. The foregoing includes, without limitation, actions
pending or threatened (or any basis therefor known to the Company) involving
the prior employment of any of the Company's employees, their use in connection
with the Company's business of any information, techniques, patents, patent
applications, copyrights, trade secrets, inventions, technology, know how,
computer software, including object and source code, enhancements, updates,
derivative versions and all related programmer and user documentation or other
intellectual property rights allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order or decree of
any Governmental Entity. There is no action, suit, proceeding, arbitration or
investigation by the Company currently pending or which the Company presently
intends to initiate.
Section 4.10 Compliance with Laws. The Company is in compliance with, and
has not violated any applicable law, rule or regulation of any United States
federal, state, local, or foreign government or agency thereof which materially
affects the business, properties or assets of the Company, and no notice,
charge, claim, action or assertion has been received by the Company or has been
filed, commenced or, to the Company's knowledge, threatened against the Company
alleging any such violation, except for any matter otherwise covered by this
sentence which does not have, individually or in the aggregate, a Company
Material Adverse Effect. All licenses, permits and approvals required under
such laws, rules and regulations are in full force and effect except where the
failure to be in full force and effect would not have a Company Material
Adverse Effect.
Section 4.11 Taxes.
(a) Giving effect to all extensions validly obtained, the Company has:
(x) duly and timely filed (or there has been filed on its behalf) with the
appropriate taxing authorities all Tax Returns (as defined below) required to
be filed by it, and all such Tax Returns are true, correct and complete and (y)
timely paid or there has been paid on its behalf, or where payment is not yet
due, have established or have had established on its behalf, or will establish
or cause to be established on or before the Closing Date on its books and
records an adequate accrual for the payment of, all Taxes (as defined below)
due or claimed to be due from it by any taxing authority;
(b) The Company has complied in all respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Section 1441
and 1442 of the Code or similar provisions under any state, local or foreign
law) and has, within the time and manner prescribed by law, withheld and paid
over to the proper taxing authorities all amounts required to be withheld and
paid over under all applicable laws;
(c) There are no liens for Taxes upon the assets or properties of the
Company except for statutory liens for current Taxes not yet due;
(d) The Company has not requested any extension of time within which to
file any Tax Return in respect of any taxable year which has not since been
filed and no outstanding waivers or comparable consents that are still in
effect regarding the application of the statute of limitations with respect to
any Taxes or Tax Returns has been given by or on behalf of the Company;
(e) No federal, state, local or foreign audits, examinations or other
administrative proceedings or court proceedings ("Audits") exist or have been
initiated or completed with regard to any Taxes or
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Tax Returns of the Company, and the Company has not received any notice that
such an Audit is pending or threatened with respect to any Taxes due from or
with respect to the Company or any Tax Return filed by or with respect to the
Company;
(f) The Company has not requested nor received an adverse ruling from
any taxing authority or signed a closing or other agreement with any taxing
authority;
(g) None of the Tax Returns of the Company has ever been Audited by the
applicable taxing authority, and the applicable statute of limitations for the
assessment of Taxes for taxable periods ending before December 31, 1995 has
expired;
(h) Except for any adjustment which may be required by the change in
filing Tax returns described in Section 4.11 of the Company Disclosure Schedule
or by the transactions contemplated by the terms of this Agreement, the Company
is not required to include in income any adjustment pursuant to Section 481(a)
of the Code, by reason of any voluntary or involuntary change in accounting
method (nor has any taxing authority proposed in writing any such adjustment or
change of accounting method);
(i) The Company is not a party to, or bound by, and does not have any
obligation under, any Tax sharing agreement, Tax indemnification agreement or
similar contract or arrangement;
(j) No power of attorney has been granted by or with respect to the
Company with respect to any matter relating to Taxes;
(k) The reserves for Taxes (determined in accordance with US GAAP)
reflected in the most recent financial statements of the Company are adequate
in accordance with US GAAP for the payment of all Taxes incurred or which may
be incurred by the Company through the date thereof. Since the date of the most
recent financial statements of the Company, the Company has not incurred any
liability for Taxes other than in the ordinary course of business;
(l) The Company is not and has not been a member of an affiliated group
(or similar state or local filing group for Tax purposes);
(m) The Company is not and has never been a United States real property
holding company as defined in Section 897(c)(2) of the Code;
(n) The Company is not a party to any agreement, plan, contract or
arrangement that could result, separately or in the aggregate, in the payment
of any "excess parachute payments" within the meaning of Section 280G of the
Code;
(o) The Company has not received notice of any claim made by a
governmental authority in a jurisdiction where the Company, as applicable, does
not file a Tax Return, that the Company is or may be subject to taxation by
that jurisdiction;
(p) The Company has previously delivered or made available to Parent
complete and accurate copies of each of: (i) all audit reports, letter rulings,
technical advice memoranda and similar documents issued by a taxing authority
relating to the United States federal, state, local or foreign Taxes due from
or with respect to the Company (ii) the United States federal income Tax
Returns, and those state, local and foreign income Tax Returns filed by the
Company, and (iii) any closing agreements entered into by the Company with any
taxing authority in each case existing on the date hereof. The Company will
deliver to Parent all materials with respect to the foregoing for all matters
arising after the date hereof.
(q) For purposes of this Agreement, (i) "Taxes" (including, with
correlative meaning, the term "Tax") shall mean all taxes, charges, fees,
levies, penalties or other assessments imposed by any federal, state, local or
foreign taxing authority, including, but not limited to, income, gross
receipts, excise, property, sales,
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transfer, franchise, payroll, withholding, social security or other taxes,
including any interest, penalties or additions attributable thereto, and (ii)
"Tax Return" shall mean any return, report, information return or other
document (including any related or supporting information) with respect to
Taxes or the refiling of any such Tax Return previously filed.
Section 4.12 ERISA.
(a) Section 4.12 of the Company Disclosure Schedule contains a true,
complete and correct list of each employee benefit plan (including, without
limitation, any "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and
each employment, change in control, bonus, pension, profit sharing, retirement,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, life or other insurance, supplemental unemployment
benefits or other plan, program, agreement, arrangement or material
understanding (whether formal or informal or whether or not legally binding)
(all the foregoing being herein called the "Company Benefit Plans"), sponsored,
maintained or contributed to or required to be contributed to by the Company
for the benefit of any current or former employee or consultant of the Company.
The Company has provided to Parent a true and correct copy of, where
applicable, all material documents related to the Company Benefit Plans,
including: (i) the three most recent annual reports (Form 5500) filed with the
IRS, (ii) a copy of each Company Benefit Plan and any summary plan description
or Summary of Material Modification, (iii) each trust agreement and group
annuity contract, if any, relating to such Company Benefit Plan, (iv) the most
recent actuarial report or valuation relating to a Company Benefit Plan subject
to Title IV of ERISA, and (v) the most recent determination letter received
from the Internal Revenue Service with respect to each Plan intended to qualify
under section 401(a) of the Code. No amendments or promises have been made with
respect to any Company Benefit Plans which would increase the expense of
maintaining such Company Benefit Plan.
(b) No Company Benefit Plans nor benefit plans of any entity which would
be treated as a "single employer" with the Company under Section 4001(b) of
ERISA are subject to Title IV of ERISA. Except as set forth in Section 4.12 of
the Company Disclosure Schedule, with respect to the Company Benefit Plans, in
the aggregate, no event has occurred and to the Company's knowledge, there
exists no condition or set of circumstances which are reasonably likely to
occur in connection with which the Company would be subject to any liability
that would have a Company Material Adverse Effect (except liability for
benefits claims and funding obligations payable in the ordinary course), under
ERISA, the Code or any other applicable law.
(c) With respect to Company Benefit Plans, in the aggregate, there are
no funded benefit obligations for which contributions have not been made or
properly accrued and there are no unfunded benefit obligations which have not
been accounted for by reserves, or otherwise properly footnoted in accordance
with US GAAP in the Financial Statements, except for obligations that would
not, in the aggregate, have a Company Material Adverse Effect.
(d) Each of the Company Benefit Plans has been administered in
compliance with its terms in all material respects and is in compliance with
applicable laws and regulations, including, but not limited to, ERISA, the
Consolidated Omnibus Budget Reconciliation Act of 1985, the Health Insurance
Portability and Accountability Act of 1996 and the Code, except for failures to
comply that, in the aggregate, would not have a Company Material Adverse
Effect.
(e) Each of the Company Benefit Plans which is intended to be a
qualified plan within the meaning of section 401(a) of the Code has been
determined by the IRS to be so qualified and nothing has occurred to cause the
loss of such qualified or tax exempt status, or the Company has applied to the
IRS for such a determination prior to the expiration of the requisite period
under applicable Treasury Regulations or IRS pronouncements in which to apply
for such a determination and to make any amendments necessary to obtain a
favorable determination, or has been established under a standardized prototype
plan for which an IRS opinion letter has been obtained by the plan sponsor and
is valid as to the adopting employer. Each fund established
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under a Company Benefit Plan that is intended to satisfy the requirements of
Section 501(c)(9) of the Code has so satisfied such requirements.
(f) The Company is not a party to any collective bargaining agreement.
(g) The Company has no obligation for retiree health, medical or life
insurance benefits under any plan referred to in Section 4.12(a) other than (i)
coverage mandated by applicable laws, (ii) deferred compensation benefits
accrued as liabilities on the Balance Sheet, or (iii) benefits, the full cost
of which is borne by the current or former employee (or a beneficiary thereof).
(h) No Company Benefit Plan is a "multiemployer pension plan," as such
term is defined in Section 3(37) of ERISA or a "multiple employer plan" as such
term is defined in Section 413(c) of the Code.
(i) Each Company Benefit Plan can be terminated within a period of 30
days, without payment of any additional compensation or amount or the
additional vesting or acceleration of any benefits.
(j) No Company Benefit Plan is under actual or, to the Company's
knowledge, threatened investigation, audit or review by any governmental
agency, or the subject of any claim, lawsuit, arbitration or other proceeding.
(k) No amounts paid by the Company to any ERISA Plan would fail to be
deductible under Section 404 of the Code.
Section 4.13 Change in Control. Except as set forth in Section 4.13 of the
Company Disclosure Schedule, the Company is not a party to any option, warrant,
contract, agreement or understanding which contains a "change in control,"
"potential change in control" or similar provision. Except as so disclosed, the
consummation of the transactions contemplated hereby will not (i) (either alone
or upon the occurrence of any additional acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from the Company to any
person, or (ii) accelerate the time of payment or vesting, or increase the
amount of or otherwise enhance any benefit due from the Company to any person.
Section 4.14 Intellectual Property. The Company owns or has a valid right to
use all trademarks, service marks, trade names, Internet domain names, designs,
slogans, and general intangibles of like nature, together with all goodwill
related to the foregoing (collectively, "Trademarks"); patents; copyrights
(including any registrations, renewals and applications for any of the
foregoing); Software; technology, trade secrets and other confidential
information, know how, proprietary processes, formulae, algorithms, models, and
methodologies (collectively, "Trade Secrets," and together with the foregoing,
the "Intellectual Property") used in or necessary for the conduct of the
business of Company as currently conducted or, to the Company's knowledge, as
contemplated to be conducted, the absence of which would be reasonably likely
to have a Material Adverse Effect.
(a) Section 4.14(a)(i) of the Company Disclosure Schedule sets forth,
for the Intellectual Property owned by the Company, a complete and accurate
list of all U.S. and foreign: (i) patents and patent applications; (ii)
Trademark registrations (including Internet domain registrations) and
applications and material unregistered Trademarks; (iii) copyright
registrations and applications, and material unregistered copyrights,
indicating for each, the applicable jurisdiction, registration number (or
application number), and date issued (or date filed). Section 4.14(a)(ii) of
the Company Disclosure Schedule sets forth a complete and accurate list of all
license agreements (except for end user license and support/maintenance
agreements entered into in the ordinary course of business ("User Agreements"))
granting any right to use or practice any rights under any Intellectual
Property, whether the Company is the licensee or licensor thereunder, and any
written settlements relating to any Intellectual Property to which the Company
is a party or otherwise bound (collectively, the "License Agreements"),
indicating for each the title, the parties, and the date executed.
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(b) Except for User Agreements and License Agreements, to the Company's
knowledge, the Intellectual Property is owned by the Company free and clear of
all Liens, and the Company, to the extent noted on Section 4.14(a)(i) of the
Company Disclosure Schedule, is listed in the records of the appropriate United
States, state, or foreign agency as the sole owner of record for each
application and registration listed on Section 4.14(a)(i) of the Company
Disclosure Schedule.
(c) The Intellectual Property owned by the Company and, to the Company's
knowledge, any Intellectual Property used by the Company, is valid and
subsisting, and has not been cancelled, expired, or abandoned. There is no
pending, or to the Company's knowledge, threatened opposition, interference or
cancellation proceeding before any court or registration authority in any
jurisdiction against the registrations listed on Section 4.14(a)(i) of the
Company Disclosure Schedule, or, to the Company's knowledge, against any
Intellectual Property licensed to the Company.
(d) To the Company's knowledge (but without conducting any patent
search), the conduct of the Company's business as currently conducted does not
infringe upon any Intellectual Property rights owned or controlled by any third
party (either directly or indirectly such as through contributory infringement
or inducement to infringe). There are no claims or suits pending or to the
Company's knowledge threatened, and the Company has not received any notice of
a third party claim or suit: (i) alleging that its activities or the conduct of
its businesses infringes upon, violates, or constitutes the unauthorized use of
the Intellectual Property rights of any third party, or (ii) challenging the
ownership, use, validity or enforceability of any Intellectual Property.
(e) There are no settlements, forebearances to sue, consents, judgments,
or orders to which the Company is a party which (i) restrict the Company's
rights to use any Intellectual Property, (ii) restrict the Company's businesses
in order to accommodate a third party's Intellectual Property rights, or (iii)
permit third parties to use any Intellectual Property owned or controlled by
the Company. The Company has not licensed or sublicensed its rights in any
material Intellectual Property other than pursuant to the User Agreements
and/or License Agreements, and no royalties, honoraria or other fees are
payable by the Company for the use of or right to use any Intellectual
Property, except pursuant to the License Agreements. To the Company's
knowledge, the License Agreements are valid and binding obligations of all
parties thereto, enforceable in accordance with their terms, and to the
Company's knowledge, there exists no event or condition which will result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default by any party under any such License Agreement.
(f) The Company takes reasonable measures to protect the confidentiality
of Trade Secrets, including requiring its employees and independent contractors
having access thereto to execute written non disclosure agreements. No Trade
Secret has been disclosed or authorized to be disclosed to any third party
other than pursuant to a non disclosure agreement that adequately protects the
Company's proprietary interests in and to such Trade Secrets other than
disclosures that, individually or in the aggregate, are not reasonably likely
to have a Company Material Adverse Effect. To the Company's knowledge, no party
to any non disclosure agreement relating to its Trade Secrets is in breach or
default thereof.
(g) To the knowledge of the Company, no third party is misappropriating,
infringing, diluting, or violating any Intellectual Property owned by the
Company, and no such claims have been brought against any third party by the
Company.
(h) The consummation of the transactions contemplated hereby will not
result in the loss or impairment of the Company's right to own or use any of
the Intellectual Property, which loss or impairment is reasonably likely to
have a Company Material Adverse Effect, nor will require the consent of any
governmental authority or third party in respect of any such Intellectual
Property, the failure of which to obtain is reasonably likely to have a Company
Material Adverse Effect.
(i) Section 4.14(a)(ii) of the Company Disclosure Schedule lists all
Software (as defined below) (other than software applications programs that are
readily available) which is owned, licensed, leased, or
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otherwise used by the Company, and identifies which Software is owned,
licensed, leased, or otherwise used, and lists all Software sold, licensed,
leased or otherwise distributed by the Company to any third party. With respect
to the Software set forth in Section 4.14(a)(ii) of the Company Disclosure
Schedule which the Company purports to own, such Software was either developed:
(i) by employees of the Company within the scope of their employment; or (ii)
by independent contractors who have assigned their rights to the Company
pursuant to written agreements. For purposes of this Section 4.14, "Software"
means any and all of the following to the extent they are readily identifiable:
(x) computer programs, including any and all software implementations of
algorithms, models and methodologies, whether in source code or object code,
(y) databases and compilations, including any and all data and collections of
data, whether machine readable or otherwise, (iii) descriptions, flow charts
and other work product used to design, plan, organize and develop any of the
foregoing, (iv) the technology supporting any Internet site(s) operated by or
on behalf of the Company, and (v) all documentation, including user manuals and
training materials, relating to any of the foregoing.
(j) To the Company's knowledge, the Company has implemented and/or is
currently implementing revisions and related testing of its material Software
that it licenses and maintains pursuant to contracts with third parties
("Licensed Software") in order to enable such Software to process accurately
(including calculating, comparing and sequencing) in all material respects
properly formatted date data from, into and between the twentieth and twenty
first centuries, including leap year calculations ("Millennial Date Data").
(k) The Company is in the process of obtaining written representations
or assurances from each third party that: (i) provides Millennial Date Data to
the Company, (ii) processes Millennial Date Data for the Company, or (iii)
otherwise provides any material product or service to the Company that is
dependent upon any Software, microcode, chip or hardware system or component,
including any electronic or electronically controlled system or component (a
"System") that processes any Millennial Date Data, stating that all of such
Systems that are used for, or on behalf of, the Company will process Millennial
Date Data without materially affecting the supply of such product or service to
the Company after December 31, 1999.
Section 4.15 Proprietary Information and Inventions Agreements. Each current
and former employee and officer of the Company has executed an Agreement
Regarding Confidential Information and Inventions, or an Employee Proprietary
Information Agreement or similar such agreement, in substantially the form
previously provided or made available to Parent. The Company is not aware that
any of the current or former employees of the Company is in violation thereof.
Section 4.16 Contracts and Commitments.
Except as set forth in Section 4.16 of the Company Disclosure Schedule or in
the Company Financial Statements:
(a) There are no purchase contracts or commitments (i) under which the
Company is required to pay in excess of $20,000 annually;
(b) There are no outstanding sales contracts, commitments, or written
memoranda of understanding of the Company that call for the payment or receipt
of more than $25,000, which the Company believes will result in any loss in
excess of $10,000 to the Company upon completion or performance thereof;
(c) Except as set forth in the Company Disclosure Schedule, the Company
has no outstanding contracts with officers, employees, agents, consultants,
advisors, salesmen, sales representatives, distributors, or dealers that are
not cancellable by it on notice of not longer than 30 days and without
liability, penalty, or premium or any agreement or arrangement providing for
the payment of any bonus or commission based on sales or earnings;
(d) The Company is not in default, nor is there any basis for any valid
claim of default, under any material contract made or obligation owed by it;
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(e) The Company is not restricted by agreement from carrying on its
business anywhere in the world;
(f) The Company is not under any material liability or obligation with
respect to the return of inventory or merchandise in the possession of
wholesalers, distributors, retailers, or other customers;
(g) The Company has no obligation for borrowed money, including
guarantees of or agreements to acquire any such obligation of others;
(h) The Company has no outstanding loan to any person other than to the
Company;
(i) The Company has no power of attorney outstanding or any obligations
or liabilities (whether absolute, accrued, contingent, or otherwise), as
guarantor, surety, co signer, endorser, co maker, indemnitor, or otherwise in
respect of the obligation of any person, corporation, partnership, joint
venture, association, organization, or other entity;
(j) None of the officers, directors or shareholders of the Company has
any interest in any property, real or personal, tangible or intangible,
including without limitation the Intellectual Property Rights, that is
material to the conduct of the business of the Company; and
(k) Other than as listed on Section 4.16(a) through 4.16(k) of the
Company Disclosure Schedule, the Company has no agreements, contracts,
commitments, or restrictions that are material to its business, financial
condition, working capital, assets, liabilities (absolute, accrued, contingent
or otherwise), reserves or operations or which require the making of any
charitable contribution.
Section 4.17 Labor Matters. The Company is in compliance in all material
respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment
and wages and hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice, except where non
compliance would not result in a Company Material Adverse Effect. The Company
has not received any notice from any Governmental Entity, and to the knowledge
of the Company, there has not been asserted before any Governmental Entity,
any claim, action or proceeding to which the Company is a party or involving
the Company and there is neither pending nor, to the knowledge of the Company,
threatened any investigation or hearing concerning the Company arising out of
or based upon any such laws, regulations or practices. There are no pending
claims against the Company under any workers compensation plan or policy or
for long term disability. Section 4.17 of the Company Disclosure Schedule
lists all current officers, directors, and employees of the Company.
Section 4.18 Personnel. Section 4.18 of the Company Disclosure Schedule
sets forth a complete and correct list of the names and current salaries of
each employee of the Company as of the date of this Agreement, and of all
employment, compensation, severance, consulting or indemnification contracts
between the Company and its present or former employees, officers, directors
and consultants to the extent the Company has any continuing obligations
thereunder. The Company has made available to Parent true and correct copies
of all such agreements.
Section 4.19 Environmental Matters.
(a) The Company is in compliance with all Environmental Laws (as
hereinafter defined), which compliance includes, but is not limited to, the
possession by the Company of all material permits and other governmental
authorizations required under applicable Environmental Laws, and compliance in
all respects with the terms and conditions thereof. The Company has not
received any communication, whether from a governmental authority, citizens
group, employee or otherwise, that alleges that the Company is not in such
compliance, and, to the knowledge of the Company, there are no material
circumstances that may prevent or interfere with such compliance in the
future. There are no permits or other governmental authorizations currently
held by the Company pursuant to the Environmental Laws.
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(b) To the knowledge of the Company, there are no Environmental Claims
(as hereinafter defined) pending, alleged or threatened against the Company or,
to the knowledge of the Company, against any person or entity whose liability
for any Environmental Claim the Company has retained or assumed either
contractually or by operation of law.
(c) To the knowledge of the Company, there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern (as hereinafter defined) by or
attributable to the Company that could form the basis of any Environmental
Claim against the Company or, to the knowledge of the Company, against any
person or entity whose liability for any Environmental Claim the Company has
retained or assumed either contractually or by operation of law.
(d) Without in any way limiting the generality of the foregoing and to
the Company's knowledge (which limitation applies to clauses (i) (iv) below),
(i) all on site and off site locations where the Company has stored Materials
of Environmental Concern are identified in Section 4.19(d)(i) of the Company
Disclosure Schedule, (ii) any underground storage tanks, and the capacity and
contents of such tanks, if known to the Company located on property owned or
leased by the Company are identified in Section 4.19(d)(ii) of the Company
Disclosure Schedule, (iii) except as set forth in Section 4.19(d)(iii) of the
Company Disclosure Schedule, there is no asbestos contained in or forming part
of any building, building component, structure or office space owned or leased
by the Company, and (iv) no polychlorinated biphenyls (PCB's) or PCB containing
items are used or stored at any property owned or leased by the Company.
(e) For purposes of this Agreement:
(i) "Environmental Claim" means any material claim, action, cause of
action, investigation or notice (written or oral) by any person or
entity alleging potential liability (including, without limitation,
potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based on or
resulting from (a) the presence, or release into the environment, of
any Material of Environmental Concern at any location, whether or not
owned or operated by the Company or (b) circumstances forming the basis
of any violation, or alleged violation, of any Environmental Law.
(ii) "Environmental Laws" means all Federal, state, local and
foreign laws and regulations relating to pollution or protection of
human health or the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata),
including, without limitation, laws and regulations relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Materials of Environmental Concern.
(iii) "Materials of Environmental Concern" means chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum and petroleum products, but excluding materials
commonly employed or wastes commonly generated in office operations
and/or janitorial operations.
Section 4.20 Insurance.
(a) Section 4.20(a) of the Company Disclosure Schedule contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by the
Company. All such policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the Effective Time
will have been paid, and no notice of cancellation or termination has been
received with respect to any such policy. Such policies will remain in full
force and effect through the respective dates set forth in Section 4.20(a) of
the Company Disclosure Schedule without the payment of additional premiums and
will not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement.
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(b) All pending claims, if any, made against the Company that are
covered by insurance have been disclosed to and accepted by the appropriate
insurance companies and are being defended by such appropriate insurance
companies and are described in Section 4.20(b) of the Company Disclosure
Schedule; no such claims have been denied coverage during the last three years.
During the last six months, no policy of the Company has been cancelled by the
issuer thereof. During the last six months, the Company has not been refused
any insurance with respect to its assets or operations, nor has its coverage
been limited, by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last three years.
Section 4.21 Customers. Section 4.21 of the Company Disclosure Schedule sets
forth a list of the Company's ten (10) largest customers in terms of gross
sales for the fiscal year ended December 31, 1998. Since December 31, 1998,
there has not been any material adverse change in the business relationships of
the Company with any of the customers listed in Section 4.21 of the Company
Disclosure Schedule.
Section 4.22 Title to Properties; Encumbrances. The Company owns no real
property. The Company has good, valid and marketable title to all the tangible
properties and assets which it purports to own, including, without limitation,
all the properties and assets reflected in the Balance Sheet, and all the
properties and assets purchased by the Company since the date of the Balance
Sheet, which subsequently acquired properties and assets (other than inventory)
are listed in Section 4.22 of the Company Disclosure Schedule. All such
properties and assets are free and clear of all mortgages, title defects or
objections, Liens, claims, charges, security interests or other encumbrances of
any nature whatsoever including, without limitation, leases, chattel mortgages,
conditional sales contracts, collateral security arrangements and other title
or interest retention arrangements, and are not, in the case of real property,
subject to any rights of way, building use restrictions, exceptions, variances,
reservations or limitations of any nature whatsoever except, with respect to
all such properties and assets, (a) liens shown on the Balance Sheet as
securing specified liabilities or obligations and liens incurred in connection
with the purchase of property and/or assets, if such purchase was effected
after the date of the Balance Sheet, with respect to which no default exists,
(b) minor imperfections of title, if any, none of which are substantial in
amount, materially detract from the value or impair the use of the property
subject thereto, or impair the operations of the Company and which have arisen
only in the ordinary course of business and consistent with past practice since
the date of the Balance Sheet, and (c) liens for current taxes not yet due.
Section 4.23 Equipment. The equipment of the Company is in good operating
condition and repair and is adequate for the uses to which it is being put.
None of such equipment is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs which are not material in nature or
cost.
Section 4.24 Leases. Section 4.24 of the Company Disclosure Schedule
contains a list of all leases, all of which have been previously delivered to
Parent. All such leases are valid, binding and enforceable against the Company
in accordance with their terms, and are in full force and effect; there are no
existing defaults by the Company thereunder; and no event of default has
occurred which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute a default by the Company
thereunder.
Section 4.25 Receivables. All accounts and notes due and uncollected as
reflected on the Balance Sheet, and all accounts and notes due and uncollected
arising subsequent to December 31, 1998: (i) have arisen in the ordinary course
of business of the Company, (ii) represent valid obligations due to the Company
enforceable in accordance with their terms, and (iii) subject only to the
reserve for doubtful accounts, computed in a manner consistent with past
practice, have been collected or, if the Company were to apply all payments
received from customers with past due accounts to the oldest receivable from
such customer, would be collectible in accordance with past practice within 120
days from the date of invoice in the aggregate recorded amounts thereof,
without being subject to any recoupments, set offs or counterclaims.
Section 4.26 Related Party Transactions. No contracts or agreements are in
effect as of the date hereof between the Company on the one hand, and employees
or affiliates of the Company, on the other hand. For purposes of this Section
4.26 of the Company Disclosure Schedule, an "affiliate" of any Person shall
mean any other person directly or indirectly controlling or controlled by or
under direct or indirect common control
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with such Person. For the purposes of this definition, "control", when used
with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings that correspond to the foregoing.
Section 4.27 Absence of Certain Payments. Neither the Company, nor, to the
Company's knowledge, any of its affiliates or any of their respective officers,
directors, employees or agents or other people acting on behalf of any of them
have: (i) engaged in any activity prohibited by the United States Foreign
Corrupt Practices Act of 1977 or any other similar law, regulation, decree,
directive or order of any Governmental Entity, and (ii) without limiting the
generality of the preceding clause (i), used any corporate or other funds for
unlawful contributions, payments, gifts or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others.
Neither the Company, nor, to the Company's knowledge, any of its affiliates or
any of their respective directors, officers, employees or agents of other
persons acting on behalf of any of them, has accepted or received any unlawful
contributions, payments, gifts or expenditures.
Section 4.28 Brokers or Finders. The Company represents, as to itself and
its affiliates, that no agent, broker, investment banker, financial advisor or
other firm or person retained by it is or will be entitled to any brokers' or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement.
Section 4.29 Books and Records. The books of account and other financial and
corporate records of the Company are complete and correct in all material
respects, and are maintained in accordance with good business practices. The
minute books and stock record books of the Company contain all: (i) minutes of
meetings of the stockholders, boards of directors and any committees of the
boards of directors, (ii) written statements of actions taken by the
shareholders, boards of directors and any committees of the boards of directors
without a meeting, and (iii) records of the issuance, transfer, transfer and
cancellation of all shares of capital stock and other securities, in each case
since the date of incorporation of the Company. Such minute books and stock
record books are true and complete in all material respects.
Section 4.30 Accounting Matters; Reorganization. To the knowledge of the
Company, neither the Company, nor any of its directors, officers or
shareholders, has taken any action which would prevent (a) the accounting for
the Merger as a pooling of interests for financial reporting purposes in
accordance with Accounting Principles Board Opinion No. 16 and the
interpretative releases pursuant thereto (collectively, "List of Defined Terms
APB 16") and the pronouncements of the SEC, or (b) the Merger from constituting
a reorganization qualifying under the provisions of Section 368(a) of the Code.
Section 4.31 Pooling Letter. The Company has received from
PricewaterhouseCoopers LLP a letter, dated not earlier than five (5) days prior
to the date hereof, to the effect that, subject to the qualifications contained
therein, the Merger qualifies for pooling of interests treatment for financial
reporting purposes in accordance with APB 16 and the pronouncements of the SEC.
Section 4.32 Information in Proxy Statement/Prospectus/Consent
Solicitation. No information provided by the Company in writing for inclusion
in the Registration Statement and the Proxy Statement/Prospectus/ Consent
Solicitation (or any amendment thereof or supplement thereto) will, at the date
mailed to the shareholders of the Company and at the time of the effectiveness
of the Registration Statement, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements made therein not misleading. No representation
is made by the Company with respect to statements made therein based on any
other information, including information supplied by Parent or Sub in writing
expressly for inclusion in the Registration Statement. The Company agrees to
correct promptly any such information provided by it that shall have become
false or misleading in any material respect and to use its commercially
reasonable efforts to take all steps necessary to cooperate with Parent in
filing with the SEC and having declared effective or cleared by the SEC any
amendment or supplement to the Registration Statement or the Proxy
Statement/Prospectus/Consent Solicitation so as to correct the same and to
cause the
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Proxy Statement/Prospectus/Consent Solicitation as so corrected to be
disseminated to the Company's shareholders and Parent's stockholders to the
extent required by applicable law. The Consent Solicitation shall comply as to
form in all material respects with the provisions of the Securities Act, the
Exchange Act, the CGCL and all other applicable laws.
Section 4.33 Full Disclosure. No representation or warranty by the Company
in this Agreement and no statement contained in any schedule or certificate
furnished or to be furnished by the Company to Parent, or any of its
representatives pursuant to the provisions hereof taken as a whole, contains as
of the date hereof any untrue statement of material fact or omits to state any
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as set forth below:
Section 5.1 Organization. Each of Parent and Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted and as proposed to be conducted. Each of Parent and Sub
is duly qualified or licensed and in good standing to do business in each
jurisdiction in which the property owned, leased, or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing or to have such power, authority and
governmental approvals would not have a Parent Material Adverse Effect. For
purposes of this Agreement, "Parent Material Adverse Effect" means,
individually or in the aggregate, a material adverse effect on the business,
financial condition, prospects or results of operations of Parent and its
Subsidiaries (as defined below), taken as a whole, but shall not include any of
the following in and of themselves, either alone or in combination: (A) any
effect or change occurring as a result of (1) general economic or financial
conditions, or (2) other developments which are not unique to Parent but which
also affect other persons who participate or are engaged in the lines of
business in which Parent participates or is engaged; or (B) any change or
effect on the business or financial condition or performance of Parent
following the date of this Agreement, resulting from a delay of, reduction in
or cancellation or change in the terms of any agreement or other transaction
with Parent attributable to (1) the announcement of this Agreement or the
transactions contemplated hereby, or (2) Parent's or any of its affiliates'
announcement or other communication of its plans or other intentions with
respect to the conduct of the business of the Company.
Section 5.2 Authority Relative to this Agreement. Each of Parent and Sub has
full corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement and the consummation of the Merger have been duly
and validly authorized by the Board of Directors of Parent and Sub, and no
other corporate proceedings on the part of Parent or Sub are necessary to
authorize this Agreement or to consummate the Merger other than, with respect
to the Parent Common Stock to be issued in the Merger, the approval of a
majority of the outstanding Parent Common Stock. This Agreement has been duly
executed by Parent and Sub, and constitutes a valid and binding agreement of
Parent and Sub, enforceable against Parent and Sub in accordance with its
terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
Section 5.3 Consents and Approvals; No Violations. Except for the filing and
recordation of an Agreement of Merger, in accordance with the requirements of
the CGCL, the filing of a Certificate of Merger,
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in accordance with the requirements of the DGCL, and the approval of the
stockholders of Parent of the Merger and the issuance of the Parent Common
Stock in the Merger, neither the execution, delivery or performance of this
Agreement by Parent and Sub, the consummation by Parent and Sub of the
transactions contemplated hereby, nor compliance by Parent and Sub with any of
the provisions hereof will: (i) require any notice to, filing with, or permit,
authorization, consent or approval of, any Governmental Entity or any private
third party, (ii) conflict with or result in any breach of any provision of the
charter or bylaws of Parent or any of its Subsidiaries (including Sub), (iii)
result in a violation or breach of, or constitute (with or without due notice
or lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or result in the creation of any Lien) under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, contract, agreement or other instrument or obligation to which Parent
or any of its Subsidiaries (including Sub) is a party or by which any of them
or any of their properties or assets may be bound, or (iv) violate any order,
writ, injunction, decree, statute, treaty, rule or regulation applicable to
Parent, any of its Subsidiaries (including Sub) or any of their properties or
assets except, in the case of clauses (i), (iii) and (iv), where the failure to
obtain such permits, authorizations, consents or approvals or to make such
filings, or where such violations, breaches or defaults would not, individually
or in the aggregate, (A) materially impair the ability of Parent to consummate
the transactions contemplated by this Agreement or (B) result in a Parent
Material Adverse Effect.
Section 5.4 Pooling Letter. Parent has received from PricewaterhouseCoopers
LLP, Parent's independent auditor, a letter, dated not earlier than five (5)
days prior to the date hereof, to the effect that, subject to customary
qualifications, the Merger qualifies for pooling of interests treatment for
financial reporting purposes in accordance with APB 16 and the pronouncements
of the SEC.
Section 5.5 Accounting Matters; Reorganization. To the knowledge of Parent,
neither Parent nor any of its directors, officers or stockholders, has taken
any action which would prevent: (a) the accounting for the Merger as a pooling
of interests for financial reporting purposes in accordance with APB 16 and the
pronouncements of the SEC, or (b) the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code.
Section 5.6 Brokers or Finders. Neither Parent nor any of its Subsidiaries
or affiliates has entered into any agreement or arrangement entitling any
agent, broker, investment banker, financial advisor or other firm or person to
any brokers' or finders' fee or any other commission or similar fee in
connection with any of the transactions contemplated by this Agreement, except
Dain Rauscher Wessels whose fees and expenses will be paid by Parent in
accordance with Parent's agreement with such firm.
Section 5.7 Information in Proxy Statement/Prospectus/Consent
Solicitation. The Registration Statement and the Proxy Statement/Prospectus/
Consent Solicitation (or any amendment thereof or supplement thereto) will not,
at the date it becomes effective, the date it is mailed to the shareholders of
the Company, and at the time of the Special Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they are made, not misleading, except
that no representation is made by Parent or Sub with respect to statements made
therein based on information supplied by the Company in writing expressly for
inclusion in the Registration Statement and the Proxy
Statement/Prospectus/Consent Solicitation. Each of Parent and Sub agrees to
correct promptly any such information provided by it that shall have become
false or misleading in any material respect and to use its commercially
reasonable efforts to take all steps necessary to file with the SEC and have
declared effective or cleared by the SEC any amendment or supplement to the
Registration Statement or the Proxy Statement/Prospectus/Consent Solicitation
so as to correct the same and to cause the Proxy Statement/Prospectus/Consent
Solicitation as so corrected to be disseminated to Parent's stockholders and
the Company's shareholders to the extent required by applicable law. The
Registration Statement and the Proxy Statement/Prospectus/Consent Solicitation
shall comply as to form in all material respects with the provisions of the
Securities Act, the Exchange Act and all other applicable laws.
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Section 5.8 SEC Documents; Parent Financial Statements. Parent has furnished
or made available to the Company a true and complete copy of its Annual Report
on Form 10 K for the fiscal year ended January 31, 1998, its Quarterly Reports
on Form 10 Q for the quarters ended April 30, 1998, July 31, 1998 and October
31, 1998 any Current Reports on Form 8 K filed since January 1, 1998 and a copy
of its proxy Statement dated June 18, 1998 (collectively, the "SEC Documents"),
which Parent filed under the Exchange Act with SEC. As of their respective
filing dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act, and none of the SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements made
therein not misleading, except to the extent corrected by a document
subsequently filed by or on behalf of Parent with the SEC. The consolidated
financial statements of Parent, including the notes thereto, included in the
SEC Documents (the "Parent Financial Statements") are complete and accurate,
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with US GAAP applied on a
consistent basis throughout the periods involved, and fairly present the
consolidated financial position of Parent and the results of its operations and
its cash flows as of the respective dates and for the periods indicated thereon
(subject, in the case of the unaudited statements, to normal recurring
accounting adjustments). Since October 31, 1998, no event has occurred which
could reasonably be expected to result in a Parent Material Adverse Effect.
Section 5.9 Employee Benefit Matters. As of the date hereof, Parent has no
intention of: (i) terminating the employment of any of the employees of the
Company, (ii) adversely modifying or affecting the employee compensation
afforded to such employees as of the Effective Time, or (iii) not providing the
employees of the Company with comparable types and levels of employee benefits
maintained by Parent for similarly situated employees of Parent, as determined
from time to time by Parent.
ARTICLE VI
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees as follows:
Section 6.1 Conduct of Business Pending Merger. Except as otherwise
specifically provided in this Agreement, from the date of this Agreement to the
earlier of Effective Time or termination, the Company will: (i) conduct its
operations only in the ordinary and usual course of business and consistent
with past practices, and (ii) use its reasonable efforts to preserve intact its
present business organization, keep available the services of its present
officers, employees and consultants and preserve its present relationships with
licensors, licensees, customers, suppliers, employees, labor organizations and
others having business relationships with it. Without limiting the generality
of the foregoing, and except as otherwise specifically provided in this
Agreement, the Company will not, directly or indirectly, prior to the Effective
Time, without the prior written consent of Parent:
(a) propose or adopt any amendment to or otherwise change its charter or
bylaws or other organizational documents;
(b) authorize for issuance, sale, pledge, disposition or encumbrance, or
issue, sell, pledge, dispose of or encumber (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase,
convertible securities or otherwise), any capital stock of any class or any
other securities of, or any other ownership interest in, the Company (except
for the issuance of Company Common Stock upon conversion of Company Preferred
Stock, or upon exercise of Company Options which are outstanding as of the date
of this Agreement) or amend any of the terms of any such securities or
agreements outstanding on the date hereof; provided, that prior to the
Effective Time, the Company may grant Company Options to newly hired employees
and consultants of the Company in numbers (measured in terms of shares of
Company Common Stock issuable upon the conversion of such Company Options) not
to exceed 10,000 to any individual nor 50,000 in the aggregate.
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(c) reclassify, combine, split or subdivide any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether in
cash, securities or property or any combination thereof) in respect of any
class or series of its capital stock, other than any dividend declared prior to
the date hereof;
(d) redeem, purchase or otherwise acquire, or propose or offer to
redeem, purchase or otherwise acquire, any outstanding shares or other
securities of the Company, except pursuant to the Company Stock Plans;
(e) organize any new subsidiary, acquire any capital stock or equity
securities of any corporation or acquire any equity or ownership interest
(financial or otherwise) in any business;
(f) (i) incur, assume or prepay any material liability, or incur any
indebtedness for borrowed money other than in accordance with the Company's
current financing arrangements, (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any third party, (iii) make any loans, advances or capital
contributions to, or investments in, any third party, (iv) mortgage or pledge
any of its material properties or assets, tangible or intangible, or create or
suffer to exist any Lien thereupon, or (v) authorize any new capital
expenditures which, individually or in the aggregate, are in excess of $25,000;
(g) license (except in the ordinary course of business) or otherwise
transfer, dispose of, permit to lapse or otherwise fail to preserve any of the
Company's Intellectual Property Rights, or dispose of or disclose to any person
any trade secret, formula, process or know how not theretofore a matter of
public knowledge;
(h) enter into any agreement, contract, commitment or transaction other
than in the ordinary course of business, consistent with past practices;
(i) make any change in the compensation or benefits payable or to become
payable to any of its officers, directors, employees, agents or consultants
(other than general increases in wages to employees who are not officers or
directors or affiliates in the ordinary course consistent with past practice)
or to persons providing management services;
(j) make any loans to any of its officers, directors, employees,
affiliates, agents or consultants or make any change in its existing borrowing
or lending arrangements for or on behalf of any of such persons, whether
pursuant to a Company Benefit Plan or otherwise;
(k) cancel any debts or waive, release or relinquish any contract rights
or other rights of substantial value other than in the ordinary course of
business, consistent with past practices;
(l) authorize, recommend, propose or enter into or announce an intention
to authorize, recommend, propose or enter into a term sheet, letter of intent,
agreement in principle or a definitive agreement with respect to any merger,
consolidation, liquidation, dissolution, or business combination, any
acquisition of a material amount of property or assets or securities, or any
disposition of a material amount of property or assets or securities;
(m) make any change with respect to accounting policies or procedures in
effect as of the Company's fiscal year ended December 31, 1998;
(n) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), including any Indebtedness, other than the payment, discharge or
satisfaction of any such claims, liabilities or obligations in the ordinary
course of business consistent with past practices, of liabilities reflected or
reserved against in the Company's Financial Statements or incurred in the
ordinary course of business consistent with past practices since the date
thereof;
(o) (i) change any of the accounting principles used by it unless
required by GAAP, (ii) take or allow to be taken any action which would
jeopardize the treatment of Parent's business combination with the
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Company as a pooling of interests for financial reporting purposes in
accordance with APB 16 and the pronouncements of the SEC, or (iii) take or
allow to be taken any action which would jeopardize qualification of the Merger
as a reorganization within the meaning of Section 368(a) of the Code;
(p) make any material election relating to Taxes, change any material
election relating to Taxes already made, adopt any accounting method relating
to Taxes, enter into any closing agreement relating to Taxes, settle any claim
or assessment relating to Taxes or consent to any claim or assessment relating
to Taxes or any waiver of the statute of limitations for any such claim or
assessment; or
(q) commit or agree (in writing or otherwise) to take any of the
foregoing actions or any action which would cause the failure of the conditions
set forth in Section 8.3(a) or Section 8.3(b).
Section 6.2 No Solicitation of Competing Transaction. (a) Neither the
Company nor any affiliate, as defined in Rule 12b 2 promulgated under the 1934
Act (an "Affiliate") of the Company shall (and the Company shall cause the
officers, directors, employees, representatives and agents of the Company and
each Affiliate of the Company, including, but not limited to, investment
bankers, attorneys and accountants, not to), directly or indirectly, encourage,
solicit, participate in or initiate discussions or negotiations with, or
provide any information to, any Person or group (other than Parent, any of its
Affiliates or representatives) concerning any proposal or offer to acquire all
or a substantial part of the business or properties of the Company or any
capital stock of the Company, whether by merger, tender offer, exchange offer,
sale of assets or similar transactions involving the Company, division or
operating or principal business unit of the Company (an "Acquisition
Proposal"). Upon execution of this Agreement, the Company will immediately
cease any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. Notwithstanding the
foregoing, prior to the date of the approval of this Agreement and the Merger
by the shareholders of the Company pursuant to the Consent Solicitation (the
"Terms Shareholder Approval Date"), the Company may furnish information
concerning its business, properties or assets to any corporation, partnership,
person or other entity or group pursuant to appropriate confidentiality
agreements, and may negotiate and participate in discussions and negotiations
with such entity or group concerning an Acquisition Proposal if:
(x) such entity or group has on an unsolicited basis submitted a bona
fide written proposal to the Company Board relating to any such transaction
which the Company Board determines in good faith, represents a superior
transaction to the Merger (a "Competing Proposal") and in the good faith
judgment of the Company Board the person or entity making such Competing
Proposal appears to have the financial means, or the ability to obtain the
necessary financing to conclude such Competing Proposal; and
(y) in the opinion of the Company Board such action is required to
discharge the Company Board's fiduciary duties to the Company's shareholders
under applicable law following receipt of advice from independent legal counsel
to the Company that the failure to provide such information or access or to
engage in such discussions or negotiations would result in a reasonable
possibility that the Company Board would violate its fiduciary duties to the
Company's shareholders under applicable law.
The Company will immediately notify Parent of the existence of any proposal,
discussion, negotiation or inquiry received by the Company, and the Company
will immediately communicate to Parent the terms of any proposal, discussion,
negotiation or inquiry which it may receive (and will immediately provide to
Parent copies of any written materials received by the Company in connection
with such proposal, discussion, negotiation or inquiry) and the identity of the
party making such proposal or inquiry or engaging in such discussion or
negotiation. The Company will promptly provide to Parent any non public
information concerning the Company provided to any other party which was not
previously provided to Parent.
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(b) Except as set forth below in this subsection (b), neither the
Company Board nor any committee thereof shall: (i) fail to include, withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Parent, the
approval or recommendation by such Board of Directors or any such committee of
this Agreement or the Merger, (ii) approve or recommend or propose to approve
or recommend, any Acquisition Proposal, or (iii) enter into any agreement with
respect to any Acquisition Proposal. Notwithstanding the foregoing, prior to
the Shareholder Approval Date, the Company Board may not include or may
withdraw or modify its approval or recommendation of this Agreement or the
Merger, approve or recommend any Acquisition Proposal which satisfies the
requirements of each of subsection (x) and subsection (y) of Section 6.2(a)
hereof (any such Acquisition Proposal, a "Terms Superior Proposal"), or enter
into an agreement with respect to a Superior Proposal, in each case at any time
after the fifth business day following Parent's receipt of written notice from
the Company advising Parent that the Company Board has received a Superior
Proposal which it intends to accept, specifying the material terms and
conditions of such Superior Proposal, identifying the person making such
Superior Proposal.
Section 6.3 Shareholder Approval. Subject to the provisions of Section 6.2
hereof, the Company shall use its reasonable best efforts to take all action
necessary, in accordance with the CGCL and its Articles of Incorporation and
Bylaws, to cause its shareholders to consider and act upon this Agreement and
the Merger as soon as practicable.
Section 6.4 Further Information. As soon as such information becomes
available, and in any event not later than thirty days after the end of each
fiscal month, the Company shall provide to Parent an unaudited consolidated
balance sheet as of the end of such month and the related consolidated
statements of results of operations for such period together with a list of the
ages and amounts of all accounts and notes due and uncollected as of the end of
such month.
Section 6.5 Access; Confidentiality. Subject to: (i) the Company's
confidentiality obligations to third parties, and (ii) the terms of the
Confidentiality Agreement, dated January 25, 1999, between Parent and the
Company, the Company shall afford to the officers, employees, accountants,
counsel, financing sources and other representatives of Parent, full access
during normal business hours from the date hereof until the Effective Time, to
all its properties, books, contracts, commitments and records, and, during such
period, the Company shall furnish promptly to the Parent all other information
concerning its business, properties and personnel as Parent may reasonably
request.
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ARTICLE VII
OTHER COVENANTS
Section 7.1 Commercially Reasonable Efforts.
(a) Subject to Section 6.2 hereof, prior to the Closing, upon the terms
and subject to the conditions of this Agreement, Parent and the Company agree
to use their respective commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable (subject to any applicable laws) to consummate and make
effective the Merger as promptly as practicable including, but not limited to:
(i) the preparation and filing of all forms, registrations and notices required
to be filed to consummate the Merger and the taking of such actions as are
necessary to obtain any requisite approvals, consents, orders, exemptions or
waivers by any third party or Governmental Entity, and (ii) the satisfaction of
the other parties' conditions to Closing. Notwithstanding the foregoing,
neither Parent nor the Company shall be required to divest or hold separate or
otherwise take or commit to take any action that limits Parent's or Company's
freedom of action with respect to, or their ability to retain, the Company or
any material portions thereof or any of the businesses, product lines,
properties or assets of the Company.
(b) Prior to the Closing, each party shall promptly consult with the
other parties hereto with respect to all filings made by such party with any
Governmental Entity or any other information supplied by such party to a
Governmental Entity in connection with this Agreement and the Merger. Each
party hereto shall promptly inform the other of any communication from any
Governmental Entity regarding the Merger. If any party hereto or Affiliate
thereof receives a request for additional information or documentary material
from any such Governmental Entity with respect to the Merger, then such party
shall endeavor in good faith to make, or cause to be made, as soon as
reasonably practicable and after consultation with the other parties, an
appropriate response in compliance with such request. To the extent that
transfers, amendments or modifications of permits (including environmental
permits) are required as a result of the execution of this Agreement or
consummation of the Merger, the Company shall use its best efforts to effect
such transfers, amendments or modifications.
(c) Notwithstanding the foregoing, nothing in this Agreement shall be
deemed to require either the Company or Parent to commence any litigation
against any entity in order to facilitate the consummation of any of the Merger
or to defend against any litigation brought by any third party or Governmental
Entity seeking to prevent the consummation of any of the Merger.
Section 7.2 Publicity. The initial press release with respect to the
execution of this Agreement shall be a joint press release acceptable to Parent
and the Company. Thereafter, until the Effective Time, or the date this
Agreement is terminated or abandoned pursuant to Article IX hereof, neither the
Company, Parent nor any of their respective Affiliates shall issue or cause the
publication of any press release or other announcement with respect to the
Merger or this Agreement without prior consultation with the other party,
except as may be required by law or by any listing agreement with a national
securities exchange or trading market.
Section 7.3 Directors' and Officers' Insurance and Indemnification.
(a) For six years after the Effective Time, Parent and the Surviving
Corporation (or any successor to the Surviving Corporation) shall indemnify,
defend and hold harmless each present and former officer and director of the
Company, and each person who become any of the foregoing prior to the Effective
Time (each, a "Company Indemnified Party") against all losses, claims, damages,
liabilities, costs, fees and expenses, including reasonable fees and
disbursements of counsel and judgments, fines, losses, claims, liabilities and
amounts paid in settlement (provided that any such settlement is effected with
the written consent of the Parent or the Surviving Corporation) arising out of
actions or omissions occurring at or prior to the Effective Time to the full
extent required or permitted under applicable California law, the terms of the
Articles of Incorporation or Bylaws of the Company or indemnification
agreements, if any, as in effect at the date hereof; provided, that, in the
event any claim or claims are asserted or made within such six year period, all
rights to indemnification in respect of any such claim or claims shall continue
until disposition of any and all such claims.
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Section 7.4 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of the
occurrence (or non occurrence) of any event of which the Company or Parent,
respectively, has knowledge, the occurrence (or non occurrence) of which would
be likely to cause any representation or warranty contained in this Agreement
to be untrue or inaccurate in any material respect and of the occurrence of any
material failure of either party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that (x) delivery of any notice pursuant to this Section 7.4
shall not limit or otherwise affect the remedies available to either party
hereunder, and (y) shall not constitute an admission by the party delivering
such notice that any such representation or warranty has been breached.
Section 7.5 Employees. As of the Effective Time, Parent will, or will cause
the Company to, give individuals who are employed by the Company as of the
Effective Time and who remain employees of the Company following the Effective
Time (each such employee, an "Affected Employee") full credit for purposes of
eligibility and vesting under any employee benefit plans or arrangements
maintained by Parent, the Company for such Affected Employees' service with the
Company or any affiliate thereof to the same extent recognized immediately
prior to the Effective Time.
Section 7.6 Affiliate Agreements. (a) Attached as Schedule 7.6 is a list
(reasonably satisfactory to counsel for Parent) setting forth the names of all
persons who are expected to be, at the time of the Special Meetings, in the
Company's reasonable judgment, "affiliates" of the Company for purposes of Rule
145 under the Securities Act or under APB 16 or applicable SEC accounting
releases with respect to pooling of interests accounting treatment. The Company
shall furnish such information and documents as Parent may reasonably request
for the purpose of reviewing such list. Each such person shall execute a
written agreement in substantially the form of Exhibit F-1 hereto within five
(5) days of the date hereof. Parent shall use commercially reasonable efforts
to cause all persons who are "affiliates" of Parent for purposes of qualifying
the Merger for pooling of interests accounting treatment under APB 16 and
applicable SEC rules and regulations to deliver to the Company on or before the
date immediately preceding the date of filing of the Registration Statement, a
written agreement substantially in the form attached as Exhibit F-2, and in the
event any other person becomes an affiliate of Parent thereafter to cause such
person to deliver such an agreement to the Company as soon as practicable but
in any event no later than the Closing Date.
(b) Within forty five (45) days after the end of the first fiscal
quarter of Parent ending at least thirty (30) days after the Effective Time,
Parent shall publish results including at least thirty (30) days of combined
operations of Parent and the Company as referred to in the Company Affiliates
Letter as contemplated by and in accordance with SEC Accounting Release No.
135.
Section 7.7 Tax free Reorganization Treatment; Accounting Treatment. (a)
Neither Parent nor the Company shall intentionally take, or cause or allow to
be taken, any action, whether before or after the Effective Time, which would
disqualify the Merger as a "reorganization" within the meaning of
Section 368(a) of the Code.
(b) Neither Parent nor the Company shall intentionally take, or cause or
allow to be taken, any action, whether before or after the Effective Time,
which would prevent the Merger from qualifying as a pooling of interests for
financial reporting purposes in accordance with APB 16 and the pronouncements
of the SEC.
Section 7.8 Nasdaq Qualification. Parent shall use all reasonable best
efforts to cause the shares of Parent Common Stock to be issued in connection
with the Merger to be qualified for inclusion in the Nasdaq Stock Market,
subject to official notice of issuance, as of or prior to the Effective Time.
Section 7.9 Consents of Accountants. Parent and the Company will each use
reasonable efforts to cause to be delivered to each other consents from
PricewaterhouseCoopers LLP, dated the date on which the Registration Statement
shall become effective, in form reasonably satisfactory to the recipient and
customary in scope and substance for consents delivered by independent public
accountants in connection with registration statements on Form S 4 under the
Securities Act.
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Section 7.10 Convertible Promissory Note. The Company shall, prior to the
Effective Time, cause any outstanding amounts owing under the Voting Debt to be
converted to Company Common Stock.
Section 7.11 Shareholder Representative. (a) For purposes of this Agreement,
Mannan Latif shall act as the Shareholder Representative, subject to the
provisions of Section 7.11(b) below. In the event that the Shareholder
Representative shall die or resign or otherwise terminate or decline to accept
his authority hereunder, his successor shall be any holder of the Company
Capital Stock and shall be elected by the vote or written consent of a majority
in interest of the holders of record of the Company Capital Stock as of the
Closing Date. The Shareholder Representative shall keep the holders of the
Company Capital Stock reasonably informed of any of his decisions which are
material in nature. Subject to the provisions of Section 7.11(b) below, (i) the
Shareholder Representative is authorized to take any action deemed by the
Shareholder Representative appropriate or necessary to carry out the provisions
of, and to determine the rights of the holders of the Company Capital Stock
under the terms of this Agreement, and is designated as the agent of, and
authorized to act on behalf of, the holders of the Company Capital Stock for
all purposes, including without limitation, to accept a service of process upon
the holders of Company Capital Stock, and (ii) all decisions of the Shareholder
Representative shall be binding upon the holders of Company Capital Stock.
(b) Any shareholder of the Company may, upon written notice to both
Parent and the Shareholder Representative, which notice shall provide an
address for receipt of notices for such shareholder, terminate the authority
and agency of the Shareholder Representative as provided herein with respect to
such shareholder. Thereafter, such Company shareholder shall have the right to
act independently.
(c) The Shareholder Representative shall not be liable to any of the
holders of Company Capital Stock for any error of judgment, act taken or
omitted to have been taken in good faith, or mistake of fact or law, unless
caused by [his] own gross negligence or willful misconduct.
Section 7.12 Parent SEC Documents. Parent agrees to furnish or make
available to the Company true and complete copies of any documents it files
under the Exchange Act with the SEC between the date of this Agreement and the
Closing Date.
Section 7.13 Non Competition Agreements. Each of the individuals identified
on Schedule 7.12 has executed and delivered to Parent a Non Competition
Agreement, substantially in the form of Exhibit G hereto, which Non Competition
Agreement is to take effect as of the Effective Time of the Merger.
Section 7.14 Registration Rights Agreement. The Company shall enter into a
Registration Rights Agreement (the "Registration Rights Agreement") with Adam
Au and Tit Wing Poon providing for one demand registration right on Form S 3
commencing not earlier than 180 days from the Effective Time. The fees and
expenses of such registration shall be borne by such shareholders of the
Company.
ARTICLE VII
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any and all of which may be waived in whole or in part by the Company or
Parent, as the case may be, to the extent permitted by applicable law:
(a) This Agreement shall have been adopted and the Merger and the
transactions related thereto shall have been approved pursuant to the Consent
Solicitation by the shareholders of the Company in accordance with the CGCL and
the Articles of Incorporation of the Company.
(b) The issuance of the Parent Common Stock in the Merger shall have
been approved by the shareholders of Parent in accordance with the rules of the
Nasdaq National Market and the DGCL.
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(c) No statute, rule or regulation shall have been enacted or
promulgated by any Governmental Entity which prohibits the consummation of the
Merger, and there shall be no order, decree or injunction of a court of
competent jurisdiction in effect precluding consummation of the Merger.
(d) The shares of Parent Common Stock to be issued in the Merger shall
have been authorized for listing on the Nasdaq National Market, upon official
notice of issuance.
(e) (i) The Registration Statement shall have been declared effective
under the Securities Act, (ii) no stop order suspending effectiveness of the
Registration Statement shall have been issued, and (iii) no proceeding for that
purpose shall have been initiated or threatened by the SEC.
(f) Parent shall have received a letter from PricewaterhouseCoopers LLP
reaffirming the statements made in the letter referenced in Section 5.4.
(g) The Company shall have received a letter from PricewaterhouseCoopers
LLP reaffirming the statements made in the letter referenced in Section 4.31.
Section 8.2 Conditions of Obligations of the Company. The obligation of the
Company to effect the Merger are further subject to the satisfaction at or
prior to the Effective Time of the following conditions, unless waived by the
Company:
(a) The representations and warranties of Parent and Sub set forth in
this Agreement shall be true and correct in all material respects as of the
date of this Agreement, except for representations and warranties qualified by
materiality which shall be correct in all respects, and except for
representations and warranties that speak as of a specific date other than the
Effective Time (which need only be true and correct in all respects as of such
date) and as of the Effective Time, with the same force and effect as though
such representations and warranties had been made on and as of the Effective
Time, except, in each case, where the failure to be true and correct could not
reasonably be expected to have a Parent Material Adverse Effect.
(b) Parent shall have performed and complied, in all material respects,
with all obligations and covenants required to be performed or complied with by
it under this Agreement at or prior to the Effective Time.
(c) The Company shall have received from Parent an officer's certificate
certifying to the fulfillment of the conditions specified in Section 8.2(a),
8.2(b), and 8.2(d).
(d) Since the date of this Agreement, there shall not have occurred any
event, change or effect having, or which would be reasonably likely to have a
Parent Material Adverse Effect.
(e) The Company shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LP, special counsel to Parent, substantially in the form
attached as Exhibit H hereto and otherwise reasonably satisfactory in form and
substance to the Company, addressed to the Company and dated as of the Closing
Date.
(f) The Company shall have received an opinion of Gunderson Detmer
Stough Villenueve Franklin & Hachigian LLP, in form and substance reasonably
satisfactory to the Company, dated the Effective Time, substantially to the
effect that, on the basis of facts, representations and assumptions set forth
in such opinion, for United States federal income tax purposes, the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the Code.
In rendering such opinion, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP may request, receive and rely upon representations contained in
certificates of Parent, Sub, the Company and others, and Parent, Sub and the
Company agree to provide such certifications as Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP may reasonably request.
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Section 8.3 Conditions of Obligations of Parent and Sub. The obligation of
Parent and Sub to effect the Merger are further subject to the satisfaction at
or prior to the Effective Time of the following conditions, unless waived by
Parent:
(a) The representations and warranties of the Company set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement, except for representations and warranties qualified by
materiality which shall be correct in all respects, and except for
representations and warranties that speak as of a specific date other than the
Effective Time (which need only be true and correct in all respects as of such
date) and as of the Effective Time, with the same force and effect as though
such representations and warranties had been made on and as of the Effective
Time, except, in each case, where the failure to be true and correct could not
reasonably be expected to have a Company Material Adverse Effect.
(b) The Company shall have performed and complied with, in all material
respects, with all obligations and covenants required to be performed or
complied with by it under this Agreement at or prior to the Effective Time.
(c) Parent shall have received from the Company an officer's certificate
certifying to the fulfillment of the conditions specified in Sections 8.3(a),
8.3(b), 8.3(d), 8.3(e), and 8.3(i).
(d) Since the date of this Agreement, there shall not have occurred any
event, change or effect having, or which would be reasonably likely to have a
Company Material Adverse Effect.
(e) All consents, permits and approvals of Governmental Entities and
other private third parties listed in Section 4.4 of the Company Disclosure
Schedule shall have been obtained.
(f) The Escrow Fund Agreement and the Shareholder Agreement shall have
been duly executed and delivered by the parties thereto, and shall be in full
force and effect, and the Escrow Fund Agreement and the Shareholder Agreement
shall remain in full force and effect.
(g) Each Non Competition Agreement executed and delivered to Parent by a
person listed on a Schedule 7.13 shall be effective as of the Effective Time of
the Merger in accordance with its terms.
(h) The Company shall have entered into the Registration Rights
Agreement with Adam Au and Tit Wing Poon in accordance with the terms of
Section 7.14.
(i) Adam Au shall have executed and delivered to Parent an Employment
Agreement substantially in the form attached hereto as Exhibit I in form and
substance satisfactory to Parent, which Employment Agreement is to take effect
as of the Effective Time of the Merger.
(j) Each share of Company Preferred Stock issued and outstanding
immediately prior to the Effective Time shall have been converted into Company
Common Stock.
(k) Parent shall have received an opinion of Coblentz, Patch, Duffy &
Bass, counsel to the Company, substantially in the form attached as Exhibit J
hereto and otherwise reasonably satisfactory in form and substance to Parent,
addressed to Parent and dated as of the Closing Date.
(l) Parent shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, in form and substance reasonably satisfactory to Parent,
dated the Effective Time, substantially to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, for United
States federal income tax purposes, the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code. In rendering
such opinion, Skadden, Arps, Slate, Meagher & Flom LLP may request, receive and
rely upon representations contained in certificates of Parent, Sub, the Company
and others, and Parent, Sub and the Company agree to provide such
certifications as Skadden, Arps, Slate, Meagher & Flom LLP may reasonably
request.
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ARTICLE IX
TERMINATION AND AMENDMENT
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the stockholders of Parent or the
shareholders of the Company:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent, if:
(i) any Governmental Entity shall have issued an order, decree or
ruling or taken any other action (which order, decree, ruling or other
action the parties hereto shall use their reasonable efforts to lift),
which permanently restrains, enjoins or otherwise prohibits the
consummation of the Merger and such order, decree, ruling or other
action shall have become final and non appealable;
(ii) (A) if the Merger is not approved and adopted by the
affirmative vote of the shareholders of the Company as required by the
CGCL and the Articles of Incorporation of the Company, or (B) if the
issuance of the Parent Common Stock in the Merger is not approved and
adopted by the stockholders of Parent in accordance with the rules of
the Nasdaq National Market and the DGCL;
(iii) if the Merger shall not have been consummated before September
30, 1999 (unless the failure to consummate the Merger by such date
shall be due to the action or failure to act of the party seeking to
terminate);
(c) by the Company:
(i) in connection with entering into a definitive agreement as
permitted by Section 6.2(b), provided the Company has complied with all
provisions thereof, including the notice provisions therein, and that
the Company makes simultaneous payment to Parent of funds as required
by Section 11.2(b);
(ii) if Parent shall have breached in any material respect any of
its representations, warranties, covenants or other agreements
contained in this Agreement, which would cause a failure of the
conditions set forth in Section 8.3(a) and Section 8.3(b), and which
breach cannot be or has not been cured within 30 days after the giving
of written notice by the Company to Parent.
(d) by Parent:
(i) if, prior to the Effective Time, the Company Board shall have:
(A) withdrawn, modified or changed in a manner adverse to Parent its
approval or recommendation of this Agreement or the Merger, (B)
recommended an Acquisition Proposal, (C) executed a letter of intent,
an agreement in principle or definitive agreement relating to an
Acquisition Proposal or similar business combination with a person or
entity other than Parent or their Affiliates, or (D) exercised its
rights pursuant to Section 6.2 with respect to an Acquisition Proposal,
and, directly or through its representatives, continued discussions
with any third party concerning an Acquisition Proposal for more than
ten business days after the date of receipt of such Acquisition
Proposal; or
(ii) if prior to the Effective Time, the Company shall have breached
in any material respect any representation, warranty, covenant or other
agreement contained in this Agreement, which would cause a failure of
the conditions set forth in Section 8.2(a) and Section 8.2(b), and
which breach cannot be or has not been cured within 30 days after the
giving of written notice to the Company.
Section 9.2 Effect of Termination. In the event of the termination of this
Agreement by any party hereto pursuant to the terms of this Agreement, written
notice thereof shall forthwith be given to the other party or
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parties specifying the provision hereof pursuant to which such termination is
made, and there shall be no liability on the part of Parent or the Company
except: (A) for fraud or for breach of this Agreement prior to such
termination, and (B) as set forth in Section 11.2.
ARTICLE X
INDEMNIFICATION AND ESCROW
Section 10.1 Indemnification by the Company and the Shareholder
Indemnitors. Each of the Company and the shareholders and option holders of the
Company (the "Shareholder Indemnitors") shall indemnify Parent and the
Surviving Corporation and any employee, director, officer or agent (the
"Indemnified Parties") of each of them against, hold each of them harmless
from, and reimburse each of them for any claim, costs, loss, liability or
expense (including reasonable attorneys' fees and expenses) or other damage
(including, without limitation, expectation, actual, punitive and consequential
damages) (collectively, "Damages") arising, directly or indirectly, from or in
connection with: (a) any inaccuracy in any of the warranties or representations
of the Company in this Agreement, (b) any failure by the Company to perform or
comply with any covenant or obligation in this Agreement, or (c) any Third
Party Claim (as defined below) relating to an inaccuracy or failure referred to
in clause (a) or (b) above.
Section 10.2 Procedure for Third Party Claims. Promptly after receipt by an
Indemnified Party under Section 10.1 of notice of the commencement of any
action or demand or claim by a third party (a "Third Party Claim") which gives
rise to Damages, such Indemnified Party shall, if a claim in respect thereof is
to be made against an indemnifying party under such Section, give notice to the
Shareholder Representative of its assertion of such claim for indemnification
and of the commencement of the action of its assertion of such claim for
indemnification and of the commencement of the action or assertion of the Third
Party Claim with respect to which the claim for indemnification pertains.
Failure to so notify the Shareholder Representative shall not relieve the
Shareholder Indemnitors of any liability that they may have to any Indemnified
Party except to the extent that the defense of such action or Third Party Claim
is materially prejudiced thereby. If any such action shall be brought or a
Third Party Claim shall be asserted against an Indemnified Party and it shall
give notice to the Shareholder Representative of the commencement or assertion
thereof, the Shareholder Representative shall be entitled, at the sole expense
of the Shareholder Indemnitors, to participate therein and, to the extent that
it shall wish, to assume the defense thereof with counsel reasonably
satisfactory to such Indemnified Party and, after notice from the Shareholder
Representative to such Indemnified Party of the election to assume the defense
thereof, the Shareholder Indemnitors shall not be liable to such Indemnified
Party under this Article X for any fees of other counsel or any other expense
(unless such fees or expenses are incurred at the request of the Shareholder
Indemnitors or the Shareholder Representative), in each case subsequently
incurred by such Indemnified Party in connection with the defense thereof. If
the Shareholder Representative receives notice of any action or Third Party
Claim, it shall promptly notify the Indemnified Party as to whether, at its
expense, it intends to control the defense thereof on behalf of the Shareholder
Indemnitors. If the Shareholder Representative defends an action, it shall have
full control over the litigation, including settlement and compromise thereof,
subject only to the following: no compromise or settlement thereof may be
effected by the Shareholder Representative without the Indemnified Party's
consent (which shall not be unreasonably withheld) unless: (i) there is no
finding or admission of any violation of law and no effect on any other claims
that may be made against the Indemnified Party, and (ii) the sole relief
provided is monetary damages that are paid in full by the Shareholder
Indemnitors or, in the case of a final disposition or settlement of such action
or Third Party Claim, out of the Escrow Fund. If notice is given to the
Shareholder Representative of the commencement of any action, and it does not,
within 20 days after the Indemnified Party's notice is given, give notice to
the Indemnified Party of its election to assume the defense thereof, the
Shareholder Indemnitors shall not be bound by any compromise or settlement
thereof effected by the Indemnified Party without the consent of the
Shareholder Indemnitors (or the Shareholder Representative on behalf of the
Shareholder Indemnitors), which shall not be unreasonably withheld.
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Section 10.3 Indemnity Period. No claim for indemnification under Section
10.1(a) of this Agreement may be made unless notice is given by the party
seeking such indemnification to the party from whom indemnification is sought
on or prior to the expiration of the applicable representation or warranty as
set forth in Section 11.1 hereof; provided, that notice of any claim based on
intentional fraud must be delivered by an Indemnified Party on or before the
third anniversary of the Effective Time.
Section 10.4 Satisfaction of Indemnification Claim. Following the Effective
Time, in the event the Shareholder Indemnitors shall have any liability for
indemnification or otherwise under this Agreement, the sole source for the
satisfaction of such liability shall be the Escrow Shares held in accordance
with the terms of the Escrow Fund Agreement; provided, however, that, with
respect to any Shareholder Indemnitor, the foregoing limitation shall not apply
with respect to any Damages arising, directly or indirectly, from or in
connection with any fraud on the part of such Shareholder Indemnitor. In all
such cases, the value of the Parent Common Stock to be so delivered shall be
determined pursuant to the terms of the Escrow Fund Agreement. In no event
shall the indemnification liability of the Company pursuant to this Article X
exceed the value of the Escrow Shares. No indemnification shall be payable
pursuant to Section 10.1 unless and until the amount of all claims for
indemnification exceeds $250,000 (the "Basket") in the aggregate; provided,
however, that in the event the Damages for which the Shareholder Indemnitors
are liable exceed the Basket, the Shareholder Indemnitors shall be responsible
only for the amount of such Damages exceed the Basket, consistent with Section
10.1 hereof, except as provided in Section 11.2 hereof. For purposes of
determining whether the Basket has been satisfied with respect to any breach of
the representations and warranties contained in Article IV hereof that are
qualified by the phrase "Company Material Adverse Effect," any such
representation or warranty so qualified shall be deemed breached if it is
untrue or incorrect, regardless of whether such breach would or could have a
Company Material Adverse Effect.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Survival of Representations and Warranties. The representations
and warranties of the Company made herein shall survive beyond the Effective
Time and shall continue in full force and effect until the earlier to occur of:
(1) the date of issuance of the first independent audit report of the Company
or of the Company consolidated with Parent following the Effective Time, and
(2) the date which is one year following the Effective Time.
Section 11.2 Fees and Expenses. (a) Except as specifically provided to the
contrary in this Agreement, including Section 11.2(b), all costs and expenses
incurred in connection with this Agreement and the consummation of the Merger
shall be paid by the party incurring such expenses; provided, however, that (i)
any fees and expenses of the Company in excess of $250,000 incurred in
connection with this Agreement and the consummation of the Merger shall be
borne by the Shareholder Indemnitors, without regard to the Basket, and (ii) if
any legal action is instituted to enforce or interpret the terms of this
Agreement, the prevailing party in such action shall be entitled, in addition
to any other relief to which the party is entitled, to reimbursement of its
actual attorneys fees.
(b) If :
(i) the Company shall terminate this Agreement pursuant to (x)
Section 9.1(b)(ii) and the shareholder who executes the Shareholder
Agreement is in breach of its obligations under such Shareholder
Agreement, or (y) Section 9.1(c)(i);
(ii) Parent shall terminate this Agreement pursuant to Section
9.1(d)(i);
(iii) Parent shall terminate this Agreement pursuant to Section
9.1(d) (ii), and prior thereto there shall have been publicly announced
another Acquisition Proposal or the Company or its directors or
officers or investment bankers shall have received an Acquisition
Proposal; or
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(iv) Parent shall terminate this Agreement pursuant to Section
9.1(b)(iii) and (x) prior thereto there shall have been publicly
announced another Acquisition Proposal or the Company or its directors
or officers or investment bankers shall have received an Acquisition
Proposal, and (y) within nine months after such termination the Company
shall have entered into an agreement with respect to or consummated
another Acquisition Proposal, then the Company shall pay to Parent an
amount equal to $1,000,000 (the "Termination Fee"), plus an amount
equal to Parent's actual and reasonably documented out of pocket fees
and expenses incurred by Parent in connection with the Merger, this
Agreement and the consummation of the Merger in an amount not to exceed
$500,000. The Termination Fee and Parent's good faith estimate of its
expenses shall be paid in same day funds (x) concurrently with the
termination of this Agreement pursuant to subsection (i), (ii) or (iii)
above, and (y) within one business day following the occurrence of the
event described in clause (y) of subsection (iv) above, in the case of
termination pursuant to subsection (iv).
Section 11.3 Amendment. This Agreement may be amended by the parties hereto
at any time before or after approval of the matters presented in connection
with the Merger by the shareholders of the Company and the stockholders of
Parent, but, after any such approval, no amendment shall be made that by law
requires further approval by such shareholders or stockholders, as applicable,
without such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 11.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
Section 11.5 Notices. All notices and other communications hereunder shall
be in writing (and shall be deemed given upon receipt) if delivered personally,
sent by facsimile transmission (receipt of which is confirmed) or by mail to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to the Company, to
AUCO, Inc.
386 Main Street
Redwood City, California 94063
Attention: Adam Au
Facsimile: (650) 568-6101
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Attention: Brooks Stough, Esq.
Facsimile No.: (650) 321-2800
and to:
Coblentz, Patch, Duffy & Bass, LLP
222 Kearny Street, 7/th/ Floor
San Francisco, California 94108
Attention: Paul Escobosa, Esq.
Facsimile: (415) 989-1663
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<PAGE>
and
(b) if to Parent, to
Peerless Systems Corporation
2381 Rosecrans Avenue, Suite 400
El Segundo, California 90245
Attention: Edward Gavaldon
Facsimile: (310) 536-0058
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 220
Palo Alto, CA 94301
Attention: Gregory C. Smith, Esq.
Facsimile No.: (650) 470-4570
and
(c) if to the Shareholder Representative, to:
Mannan Latif c/o AUCO, Inc.
386 Main Street
Redwood City, California 94063
Facsimile: (650) 568-6101
Section 11.6 Descriptive Headings. The descriptive headings herein are
inserted for convenience only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
Section 11.7 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 11.8 Entire Agreement; Assignment. This Agreement (including the
Exhibits and Schedules attached hereto): (a) constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, any provisions of
such latter agreement which are inconsistent with the transactions contemplated
by this Agreement being waived hereby), and (b) shall not be assigned by
operation of law or otherwise except that Parent and Sub may assign, in their
sole discretion, any or all of their rights, interests and obligations
hereunder to any direct or indirect wholly or majority owned Subsidiary or
Affiliate of Parent; provided, however, that such assignment shall not relieve
Parent of its obligations hereunder.
Section 11.9 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of California without regard to any
applicable principles of conflicts of law.
Section 11.10 Specific Performance. The parties hereto agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
Section 11.11 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first written above.
PEERLESS SYSTEMS CORPORATION
By: /s/ Edward A. Gavaldon
---------------------------------
Name: Ed Gavaldon
Title: President and CEO
AUCO MERGER SUB, INC.
By: /s/ Edward A. Gavaldon
---------------------------------
Name: Ed Gavaldon
Title: President
AUCO, INC.
By: /s/ Adam Au
---------------------------------
Name: Adam Au
Title: President
For purposes of Article VII, Article
X and Article XI only:
SHAREHOLDER REPRESENTATIVE
By: /s/ Mannan Latif
---------------------------------
Mannan Latif
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<PAGE>
EXHIBIT A TO MERGER AGREEMENT
FORM OF SHAREHOLDER AGREEMENT
(SEE ANNEX B)
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<PAGE>
EXHIBIT B TO THE MERGER AGREEMENT
FORM OF AGREEMENT OF MERGER
1. The Merger. Auco Merger Sub, Inc., a Delaware corporation ("Sub") and a
wholly owned subsidiary of Peerless Systems Corporation, a Delaware corporation
("Parent"), shall be merged (the "Merger") with and into AUCO, Inc., a
California corporation ("Auco"), with Auco remaining as the Surviving
Corporation in the Merger (the "Surviving Corporation"). The Merger shall
become effective upon the filing of this Agreement of Merger, together with any
required officers' certificates, with the Office of the Secretary of State of
the State of California, which time is referred to herein as the "Effective
Time".
2. Conversion of Shares.
(a) At the Effective Time, each issued and outstanding share of common
stock, par value $0.01 per share, of Sub shall be converted into one fully paid
and nonassessable share of common stock, par value $0.01 per share, of the
Surviving Corporation.
(b) At the Effective Time, (i) each issued and outstanding share of common
stock, no par value ("Auco Common Stock"), of Auco shall be converted into the
right to receive 0.2585 of a fully paid and nonassessable share of common
stock, par value $0.01 per share, of Parent (the "Parent Common Stock"). As of
the Effective Time of the Merger, all such shares shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease to
exist.
3. Amendment to Articles of Surviving Corporation. Immediately following the
Effective Time of the Merger, the Articles of Incorporation of the Surviving
Corporation shall be amended and restated in their entirety as set forth in
Annex I hereto.
Dated: [ ], 1999
-------------------------
[ ]
President
-------------------------
[ ]
Secretary
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<PAGE>
ANNEX I TO EXHIBIT B TO THE MERGER AGREEMENT
FORM OF AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF AUCO, INC.
(See EXHIBIT C to the Merger Agreement)
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OFFICER'S CERTIFICATE OF
AUCO MERGER SUB, INC.
We, [ ], the President, and [ ], the Secretary, of
Auco Merger Sub, Inc., a Delaware corporation (the "Corporation") do hereby
certify:
1. That we are the President and the Secretary of this Corporation.
2. That this Corporation is duly organized and existing under the laws of
the State of Delaware.
3. That a total of shares of common stock of this Corporation, par
value $0.01 per share, are issued and outstanding and are entitled to vote on
the merger to be effected by the Agreement of Merger attached hereto.
4. That the principal terms of the Agreement of Merger attached hereto were
approved by a vote of the issued and outstanding shares of each class of this
Corporation entitled to vote thereon which equaled or exceeded the vote
required. A majority vote of the issued and outstanding shares of common stock
of this Corporation is the required voting percentage.
5. That the required vote of the stockholders of Peerless Systems
Corporation, a Delaware corporation and the parent of this Corporation
("Parent"), relating to the issuance of Parent's equity securities in the
merger, has been obtained.
Each of the undersigned declares under the penalties of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge.
Executed at [ ], California on [ ], 1999.
-------------------------
[ ]
President
-------------------------
[ ]
Secretary
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OFFICER'S CERTIFICATE OF
AUCO, INC.
We, [ ], the President, and [ ], the Secretary, of
AUCO, Inc., a California corporation (the "Corporation") do hereby certify:
1. That we are the President and the Secretary of the Corporation.
2. That the Corporation is duly organized and existing under the laws of the
State of California.
3. That a total of shares of common stock of this Corporation, par
value $0.001 per share, are issued and outstanding and are entitled to vote on
the merger to be effected by the Agreement of Merger attached hereto.
4. That the principal terms of the Agreement of Merger attached hereto were
approved by a vote of the issued and outstanding shares of each class of the
Corporation entitled to vote thereon which equaled or exceeded the vote
required. A majority vote of the issued and outstanding shares of common stock
of this Corporation is the required voting percentage.
Each of the undersigned declares under the penalties of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge.
Executed at Redwood City, California on [ ], 1999.
-------------------------
[ ]
President
-------------------------
[ ]
Secretary
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EXHIBIT C TO THE MERGER AGREEMENT
FORM OF ARTICLES OF INCORPORATION
OF
GOLD, INC.
FIRST: The name of the corporation is Gold, Inc. (hereinafter, the
"Corporation").
SECOND: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the California
Corporations Code.
THIRD: The total number of shares of stock which the Corporation shall have
authority to issue is one thousand (1,000) shares of Common Stock, having a par
value of one thousandth of a dollar ($0.01).
FOURTH: The Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the General Corporation Law of California (the
"CGCL")) through Bylaw provisions, agreements with agents, vote of shareholders
or disinterested directors or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL, subject only to the applicable
limitations set forth in Section 204 of the CGCL with respect to actions for
breach of duty to the Corporation and its shareholders.
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EXHIBIT D TO THE MERGER AGREEMENT
FORM OF BYLAWS
OF
GOLD, INC.
a California corporation
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<PAGE>
ARTICLE I
OFFICES
1.1. PRINCIPAL OFFICES. The board of directors shall fix the location of the
principal and executive offices of the corporation at any place within or
outside the State of California. The board of directors is hereby granted full
power and authority to change the location of the principal executive office of
the corporation from one location to another. If the principal executive office
is located outside the State of California, and the corporation has one (1) or
more business offices in the State of California, the board of directors shall
likewise fix and designate a principal business office in the State of
California.
1.2. OTHER OFFICES. The board of directors may at any time establish branch
or subordinate offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place
within or outside the State of California designated by the board of directors.
In the absence of any such designation, shareholders' meetings shall be held at
the principal executive office of the corporation or at any place consented to
in writing by all persons entitled to vote at such meeting, given before or
after the meeting and filed with the secretary of the corporation.
2.2. ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of shareholders
shall be held each year on a date and at a time designated by the board of
directors. At each annual meeting, directors shall be elected and any other
proper business may be transacted.
2.3. SPECIAL MEETINGS. A special meeting of the shareholders may be called
at any time, subject to the provisions of Sections 4 and 5 of this Article II,
by the board of directors, the chairman of the board, the president or the
holders of shares entitled to cast not less than ten percent (10%) of the votes
at the meeting or such additional persons as provided in the articles of
incorporation or in these Bylaws.
If a special meeting is called by anyone other than the board of directors
or the president or the chairman of the board, then the request shall be in
writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent
by registered mail or by other written communication to the chairman of the
board, the president, any vice president or the secretary of the corporation.
The officer receiving the request forthwith shall cause notice to be given to
the shareholders entitled to vote, in accordance with the provisions of
Sections 4 and 5 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting so long as that time is
not less than thirty-five (35) nor more than sixty (60) days after the receipt
of the request. If the notice is not given within twenty (20) days after the
receipt of the request, then the person or persons requesting the meeting may
give the notice. Nothing contained in this paragraph of this Section 3 shall be
construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be held.
2.4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 2.5 of
these Bylaws not less than ten (10) (or, if sent by third-class mail pursuant
to Section 2.5 of these Bylaws, not less than thirty (30)) nor more than sixty
(60) days before the date of the meeting to each shareholder entitled to vote
thereat. Such notice shall state the place, day and hour of the meeting and (i)
in the case of a special meeting, the general nature of the business to be
transacted, and no other business may be transacted, or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of the
mailing of the notice, intends to present for action by the
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shareholders, but subject to the provisions of the next paragraph of this
Section 2.4, any proper matter may be presented at the meeting for such action.
The notice of any meeting at which directors are to be elected shall include
the names of nominees intended at the time of the notice to be presented by the
board of directors for election.
If action is proposed to be taken at any shareholders' meeting for approval
of (i) a contract or transaction between the corporation and one or more of its
directors, or between the corporation and any corporation, firm or association
in which one or more of its directors has a material financial interest,
pursuant to Section 310 of the California Corporations Code (the "CCC"), (ii)
an amendment to the articles of incorporation, pursuant to Section 902 of the
CCC, (iii) a reorganization of the corporation, pursuant to Section 1201 of the
CCC, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900
of the CCC or (v) a distribution in dissolution other than in accordance with
the rights of outstanding preferred shares pursuant to Section 2007 of the CCC,
such approval, other than unanimous approval by those entitled to vote, shall
be valid only if the general nature of the proposal so approved was stated in
the notice of meeting or in any written waiver of notice.
2.5. MANNER OF GIVING NOTICE. Notice of any meeting of shareholders shall be
given in writing either personally or by first-class mail, or, if the
corporation has outstanding shares held of record by five hundred (500) or more
persons (determined as provided in Section 605 of the CCC) on the record date
for the shareholders' meeting, notice may be sent by third-class mail, or other
means of written communication, addressed to the shareholder at the address of
such shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice; or, if no such
address appears or is given, at the place where the principal executive office
of the corporation is located or by publication at least once in a newspaper of
general circulation in the county in which the principal executive office is
located. Such notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of written
communication.
If any notice (or any report referenced in Article VI of these Bylaws)
addressed to a shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice or report to the shareholder at such address, all
future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of such notice or
report to all other shareholders.
An affidavit of the mailing or other means of giving any notice in
accordance of the provisions of this Section 2.5, executed by the secretary,
assistant secretary or any transfer agent of the corporation giving such
notice, shall be prima facie evidence of the giving of the notice or report.
2.6. QUORUM. Unless otherwise provided in the articles of incorporation, the
presence in person or by proxy of the holders of a majority of the shares
entitled to vote shall constitute a quorum at a meeting of the shareholders.
Except as provided in the immediately succeeding sentence, if a quorum is
present, the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting
by classes is required by the CCC or the articles of incorporation. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum. In the absence of a quorum, any meeting of
shareholders may be adjourned from time to time by the vote of a majority of
the shares represented either in person or by proxy, but no other business may
be transacted, except as provided in the immediately preceding sentence.
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2.7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting,
whether annual or special, and whether or not a quorum is present, may be
adjourned from time to time by the vote of the majority of the shares
represented at such meeting, either in person or by proxy. When any
shareholders' meeting, whether annual or special, is adjourned to another time
or place, notice of the adjourned meeting need not be given if the time and
place thereof are announced at the meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than forty-five (45) days from the date set for the
original meeting. At the adjourned meeting the corporation may transact any
business which might have been transacted at the original meeting. Notice of
any such adjourned meeting, if required, shall be given to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5.
2.8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section
2.11, subject to the provisions of Chapter 7 of the CCC. Elections for
directors and voting on any other matter at a shareholders' meeting need not be
by ballot unless a shareholder demands election by ballot at the meeting and
before the voting begins. Except as provided in the last paragraph of this
Section 2.8, or as may be otherwise provided in the articles of incorporation,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote of the shareholders.
Any shareholder entitled to vote on any matter may vote part of the shares
in favor of the proposal and refrain from voting the remaining shares or vote
them against the proposal, other than elections to office, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares such shareholder is entitled to
vote.
At a shareholders' meeting involving the election of directors, no
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes equal to the number of directors to be elected multiplied by
the number of votes to which such shareholder's shares are entitled, or
distribute the shareholder's votes on the same principle among any or all of
the candidates as the shareholder thinks fit) for any candidate or candidates
unless such candidate or candidates names have been placed in nomination prior
to the voting and the shareholder has given notice at such meeting prior to the
voting of the shareholder's intention to cumulate the shareholder's votes. If
any one shareholder has given such notice, all shareholders may cumulate their
votes for candidates in nomination. The candidates receiving the highest number
of affirmative votes of the shares entitled to be voted for them, up to the
number of directors to be elected, shall be elected; votes against a candidate
and votes withheld shall have no legal effect.
2.9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of
any meeting of the shareholders, whether annual or special, however called and
noticed, and wherever held, are as valid as though they had been taken at a
meeting duly held after regular call and notice, if a quorum is present either
in person or by proxy, and if, either before or after the meeting, each of the
persons entitled to vote, not present in person or by proxy, signs a written
waiver of notice or a consent to the holding of the meeting or an approval of
the minutes thereof. Neither the business to be transacted at nor the purpose
of any meeting of the shareholders need be specified in any written waiver of
notice, consent to the holding of the meeting or approval of the minutes
thereof, unless otherwise provided for in the articles of incorporation or
these Bylaws, except as provided in the second paragraph of Section 2.4 of
these Bylaws. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting constitutes a waiver of notice of and
presence at such meeting, except when the person objects, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened; provided, that attendance at a meeting shall not
constitute a waiver of any right to object to the consideration of matters
required by the CCC to be included in the notice of such meeting but not so
included, if such objection is expressly made at the meeting.
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2.10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
which may be taken at any annual or special meeting of shareholders may be
taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Directors may not be elected
by written consent except by unanimous written consent of all shares entitled
to vote for the election of directors; provided, however, that the shareholders
may elect a director at any time to fill any vacancy not filled by the
directors and not created by the removal of such director, by written consent
of the holders of a majority of the outstanding shares entitled to vote for the
election of directors.
All such consents shall be filed with the secretary of the corporation and
shall be maintained in the corporate records. Any shareholder giving a written
consent, or the shareholder's proxy holders, or a transferee of the shares, or
a personal representative of the shareholder, or their respective proxy
holders, may revoke the consent by a writing received by the secretary of the
corporation before written consents of the number of shares required to
authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been solicited
in writing, the secretary shall give prompt notice to those shareholders
entitled to vote who have not consented in writing of the taking of any
corporate action approved by shareholders without a meeting by less than
unanimous written consent. Such notice shall be given in accordance with
Section 5 of this Article II. In the case of approval of (i) contracts or
transactions between the corporation and one or more of its directors, or
between the corporation and any corporation, firm or association in which one
or more of its directors has a material financial interest, pursuant to Section
310 of the CCC, (ii) indemnification of agents of the corporation, pursuant to
Section 317 of the CCC, (iii) a reorganization of the corporation, pursuant to
Section 1201 of the CCC or (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the CCC, such notice shall be given at least ten (10) days before the
consummation of the action authorized by such approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.
2.11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS. In
order that the corporation may determine the shareholders entitled to notice of
any meeting or to vote, the board of directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days
prior to the date of such meeting nor more than sixty (60) days before any
other action. Shareholders at the close of business on the record date are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date, except as otherwise
provided in the CCC, the articles of incorporation or by agreement.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned
meeting, but the board of directors shall fix a new record date if the meeting
is adjourned for more than forty-five (45) days from the date set for the
original meeting.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give consent to
corporate action in writing without a meeting, when no prior action by the
board of directors has been taken, shall be the day on which the first written
consent is given.
(c) The record date for determining shareholders entitled to give consent to
corporate action in writing without a meeting, when prior action by the board
of directors has been taken, shall be at the close of business
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on the day on which the board adopts the resolution relating thereto, or the
sixtieth (60th) day prior to the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Section 7.1 of
these Bylaws.
2.12. PROXIES. Every person entitled to vote shares shall have the right to
do so either in person or by one or more agents authorized by a written proxy
signed by the person and filed with the secretary of the corporation. A proxy
shall be deemed to be signed if the shareholder's name or other authorization
is placed on the proxy (whether by manual signature, typewriting, telegraphic
or electronic transmission or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect until revoked by
the person executing it prior to the vote pursuant thereto, except as otherwise
provided in this Section 2.12. Such revocation may be effected by a writing
delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or as to any meeting by attendance at such meeting and voting
in person by the person executing the proxy. The dates contained on the forms
of proxy presumptively determine the order of execution, regardless of the
postmark dates on the envelopes in which they are mailed. A proxy is not
revoked by the death or incapacity of the maker unless before the vote is
counted, written notice of such death or incapacity is received by the
corporation. No proxy shall be valid after the expiration of eleven (11) months
from the date thereof unless otherwise provided in the proxy. The revocability
of a proxy that states on its face that it is irrevocable shall be governed by
the provisions of Sections 705(e) and 705(f) of the CCC.
2.13. INSPECTORS OF ELECTION. In advance of any meeting of shareholders the
board of directors may appoint inspectors of election to act at the meeting and
any adjournment thereof. If such inspectors are not so appointed, or if any
persons so appointed fail to appear or refuse to act, the chairman of the
meeting of shareholders may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election (or persons to
replace those who fail to appear or refuse to act) at the meeting. The number
of inspectors shall be either one (1) or three (3). If appointed at a meeting
on the request of one (1) or more shareholders or proxies, the majority of
shares represented in person or by proxy shall determine whether one (1) or
three (3) inspectors are to be appointed. If there are three (3) inspectors of
election, the decision, act or certificate of a majority is effective in all
respects as the decision, act or certificate of all.
The inspectors of election shall determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum and the authenticity, validity and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1. POWERS. Subject to the provisions of the CCC and any limitations in the
articles of incorporation and these Bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, or by a less than
majority vote of a class or series of preferred shares (if so provided in
accordance with Section 402.5 of the CCC), the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors. The board may delegate the
management of the day-to-day operation of the business of the corporation to a
management company or other person provided that the business and affairs of
the corporation shall be managed and all corporate powers shall be exercised
under the ultimate direction of the board of directors.
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3.2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors of the corporation shall be not less than four (4) nor more than
seven (7), with the exact number of directors to be fixed, within the limits
specified, by a resolution amending such exact number, duly adopted by the
board or by the shareholders. Such maximum or minimum number of directors, or a
fixed board to a variable board or vice-versa, may be changed only by a duly
adopted amendment to the articles of incorporation or to these Bylaws by the
affirmative vote or written consent of the holders of a majority of the
outstanding shares entitled to vote (including separate class votes, if so
required by the CCC or the articles of incorporation); provided, however, that
a Bylaw or amendment to the articles of incorporation reducing the fixed number
or the minimum number of directors to a number less than five cannot be adopted
if the votes cast against its adoption at a meeting or the shares not
consenting in the case of action by written consent are equal to more than 16
2/3% of the outstanding shares entitled to vote thereon.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at
each annual meeting of shareholders to hold office until the next annual
meeting. Each director, including a director elected to fill a vacancy, shall
hold office until the expiration of the term for which elected and until a
successor has been elected and qualified, except in the case of the death,
resignation or removal of such director.
3.4. VACANCIES AND RESIGNATION. A vacancy or vacancies in the board of
directors shall be deemed to exist in the case of the death, resignation, or
removal of any director, or if the authorized number of directors is increased
(by the board of directors or shareholders), or if the board of directors by
resolution declares vacant the office of a director who has been declared of
unsound mind by an order of court or convicted of a felony, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
elected at that meeting.
Unless otherwise provided in the articles of incorporation, vacancies on the
board of directors, except for a vacancy created by the removal of a director,
may be filled by approval of the board or, if the number of directors then in
office is less than a quorum, by (i) the unanimous written consent of the
directors then in office, (ii) the affirmative vote of a majority of the
directors then in office at a meeting held pursuant to notice or waivers of
notice complying with Section 307 of the CCC or (iii) a sole remaining
director. Unless the articles of incorporation or a Bylaw adopted by the
shareholders provide that the board of directors may fill vacancies occurring
in the board of directors by reason of the removal of directors, such vacancies
may be filled only by approval of the shareholders.
The shareholders may elect a director at any time to fill any vacancy not
filled by the directors. Any such election by written consent other than to
fill a vacancy created by removal requires the consent of a majority of the
outstanding shares entitled to vote thereon. A director may not be elected by
written consent to fill a vacancy created by removal except by unanimous
written consent of all shares entitled to vote for the election of directors.
Any director may resign effective upon giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation of a director is effective at a future time, a successor may be
elected to take office when the resignation becomes effective.
3.5. REMOVAL. Any or all of the directors may be removed from office without
cause if the removal is approved by the outstanding shares, subject to the
following: (i) no director may be removed (unless the entire board is removed)
when the votes cast against removal, or not consenting in writing to the
removal, would be sufficient to elect the director if voted cumulatively at an
election at which the same total number of votes were cast (or, if the action
is taken by written consent, all shares entitled to vote were voted) and the
entire number of directors authorized at the time of the director's most recent
election were then being elected; (ii) when by
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the provisions of the articles of incorporation the holders of the shares of
any class or series, voting as a class or series, are entitled to elect one or
more directors, any director so elected may be removed only by the applicable
vote of the holders of the shares of that class or series; and (iii) any
reduction of the authorized number of directors or amendment reducing the
number of classes of directors does not remove any director prior to the
expiration of the director's term of office.
3.6. PLACE OF MEETINGS AND TELEPHONIC, ETC. MEETING. Regular meetings of the
board of directors may be held at any place within or outside the State of
California that has been designated from time to time by resolution of the
board of directors. In the absence of such designation, regular meetings shall
be held at the principal executive office of the corporation. Special meetings
of the board of directors shall be held at any place within or outside the
State of California that has been designated in the notice of the meeting or,
if not stated in the notice or if there is no notice, at the principal
executive office of the corporation.
Members of the board of directors may participate in a meeting through the
use of conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another. Participation in a
meeting pursuant to this paragraph of Section 3.6 constitutes presence in
person at such meeting.
3.7. REGULAR MEETINGS. Regular meetings of the board of directors may be
held without notice if the time and place of the meetings are fixed by the
board of directors or these Bylaws.
3.8. SPECIAL MEETINGS; NOTICE. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board or the president or any vice president or the secretary or any two
directors. Special meetings of the board of directors shall be held upon four
(4) days' notice by mail or forty-eight (48) hours' notice delivered personally
or by telephone, including a voice messaging system or other system or
technology designed to record and communicate messages, telegraph, facsimile,
electronic mail or other electronic means.
3.9. WAIVER OF NOTICE. Notice of a meeting need not be given to a director
who signs a waiver of notice or a consent to holding the meeting or an approval
of the minutes thereof, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to that director. These waivers, consents and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting. A
notice, or waiver of notice, need not specify the purpose of any regular or
special meeting of the board of directors.
3.10. QUORUM. A majority of the authorized number of directors constitutes a
quorum of the board of directors for the transaction of business, except to
adjourn as provided by Section 3.11 of these Bylaws. An act or decision done or
made by a majority of the directors present at a meeting duly held at which a
quorum is present is the act of the board of directors, subject to the
provisions of Section 310 of the CCC (approval of contracts in which a director
has a direct or indirect material financial interest) and Section 317(e) of the
CCC (indemnification of agents of the corporation). A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for that meeting.
3.11. ADJOURNMENT. A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another time and place. If the
meeting is adjourned for more than twenty-four (24) hours, notice of an
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of
adjournment.
3.12. ACTION WITHOUT A MEETING. An action required or permitted to be taken
by the board may be taken without a meeting, if all members of the board shall
individually or collectively consent in writing to that action. The written
consent or consents shall be filed with the minutes of the proceedings of the
board of directors. The action by written consent shall have the same force and
effect as a unanimous vote of the directors.
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3.13. FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
board of directors. This Section 3.13 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee or otherwise and receiving compensation for those services.
3.14. COMMITTEES. The board of directors may, by resolution adopted by a
majority of the authorized number of directors, designate one or more
committees, each consisting of two or more directors, to serve at the pleasure
of the board of directors. The board of directors may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the board of directors, shall have the authority of the board of directors,
except with respect to:
(i) the approval of any action which, under the CCC, also requires
shareholders' approval or the approval of the outstanding shares;
(ii) the filling of vacancies on the board of directors or on any
committee;
(iii) the fixing of compensation of the directors for serving on the board
or on any committee;
(iv) the amendment or repeal of these Bylaws or the adoption of new Bylaws;
(v) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(vi) a distribution, except at a rate, in a periodic amount or within a
price range set forth in the articles of incorporation or determined
by the board of directors; and
(vii) the appointment of other committees of the board of directors or the
members thereof.
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these Bylaws, with such
changes in the context of these Bylaws as is necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors, and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to
attend all meetings of the committee. The board of directors may adopt rules
for the government of any committee not inconsistent with the provisions of
these Bylaws.
3.15. APPROVAL OF LOANS TO OFFICERS. If these Bylaws have been approved by
the corporation's shareholders in accordance with the CCC, the corporation may,
upon the approval of the Board of Directors alone, make loans of money or
property to, or guarantee the obligations of, any officer of the corporation or
of its parent, if any, whether or not a director, or adopt an employee benefit
plan or plans authorizing such loans or guarantees; provided, that (i) the
Board of Directors determines that such a loan or guaranty or plan may
reasonably be expected to benefit the corporation, (ii) the corporation has
outstanding shares held of record by 100 or more persons (determined as
provided in Section 605 of the CCC) on the date of the approval by the Board of
Directors and (iii) the approval of the Board of Directors is by a vote
sufficient without counting the vote of any interested director or directors.
Notwithstanding the foregoing, the corporation shall have the power to make
loans permitted by the CCC.
ARTICLE IV
OFFICERS
4.1. OFFICERS. The corporation shall have a chairman of the board or a
president or both, a secretary, a chief financial officer and such other
officers with such titles and duties as shall be determined by the board of
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directors and as may be necessary to enable it to sign instruments and share
certificates. The president, or if there is no president the chairman of the
board, is the general manager and chief executive officer of the corporation,
unless otherwise provided in the articles of incorporation or these Bylaws. Any
number of offices may be held by the same person unless the articles of
incorporation or these Bylaws provide otherwise. The board of directors may
appoint, or may empower the chairman of the board or the president to appoint,
such other officers as the business of the corporation may require, each of
whom shall hold office for such period, have such authority and perform such
duties as are provided in these Bylaws or as the board of directors may from
time to time determine.
4.2. ELECTION OF OFFICERS. Except as otherwise provided by the articles of
incorporation or these Bylaws, officers shall be chosen by the board of
directors and serve at the pleasure of the board of directors, subject to the
rights, if any, of an officer under contract of employment.
4.3. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of
an officer under any contract of employment, all officers serve at the pleasure
of the board of directors and any officer may be removed, either with or
without cause, by the board of directors at any regular or special meeting of
the board of directors or, except in case of an officer chosen by the board of
directors, by any officer upon whom such power of removal may be conferred by
the board of directors. Any officer may resign at any time upon written notice
to the corporation without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of that notice or at any later time
specified in that notice, and, unless otherwise specified in that notice, the
acceptance of the resignation shall not be necessary to make it effective.
4.4. VACANCIES IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in
the manner prescribed in these Bylaws for regular appointments to such offices.
4.5. CHAIRMAN OF THE BOARD. The chairman of the board of directors, if such
an officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned by the board of directors or prescribed by these Bylaws.
If there is no president, the chairman of the board of directors shall in
addition be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 4.6 of these Bylaws.
4.6. PRESIDENT. Subject to such supervisory powers, if any, as may be given
by the board of directors to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the corporation,
and shall, subject to the control of the board of directors, have general
supervision, direction and control of the business and the officers of the
corporation. The president shall preside at all meetings of shareholders and,
in the absence or nonexistence of the chairman of the board, at all meetings of
the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and
shall have such other powers and duties as may be prescribed by the board of
directors or these Bylaws.
4.7. VICE PRESIDENTS. In the absence or disability of the president (or
chairman of the board, if there is no office of president), the vice
presidents, if any, in order of their rank as fixed by the board of directors
or, if not ranked, a vice president designated by the board of directors, shall
perform all the duties of the president, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors
or these Bylaws, the president or the chairman of the board, if there is no
president.
4.8. SECRETARY. The secretary shall keep or cause to be kept, at the
principal executive office of the corporation or such other place as the board
of directors may order, a book of minutes of all meetings and actions of
directors, committees of directors and shareholders, with the time and place of
each meeting, whether
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regular or special, and, if special, how authorized, the notice thereof given,
the names of those present at directors' and committee meetings, the number of
shares present or represented at shareholders' meetings and the proceedings
thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, if either be appointed and as determined by resolution of the
board of directors, a share register, or a duplicate share register, showing
the names of all shareholders and their addresses, the number and classes of
shares held by each, the number and date of certificates issued for the same,
and the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required by these Bylaws or by
the CCC to be given, and shall keep the seal of the corporation, if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by these Bylaws.
4.9. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall be open at all reasonable time to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. The chief financial officer shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president (or chairman of the board, if there is
no president) and directors, whenever they request it, an account of all of his
or her transactions as chief financial officer and of the financial condition
of the corporation, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or these Bylaws.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
5.1. INDEMNIFICATION OF DIRECTORS. The corporation shall, to the maximum
extent and in the manner permitted by the CCC, indemnify each of its directors
against expenses (as defined in Section 317(a) of the CCC), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding (as defined in Section 317(a) of the CCC), arising by
reason of the fact that such person is or was a director of the corporation.
For purposes of this Article V, a "director" of the corporation includes any
person (i) who is or was a director of the corporation, (ii) who is or was
serving at the request of the corporation as a director of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
5.2. INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the
extent and in the manner permitted by the CCC, to indemnify each of its
employees, officers and agents (other than directors) against expenses (as
defined in Section 317(a) of the CCC), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the CCC), arising by reason of the fact that such
person is or was an employee, officer or agent of the corporation. For purposes
of this Article V, an "employee" or "officer" or "agent" of the corporation
(other than a director) includes any person (i) who is or was an employee,
officer or agent of the corporation, (ii) who is or was serving at the request
of the corporation as an employee, officer or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise or
(iii) who was an employee, officer, or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
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5.3. PAYMENT OF EXPENSES IN ADVANCE. Expenses and attorneys' fees incurred
in defending any civil or criminal action or proceeding for which
indemnification is required pursuant to Section 5.1, or if otherwise approved
by the board of directors, shall be paid by the corporation in advance of the
final disposition of such action or proceeding upon receipt of an undertaking
by or on behalf of the indemnified party to repay such amount if it shall
ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article V.
5.4. INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article V
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any Bylaw, agreement, vote of
shareholders or directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office. The
rights to indemnity hereunder shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
5.5. INSURANCE INDEMNIFICATION. The corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation against any liability
asserted against or incurred by such person in such capacity or arising out of
that person's status as such, whether or not the corporation would have the
power to indemnify that person against such liability under the provisions of
this Article V.
5.6. CONFLICTS. No indemnification or advance shall be made under this
Article V, except where such indemnification or advance is mandated by law or
the order, judgment or decree of any court of competent jurisdiction, in any
circumstances where it appears:
(i) that it would be inconsistent with a provision of the articles of
incorporation, these Bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of
action asserted in the proceeding in which the expenses were incurred
or other amounts were paid, which prohibits or otherwise limits
indemnification; or
(ii) that it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
5.7. RIGHT TO BRING SUIT. If a claim under this Article V is not paid in
full by the corporation within 90 days after a written claim has been received
by the corporation (either because the claim is denied or because no
determination is made), the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expenses of prosecuting such claim. The corporation shall be entitled to
raise as a defense to any such action that the claimant has not met the
standards of conduct that make it permissible under the CCC for the corporation
to indemnify the claimant for the claim. Neither the failure of the corporation
(including its board of directors, independent legal counsel or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he or she has met the applicable standard of conduct, if any, nor an
actual determination by the corporation (including its board of directors,
independent legal counsel or its shareholders) that the claimant has not met
the applicable standard of conduct, shall be a defense to such action or create
a presumption for the purposes of such action that the claimant has not met the
applicable standard of conduct.
5.8. INDEMNITY AGREEMENTS. The board of directors is authorized to enter
into a contract with any director, officer, employee or agent of the
corporation, or any person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, or any person who was a director, officer, employee or agent of
a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation, providing
for indemnification rights equivalent to or, if the board of directors so
determines and to the extent permitted by applicable law, greater than, those
provided for in this Article V.
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5.9. AMENDMENT, REPEAL OR MODIFICATION. Any amendment, repeal or
modification of any provision of this Article V shall not adversely affect any
right or protection of a director, officer, employee or agent of the
corporation existing at the time of such amendment, repeal or modification.
ARTICLE VI
RECORDS AND REPORTS
6.1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall
keep either at its principal executive office or at the office of its transfer
agent or registrar (if either be appointed) a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent (1%) of such voting shares and
have filed a Schedule 14A with the United States Securities and Exchange
Commission, shall have an absolute right to do either or both of the following:
(i) inspect and copy the record of shareholders' names, addresses and
shareholdings during usual business hours upon five (5) days' prior written
demand upon the corporation or (ii) obtain from the transfer agent of the
corporation, upon written demand and upon the tender of such transfer agent's
usual charges for such list (the amount of which charges shall be stated to the
shareholder by the transfer agent upon request), a list of the shareholders'
names and addresses, who are entitled to vote for the election of directors,
and their shareholdings, as of the most recent record date for which it has
been compiled or as of a date specified by the shareholder subsequent to the
date of demand. The list shall be made available on or before the later of five
(5) business days after the demand is received or the date specified therein as
the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection and copying by a
shareholder or holder of a voting trust certificate at any time during usual
business hours upon written demand on the corporation, for a purpose reasonably
related to the holder's interests as a shareholder or holder of a voting trust
certificate.
Any inspection and copying under this Section 6.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
6.2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its
principal executive office or, if its principal executive office is not in the
State of California, at its principal business office in California, the
original or a copy of these Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in such state,
then it shall, upon the written request of any shareholder, furnish to such
shareholder a copy of these Bylaws as amended to date.
6.3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the board
of directors, and committees of the board of directors, shall be kept at such
place or places as are designated by the board of directors or, in absence of
such designation, at the principal executive office of the corporation. The
minutes shall be kept in written form, and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand on the corporation of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours,
for a purpose reasonably related to such holder's interests as a shareholder or
as the holder of a voting trust certificate. Such inspection by a shareholder
or holder of a voting trust certificate may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts. Such rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.
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6.4. INSPECTION BY DIRECTORS. Every director shall have the absolute right
at any reasonable time to inspect and copy all books, records and documents of
every kind and to inspect the physical properties of the corporation and each
of its subsidiary corporations, domestic or foreign. Such inspection by a
director may be made in person or by an agent or attorney and the right of
inspection includes the right to copy and make extracts.
6.5. ANNUAL REPORT TO SHAREHOLDERS; WAIVER. The board of directors shall
cause an annual report to be sent to the shareholders not later than one
hundred twenty (120) days after the close of the fiscal year adopted by the
corporation. Such report shall be sent to the shareholders at least fifteen
(15) (or, if sent by third-class mail, thirty-five (35)) days prior to the
annual meeting of shareholders to be held during the next fiscal year and in
the manner specified in Section 2.5 of these Bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the fiscal
year and an income statement and statement of changes in financial position for
the fiscal year, accompanied by any report thereon of independent accountants
or, if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as the
shares of the corporation are held by fewer than one hundred (100) holders of
record.
6.6. FINANCIAL STATEMENTS. If no annual report for the fiscal year has been
sent to shareholders, then the corporation shall, upon the written request of
any shareholder made more than one hundred twenty (120) days after the close of
such fiscal year, deliver or mail to the person making the request, within
thirty (30) days thereafter, a copy of the balance sheet as of the end of such
fiscal year and an income statement and statement of changes in financial
position for such fiscal year.
A shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation may make a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the current fiscal year ended
more than thirty (30) days prior to the date of the request and a balance sheet
of the corporation as of the end of that period. The statements shall be
delivered or mailed to the person making the request within thirty (30) days
thereafter. A copy of the statements shall be kept on file in the principal
office of the corporation for twelve (12) months and it shall be exhibited at
all reasonable times to any shareholder demanding an examination of the
statements or a copy shall be mailed to the shareholder. If the corporation has
not sent to the shareholders its annual report for the last fiscal year, the
statements referred to in the second paragraph of Section 6.5 shall likewise be
delivered or mailed to the shareholder or shareholders within thirty (30) days
after the request.
The quarterly income statements and balance sheets referred to in this
Section 6.6 shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that the financial statements were
prepared without audit from the books and records of the corporation.
6.7. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the
board, the president, any vice president, the chief financial officer, the
secretary or assistant secretary of this corporation, or any other person
authorized by the board of directors or the president or a vice president, is
authorized to vote, represent and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority herein granted may be
exercised either by such person directly or by any other person authorized to
do so by proxy or power of attorney duly executed by such person having the
authority.
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ARTICLE VII
GENERAL MATTERS
7.1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of
determining the shareholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any
rights in respect of any other lawful action (other than with respect to notice
or voting at a shareholders meeting or action by shareholders by written
consent without a meeting), the board of directors may fix, in advance, a
record date, which shall not be more than sixty (60) days prior to any such
action. Only shareholders of record at the close of business on the record date
are entitled to receive the dividend, distribution or allotment of rights, or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the articles of incorporation, the CCC or by agreement.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the date on which the board of directors adopts the resolution
relating thereto or the sixtieth (60th) day prior to the date of that action,
whichever is later.
7.2. CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. From time to time, the board
of directors shall determine by resolution which person or persons may sign or
endorse all checks, drafts, other orders for payment of money, notes or other
evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
7.3. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. The board of
directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation; such authority
may be general or confined to specific instances. Unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or arrangement or to pledge its credit or to render
it liable for any purpose or for any amount.
7.4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of
the corporation shall be issued to each shareholder when any of such shares are
fully paid. The board of directors may authorize the issuance of certificates
for shares partly paid provided that these certificates shall state the total
amount of the consideration to be paid for them and the amount actually paid.
All certificates shall be signed in the name of the corporation by the chairman
of the board or the president or a vice president and by the chief financial
officer or an assistant treasurer or the secretary or an assistance secretary,
certifying the number of shares and the class or series of shares owned by the
shareholder. Any or all of the signatures on the certificate may be by
facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
7.5. LOST CERTIFICATES. Except as provided in this Section 7.5, no new
certificates for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the corporation or its transfer
agent or registrar and cancelled at the same time. The board of directors may,
in case any share certificate or certificate for any other security is lost,
stolen or destroyed (as evidenced by a written affidavit or affirmation of such
fact), authorize the issuance of replacement certificates on such terms and
conditions as the board of directors may require; the board of directors may
require indemnification of the corporation secured by a bond or other adequate
security sufficient to protect the corporation against any claim that may be
made against it, including any expense or liability, on account of the alleged
loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
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7.6. CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the
general provisions, rules of construction, and definitions in the CCC shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE VIII
AMENDMENTS
8.1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted, or these Bylaws
may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the articles of incorporation set forth the number of authorized directors,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.
8.2 AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as
provided in Section 8.1 of these Bylaws, Bylaws, other than a Bylaw or an
amendment of a Bylaw changing the authorized number of directors (except to fix
the authorized number of directors pursuant to a Bylaws providing for a
variable number of directors), may be adopted, amended or repealed by the board
of directors.
8.3. RECORD OF AMENDMENTS. Whenever an amendment or new Bylaw is adopted, it
shall be copied in the book of minutes with the original Bylaws. If any Bylaw
is repealed, the fact of repeal, with the date of the meeting at which the
repeal was enacted or written consent was filed, shall be stated in said book.
ARTICLE IX
INTERPRETATION
Reference in these Bylaws to any provision of the CCC shall be deemed to
include all amendments thereof.
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EXHIBIT E TO THE MERGER AGREEMENT
FORM OF ESCROW FUND AGREEMENT
ESCROW FUND AGREEMENT (this "Agreement"), dated as of April 6, 1999, by and
among Peerless Systems Corporation, a Delaware corporation ("Parent"), Mannan
Latif, as representative of the shareholders and option holders (collectively,
"Holders") of AUCO, Inc., a California corporation (the "Company") (the
"Shareholder Representative"), and [ ], as escrow agent (the
"Escrow Agent").
A. The Company, Parent, Auco Merger Sub, Inc., a Delaware corporation and
a wholly-owned subsidiary of Parent ("Sub"), and the Shareholder Representative
have entered into an Agreement and Plan of Reorganization and Merger, dated of
even date herewith (the "Merger Agreement"), pursuant to which Sub will be
merged with and into the Company (the "Merger"), with the Company remaining as
the surviving corporation in the Merger (the "Surviving Corporation").
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meaning assigned to such terms in the Merger Agreement.
B. Pursuant to the Merger Agreement, each share of common stock, par value
$0.001 per share (the "Company Common Stock"), of the Company shall be
converted into the right to receive 0.2585 (the "Exchange Ratio") of a share of
common stock, par value $0.01 per share (the "Parent Common Stock"), of Parent,
and each outstanding option (the "Company Options") to acquire Company Common
Stock shall be assumed by Parent and shall represent the right to acquire that
number of shares of Parent Common Stock equal to the product of (x) the number
of shares of Company Common Stock subject to such Company Option immediately
prior to the Effective Time of the Merger, and (y) the Exchange Ratio.
C. The Merger Agreement provides that, at the Effective Time of the Merger
or from time to time thereafter, Parent will deliver to the Escrow Agent
certificates representing ten percent (10%) of the Parent Common Stock that is
to be issued in the Merger to the shareholders of the Company and to option
holders of the Company upon exercise of their options. Such shares, together
with any other securities of the Company issued by means of dividend,
distribution, split-up, recapitalization, combination, exchange of shares or
the like upon or with respect to such shares, being collectively referred to
herein as the "Escrow Shares", shall be held as collateral for the
indemnification obligations under Article X of the Merger Agreement and
pursuant to the provisions hereof, on the terms and subject to the conditions
set forth herein.
D. The parties hereto desire to establish the terms and conditions
pursuant to which the Escrow Shares will be deposited, held in, and disbursed
from the Escrow Account.
NOW, THEREFORE, in consideration of the foregoing premises, and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Escrow.
(a) Escrow of Shares. Promptly after the Effective Time, the Exchange
Agent will deposit the Escrow Shares deducted from the shares of Parent Common
Stock to be issued to the Company's shareholders in the Merger with the Escrow
Agent, who will hold such Escrow Shares in escrow as collateral for the
indemnification obligations set forth pursuant to Article X of the Merger
Agreement until the Escrow Agent is required to release such Escrow Shares
pursuant to the terms of this Agreement. In addition, promptly following the
exercise of any Company Option by the holder of any Company Option after the
Effective Time and prior to the Termination Date, Parent will deduct from the
shares of the Parent Common Stock issuable upon such exercise a number of
shares of such Parent Common Stock equal to 10% of such shares, and will
deliver such Escrow Shares to the Escrow Agent, who will hold them in escrow as
collateral for the indemnification obligations set forth pursuant to Article X
of the Merger Agreement.
For purposes of this Agreement, the term "Escrow Shares" will be deemed
to include "Additional Escrow Shares" as that term is defined in Section 2(b)
of this Agreement. The Escrow Agent agrees to accept delivery of the Escrow
Shares and to hold such Escrow Shares in escrow subject to the terms and
conditions of this Agreement.
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(b) Indemnification. The provisions set forth in Article X of the Merger
Agreement are incorporated by reference herein. For purposes of this Agreement,
references to Parent will include all other Indemnified Parties, as applicable.
It is hereby agreed that the Escrow Shares will serve as security for such
indemnity obligations, subject to the limitations prescribed in Article X of
the Merger Agreement and this Agreement. Subject to the terms contained in
Section 10.2 of the Merger Agreement, promptly after the receipt by Parent of
notice or discovery of any claim, damage or legal action or proceeding giving
rise to indemnification rights under the Merger Agreement, (i) Parent will give
the Shareholder Representative and the Escrow Agent written notice of such
claim, damage, legal action or proceeding (a "Claim") in accordance with
Section 3 hereof, and will notify the Shareholder Representative of the
progress of any such Claim, (ii) Parent will permit the Shareholder
Representative, at the sole cost of the Holders, to participate in such
defense, and (iii) Parent will not compromise or settle any such Claim without
the written consent of the Shareholder Representative, which consent will not
be unreasonably withheld.
(c) Limitation on Liability. Except as otherwise set forth in this
Agreement and without limiting any other remedy that may be available, the
maximum liability under this Agreement will be the number of Escrow Shares set
forth next to such Holder's name on Schedule A plus any Additional Escrow
Shares, and any cash proceeds deposited into the Escrow Account pursuant to
Section 2(b) hereof. Payments for finally determined Claims will be deducted
from the Escrow Shares of each Holder in proportion to such Holder's
Indemnification Pro Rata Percentage.
2. Deposit of Escrow Shares; Release from Escrow.
(a) Delivery of Escrow Shares. Promptly following the Effective Time,
(i) the Escrow Shares allocable to the Company's shareholders (the "Initial
Escrow Shares") will be delivered by the Exchange Agent to the Escrow Agent in
the form of duly authorized stock certificates issued in the respective names
of the holders thereof, and (ii) each holder of Initial Escrow Shares and each
holder of a Company Option will deliver to the Escrow Agent an executed stock
power in form satisfactory to Parent (with the date and number of shares left
blank), which will apply to the Initial Escrow Shares or Option Shares, as the
case may be. In addition, promptly following the exercise of any Company Option
by the holder of any Company Option after the Effective Time and prior to the
Termination Date, Parent will deduct from the shares of the Parent Common Stock
issuable upon such exercise a number of shares of such Parent Common Stock
equal to 10% of such shares, and will deliver such Escrow Shares to the Escrow
Agent, who will hold them in escrow as collateral for the indemnification
obligations set forth pursuant to Article X of the Merger Agreement. In the
event Parent issues any Additional Escrow Shares (as defined below), such
shares will be issued and delivered to the Escrow Agent in the same manner as
the Escrow Shares delivered promptly following the Effective Time.
(b) Dividends, Voting and Rights of Ownership. Except for dividends paid
in stock declared with respect to the Escrow Shares (other than the Option
Shares) that are not subject to tax pursuant to section 305(a) of the Internal
Revenue Code of 1986, as amended (the "Code") ("Additional Escrow Shares"), any
cash dividends, dividends payable in securities or other distributions of any
kind made in respect of the Escrow Shares will be distributed concurrently by
Parent to the Holders. Each such Holder will have the right to vote the Escrow
Shares deposited in the Escrow Account for the account of such Holder so long
as such Escrow Shares are held in escrow, and Parent will take reasonable steps
necessary to allow the exercise of such rights. Each Holder shall include in
taxable income: (i) any taxable dividends distributed in respect of the Escrow
Shares, and (ii) any gain or loss arising from the sale of such Escrow Shares
by the Escrow Agent. Within 30 days after the earlier of the close of the
calendar year or the Termination Date (as defined below), the Escrow Agent
shall furnish to each Holder an information statement indicating the amount of
such dividends, sale proceeds, and interest income attributable to the Escrow
Shares or proceeds held on such Holder's behalf. For purposes of this
Agreement, subject to Section 4(b) hereof, "Termination Date" shall mean the
earlier to occur of: (i) the date of issuance of the first independent audit
report of the Company or of the Company consolidated with Parent following the
Effective Time, and (ii) the date which is one year following the Effective
Time.
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(c) Distribution to Holders. Within five business days after the
Termination Date, the Escrow Agent will release from escrow to the Holders
their respective Escrow Shares, plus all Additional Escrow Shares, and invested
cash, if any, less (A) any Escrow Shares delivered to Parent in accordance with
Section 4 hereof in satisfaction of Claims, and (B) any Escrow Shares subject
to delivery to Parent in accordance with Section 4 hereof with respect to any
then pending but unresolved Claims. Any Escrow Shares held as a result of
clause (B) above will be released to the Holders or released to Parent for
cancellation (as appropriate) promptly upon resolution of each specific Claim
involved.
(d) Release of Shares. The Escrow Shares will be held by the Escrow
Agent until required to be released pursuant to Section 2(c) above. Within five
business days after the release condition is met, the Escrow Agent will deliver
to each Holder the requisite number of Escrow Shares, Additional Escrow Shares
and invested cash, if any, to be released on such date as identified by Parent
and the Shareholder Representative to the Escrow Agent in writing. Such
delivery will be in the form of stock certificate(s) issued in the name of such
Holder or invested cash. Parent and the Shareholder Representative undertake to
deliver a timely notice to Escrow Agent identifying the number of Escrow Shares
to be released within such five business day period. The Escrow Shares will be
released to each Holder in accordance with the proportion that the number of
Escrow Shares held by each such Holder bears to the aggregate number of Escrow
Shares held in the Escrow Account as of the Termination Date (each such
Holder's "Indemnification Pro Rata Percentage"). Parent will take such action
as may be necessary to cause stock certificates to be issued in the names of
the appropriate Holders. Certificates representing Escrow Shares held for the
accounts of Holders who were affiliates of the Company on the date of the
Merger Agreement or thereafter will bear a legend indicating that they are
subject to resale restrictions under Rule 145 promulgated under the Securities
Act.
(e) No Encumbrance. The Shareholder Representative agrees to cause no
Escrow Shares or any interest (beneficial or otherwise) thereon to be pledged,
sold, assigned or transferred, including by operation of law, by a Holder, or
be taken or reached by any legal or equitable process in satisfaction of any
debt or other liability of a Holder (other than such Holder's obligations under
Articles X), prior to the delivery to such Holder of the Escrow Shares by the
Escrow Agent.
(f) Power to Transfer Escrow Shares. The Escrow Agent is hereby granted
the power to effect any transfer of Escrow Shares contemplated by this
Agreement. Parent will cooperate with the Escrow Agent in promptly issuing
stock certificates to effect such transfers.
3. Notice of Claim.
(a) Each notice of a Claim by Parent (the "Notice of Claim") will be in
writing and will contain the following information to the extent it is known to
Parent:
(i) Parent's good faith estimate of the reasonably foreseeable
maximum amount of the alleged Damages (which amount may or may not be the
amount of damages claimed by a third party plaintiff in an action brought
against Parent or the Company based on alleged facts, which if true, would
constitute a breach of the representations and warranties or the Company
contained in the Merger Agreement); and
(ii) A brief description of the facts, circumstances or events giving
rise to the alleged Damages based on Parent's good faith belief thereof,
including, without limitation, the identity and address of any third-party
claimant (to the extent known to Parent) and copies of any formal demand or
complaint.
(b) The Escrow Agent will not transfer any of the Escrow Shares held in
the Escrow Account to Parent pursuant to a Notice of Claim until such Notice of
Claim has been resolved in accordance with Section 4 below.
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4. Resolution of Notice of Claim and Transfer of Escrow Shares. Any Notice
of Claim received by the Shareholder Representative and the Escrow Agent
pursuant to Section 3 above will be resolved as follows:
(a) Uncontested Claims. In the event that the Shareholder Representative
does not contest a Notice of Claim in writing to the Escrow Agent within 20
calendar days after a Notice of Claim containing a statement of the claimed
Damages is delivered pursuant to Section 7 below, the Escrow Agent will
immediately transfer to Parent for cancellation that number of Escrow Shares
having a value (determined pursuant to Section 4(c) hereof) equal to the amount
of Damages specified in the Notice of Claim, and will notify the Shareholder
Representative of such transfer.
(b) Contested Claims. In the event that the Shareholder Representative
gives written notice contesting all, or any portion of, a Notice of Claim to
Parent and the Escrow Agent (a "Contested Claim") within the 20-day period
provided above, matters that are subject to Third Party Claims (as defined in
the Merger Agreement) brought against Parent or the Company in a litigation or
arbitration will await the final decision, award or settlement of such
litigation or arbitration, while matters that arise between Parent on the one
hand and the Holders (or the Shareholder Representative) on the other hand
("Arbitrable Claims"), will be settled by binding arbitration. Any portion of
the Notice of Claim that is not contested will be resolved as set forth in
Section 4(a) above. The final decision of the arbitrator will be furnished to
the Escrow Agent, the Shareholder Representative, and Parent in writing and
will constitute a final, conclusive and non appealable determination of the
issue in question, binding upon the Holders, the Shareholder Representative and
Parent, and an order with respect thereto may be entered in any court of
competent jurisdiction. After delivery of written notice by the Shareholder
Representative that the Notice of Claim is contested by the Shareholder
Representative, the Escrow Agent will continue to hold in the Escrow Account
Escrow Shares having a value (determined pursuant to Section 4(c) hereof)
sufficient to cover such Claim (notwithstanding the occurrence of the
Termination Date) until: (i) execution of a settlement or joint escrow
instructions agreement by Parent and the Shareholder Representative setting
forth a resolution of the Notice of Claim, or (ii) receipt of a copy of the
final award of the arbitrator.
(i) Arbitration. Any Arbitrable Claim and any other dispute arising
out of or relating to this Agreement shall be resolved by arbitration in San
Francisco, California and, except as herein specifically stated, in accordance
with the commercial arbitration rules of the American Arbitration Association
(the "AAA Rules") then in effect. However, in all events, the provisions
contained herein shall govern over any conflicting rules which may now or
hereafter be contained in the AAA Rules. Any judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction over the
subject matter thereof. The arbitrator shall have the authority to grant any
equitable and legal remedies that would be available if any judicial proceeding
was instituted to resolve an Arbitrable Claim or such dispute.
(ii) Compensation of Arbitrator. Any such arbitration will be
conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon
his or her rate of compensation.
(iii) Selection of Arbitrator. The arbitrator shall be mutually
agreed upon by Parent and the Shareholder Representative. In the event Parent
and the Shareholder Representative are unable to agree within 20 days following
submission of the dispute to the American Arbitration Association by one of the
parties, the American Arbitration Association will have the authority to select
an arbitrator from a list of arbitrators who satisfy the criteria set forth in
clause (iv) hereof.
(iv) Qualifications of Arbitrator. No arbitrator shall have any past
or present family, business or other relationship with Parent, the Company or
any "affiliate" (as such term is defined in Rule 12b-2 of the Securities Act of
1933, as amended (the "Securities Act"), director or officer thereof, or any
"associate" (as such term is defined in Rule 12b-2 of the Securities Act) of
Parent, the Company or any affiliate, director or officer thereof, unless,
following full disclosure of all such relationships, Parent and the Shareholder
Representative agree in writing to waive such requirement with respect to an
individual in connection with any dispute.
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(v) Hearing. The arbitrator shall be instructed to hold an up to
eight (8) hour, one (1) day hearing regarding the disputed matter within 60
days of his designation and to render an award (without written opinion) no
later than ten (10) days after the conclusion of such hearing, in each case
unless otherwise mutually agreed in writing by Parent and the Shareholder
Representative.
(vi) Payment of Costs. Parent and the Shareholder Representative on
behalf of the Holders as a group will each pay 50% of the initial compensation
to be paid to the arbitrator in any such arbitration and 50% of the costs of
transcripts and other normal and regular expenses of the arbitration
proceedings; provided, however, that (i) the prevailing party in any
arbitration will be entitled to an award of attorneys' fees and costs, and (ii)
all costs of arbitration, other than those provided for above, will be paid by
the losing party, and the arbitrator will be authorized to make such
determinations. The Holders' liability for such fees and expenses of
arbitration shall be paid by Parent and shall be recovered as a Claim hereunder
out of the Escrow Shares.
(vii) Terms of Arbitration. The arbitrator chosen in accordance with
these provisions will not have the power to alter, amend or otherwise affect
the terms of these arbitration provisions or any other provisions contained in
this Agreement or the Merger Agreement.
(viii) Exclusive Remedy. Except as specifically otherwise provided in
this Agreement or the Merger Agreement, arbitration will be the sole and
exclusive remedy of the parties for any Arbitrable Claim or any other dispute
arising out of or relating to this Agreement.
(c) Determination of Amount of Claims. Any amount owed to Parent
hereunder, as determined pursuant to Section 4(a) or 4(b) above, will be
immediately payable to Parent out of the Escrow Shares then held by the Escrow
Agent at a per share value for all Escrow Shares equal to the fair market value
of the Parent Common Stock, determined at the time of the payment of such
amount to Parent.
(d) No Exhaustion of Remedies. Parent need not pursue or exhaust any
other remedies that may be available to it before proceeding in accordance with
the provisions contained in this Agreement. Parent may institute Claims against
the Escrow Account and in satisfaction thereof may recover Escrow Shares, in
accordance with the terms of this Agreement, without making any other Claims
directly against any Holders or the Shareholder Representative, and without
rescinding or attempting to rescind the transactions effected by the Merger
Agreement. The assertion of any single Claim for indemnification hereunder will
not bar Parent from asserting any other Claims hereunder.
5. Limitation of Escrow Agent's Duties and Liability.
(a) The duties and responsibilities of the Escrow Agent hereunder shall
be determined solely by the express provisions of this Escrow Agreement, and no
other or further duties or responsibilities shall be implied. The Escrow Agent
shall not have any liability under, nor duty to inquire into the terms and
provisions of any agreement or instructions, other than as outlined in the
Agreement.
(b) The Escrow Agent may rely and shall be protected in acting or
refraining from acting upon any written notice, instruction or request
furnished to it hereunder and believed by it to be genuine and to have been
signed or presented by the proper party or parties. The Escrow Agent shall be
under no duty to inquire into or investigate the validity, accuracy or content
of any such document. The Escrow Agent shall have no duty to solicit any items
which may be due it hereunder.
(c) The Escrow Agent shall not be liable for any action taken or omitted
by it in good faith unless a court of competent jurisdiction determines that
the Escrow Agent's willful misconduct or gross negligence was the primary cause
of any loss to Parent or any Holder. The Escrow Agent may consult with counsel
of its own choice and shall have full and complete authorization and protection
for any action taken or omitted by it hereunder in good faith and in accordance
with the opinion of such counsel.
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(d) Parent and the Shareholder Representative hereby agree to jointly
and severally indemnify the Escrow Agent for, and to hold it harmless against
any loss, liability or expense arising out of or in connection with this Escrow
Agreement and carrying out its duties hereunder, including the costs and
expenses of defending itself against any claim of liability, except in those
cases where the Escrow Agent has acted in bad faith or has been guilty of gross
negligence or willful misconduct. Anything in this Escrow Agreement to the
contrary notwithstanding, in no event shall the Escrow Agent be liable for
special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Escrow Agent has been
advised of the likelihood of such loss or damage and regardless of the form of
action.
(e) Each party hereto, except the Escrow Agent, shall provide the Escrow
Agent with their Tax Identification Number (TIN) as assigned by the Internal
Revenue Service. All interest or other income earned under the Escrow Agreement
shall be allocated and paid as provided herein and reported by the recipient to
the Internal Revenue Service as having been so allocated and paid.
(f) The Escrow Agent shall not incur any liability for following the
instructions herein contained or expressly provided for, or written
instructions given jointly by Parent and the Shareholder Representative.
(g) In the event that the Escrow Agent shall be uncertain as to its
duties or rights hereunder or shall receive instructions, claims or demands
from any party hereto which, in its opinion, conflict with any of the
provisions of this Agreement, it shall be entitled to refrain from taking any
action and its sole obligation shall be to keep safely all property held in
escrow until it shall be directed otherwise in writing by all of the other
parties hereto or by a final order or judgment of a court of competent
jurisdiction.
6. Notices. All notices and other communications hereunder shall be in
writing (and shall be deemed given upon receipt) if delivered personally, sent
by facsimile transmission (receipt of which is confirmed) by mail or by an
internationally recognized private overnight or overseas courier to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) If to Parent, to:
Peerless Systems Corporation2381 Rosecrans Avenue, Suite 400El Segundo,
California 90245Attention: Edward GavaldonFacsimile No.: 310-536-0058
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP525 University Avenue, Suite
220Palo Alto, California 94301Attention: Gregory C. Smith, Esq.Facsimile
No.: (650) 470-4570
(b) if to the Shareholder Representative, to:
Mannan Latifc/o AUCO, Inc.386 Main StreetRedwood City, California
94063Facsimile No.: 650-569-4403
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with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP155
Constitution DriveMenlo Park, California 94025Attention: Brooks Stough,
Esq.Facsimile No.: 650-321-2800
and to:
Coblentz, Patch, Duffy & Bass222 Kearny Street, 7th FloorSan Francisco,
California 94108Attention: Paul Escobosa, Esq.Facsimile No.: 415-989-
1663
(c) if to the Escrow Agent, to:
[To be supplied]
7. General.
(a) Governing Law; Successors and Assigns. This Agreement will be
governed by and construed in accordance with the internal laws of the State of
California without regard to conflict of law principles and will be binding
upon, and inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(c) Entire Agreement. This Agreement, together with the Merger
Agreement, constitutes the entire understanding and agreement of the parties
with respect to the subject matter contained herein, and supersedes all prior
agreements or understandings, written or oral, between the parties with respect
to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement will be effective unless in writing.
No waiver by any party of any such condition or breach, in any one instance,
will be deemed to be a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other provision
contained herein.
8. Expenses.
(a) Escrow Agent. All reasonable fees and expenses of the Escrow Agent
incurred in the ordinary course of performing its responsibilities hereunder
will be paid out of the Escrow Account; provided, however, that the foregoing
shall only be applicable to the extent such fees and expenses do not exceed
$10,000. Any fees and expenses of the Escrow Agent in excess of $10,000 shall
be paid by Parent.
9. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by giving
resignation to the parties to this Agreement, specifying a date not less than
thirty (30) days following such notice date of when such resignation will take
effect. Parent will designate a successor Escrow Agent prior to the expiration
of such period by giving written notice to the Escrow Agent and the Shareholder
Representative. Parent may appoint a successor Escrow Agent without the consent
of the Holders or the Shareholder Representative so long as such successor is a
bank with assets of at least $500 million, and may
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appoint any other successor Escrow Agent with the consent of the Shareholder
Representative, which consent will not be unreasonably withheld. The Escrow
Agent will promptly transfer the Escrow Shares to such designated successor.
10. Amendment. This Agreement may be amended by the written agreement of
Parent, the Escrow Agent and the Shareholder Representative, provided that, if
the Escrow Agent does not agree to an amendment agreed upon by Parent and the
Shareholder Representative, the Escrow Agent will resign and Parent will
appoint a successor Escrow Agent in accordance with Section 10 above. No such
amendment may treat any one Holder differently from the other Holders unless
consented to in writing by Holders having beneficial ownership in a majority of
the outstanding Escrow Shares, including the consent of any such Holder who is
to be treated differently.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first written above.
Peerless Systems Corporation
By___________________________________
Name:
Title:
Shareholder Representative
By___________________________________
[Escrow Agent]
By___________________________________
Name:
Title:
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EXHIBIT F-1 TO THE MERGER AGREEMENT
FORM OF AUCO AFFILIATE LETTER
Peerless Systems Corporation
2381 Rosecrans Avenue, Suite 400
El Segundo, California 90245
April 6, 1999
Ladies and Gentlemen:
I am a holder of shares of preferred stock, par value $0.001 per share,
shares of common stock, par value $0.001 per share, and/or options to purchase
such shares of common stock or preferred stock (the "Company Stock"), of AUCO,
Inc., a California corporation (the "Company"). I am aware that pursuant to the
terms of the Agreement and Plan of Reorganization and Merger, dated as of April
6, 1999 (the "Merger Agreement") by and among Peerless Systems Corporation, a
Delaware corporation ("Parent"), Auco Merger Sub, Inc. ("Sub") and the Company,
Sub will merge with and into the Company, with the Company continuing as the
surviving corporation (the "Merger"), and each of the shares of Company Common
Stock outstanding as of the Effective Time (as defined in the Merger Agreement)
of the Merger shall be converted into shares of common stock of Parent ("Parent
Common Stock").
I have been advised that as of the date hereof, I may be deemed an
"affiliate" of the Company as the term "affiliate" is used in and for purposes
of Accounting Series, Releases 130 and 135, as amended, of the Securities
Exchange Commission (the "Commission"), although nothing contained herein
should be construed as an admission of such fact.
I understand that it is a condition precedent to the obligations of each of
Parent and the Company to consummate the Merger that it has received a letter
from Parent's independent accountants to the effect that the Merger may be
accounted for as a pooling of interests. I further understand that in order for
the Merger to be accounted for as a pooling of interests, affiliates of Parent
and the Company must not reduce their interests in or risk relative to their
ownership of the shares of capital stock of either Parent or the Company owned
by them for a certain time period prior to and following the Merger.
As an inducement to Parent to consummate the Merger, I represent to and
covenant with Parent that, during the period starting 35 days prior to the
Effective Time and ending after such time as combined financial results
(including combined sales and net income) covering at least 30 days of combined
operations of the Company and Parent have been published by Parent, in the form
of a quarterly earnings report, an effective registration statement filed with
the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any
other public filing or announcement which includes such combined results of
operations (such period is referred to herein as the "Pooling Period"), sell,
transfer or otherwise dispose of or reduce my risk (as contemplated by the SEC
Accounting Series Release No. 135) with respect to any shares of the capital
stock of either the Company or Parent that I may hold, and (ii) I will not
sell, transfer or otherwise dispose of or reduce my risk (as contemplated by
SEC Accounting Series Release No. 135) with respect to any shares of the
capital stock of Parent that I may hold.
In addition to the resale restrictions set forth above that relate to
pooling, I understand further that I may be deemed to be an "affiliate" of the
Company for purposes of Rule 145 ("Rule 145") promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), although nothing contained
herein should be construed as an admission of such fact. I understand that (i)
if, in fact, I am deemed an "affiliate" under the Securities Act, and (ii) if I
receive shares of Parent Common Stock in exchange for any shares of Company
Common Stock pursuant to the Merger, my ability to sell, assign or transfer
such Parent Common Stock received by me in the Merger may be restricted unless
such transaction is registered under the Securities Act or an exemption from
such registration is available. I understand that such exemptions are limited,
including
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limitations with respect to the applicability to the sale of such securities
under Rule 145(d) promulgated under the Securities Act, to the extent
applicable.
I have been informed and understand that the accuracy of my representations
and warranties and my compliance with the covenants set forth herein will be
relied upon by Parent and the Company, their respective counsel, and
shareholders of Parent and the Company.
With respect to Securities Act, and only to the extent that I receive shares
of Parent Common Stock in exchange for any shares of Company Common Stock
pursuant to the Merger, I represent and warrant to Parent and agree that:
A. I have full power and authority to execute this Agreement, to make the
representations, warranties and covenants herein contained and to perform my
obligations hereunder.
B. I have been advised that the issuance of Parent Common Stock to me in the
Merger will be registered with the SEC under the Securities Act on a
Registration Statement on Form S-4. I have also been advised, however, that
because I may be deemed to have been an "affiliate" of Parent at the time
the Merger was submitted for a vote of the shareholders of Parent, and
because any distribution by me of Parent Common Stock has not been
registered under the Securities Act, I may not sell, transfer, exchange,
pledge, or otherwise dispose of, or make any offer or agreement relating to
any of the foregoing with respect to, any Restricted Securities (as defined
below), or any option, right or other interest with respect to any
Restricted Securities, unless (i) such transaction is permitted pursuant to
Rules 145(c) and 145(d) under the Securities Act, (ii) no registration under
the Securities Act would be required in connection with the proposed sale,
transfer or other disposition, (iii) a registration statement under the
Securities Act covering the Restricted Securities proposed to be sold,
transferred or otherwise disposed of, describing the manner and terms of the
proposed sale, transfer or other disposition, and containing a current
prospectus, shall have been filed with the SEC and made effective under the
Securities Act, or (iv) an authorized representative of the SEC shall have
rendered written advice to me (sought by me or counsel representing me, with
a copy thereof and all other related communications delivered to Parent) to
the effect that the SEC would take no action, or that the Staff of the SEC
would not recommend that the SEC take action, with respect to the proposed
disposition if consummated.
C. I have no present plan or intent to dispose of the Parent Common Stock
acquired by me pursuant to the Merger, or any securities that may be paid as
a dividend or otherwise distributed thereon or with respect thereto or
issued or delivered in exchange or substitution therefor (all such shares
and other securities of Parent being herein sometimes collectively referred
to as "Restricted Securities") and I shall not formulate prior to the
Effective Time (as defined in the Merger Agreement) of the Merger any such
plan or intent to dispose of such Restricted Securities.
D. I will not make any sale, transfer or other disposition of Restricted
Securities in violation of the Securities Act or the rules and regulations
promulgated thereunder.
E. I understand that Parent is under no obligation to register the sale,
transfer or other disposition of Restricted Securities by me or on my behalf
under the Securities Act or to take any other action necessary in order to
make compliance with an exemption from such registration available.
F. From and after the Effective Time (as defined in the Merger Agreement) of
the Merger and for so long as is necessary in order to permit me to sell the
Restricted Securities held by and pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Securities Act, Parent will use its best
efforts to file on a timely basis all reports required to be filed by it
pursuant to Section 13 of the Securities Exchange Act of 1934, as amended,
referred to in paragraph (c)(1) of Rule 144 under the Securities Act. Parent
is under no obligation to register the sale, transfer or other disposition
of any Restricted Securities by me or on my behalf.
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G. I understand that, in addition to the restrictions imposed under this
Agreement, the provisions of Rule 145 limit any public resale by me of
Restricted Securities and that the restrictive legends described below will
be placed upon the Restricted Securities.
H. I understand that stop transfer instructions will be given to the registrar
of the certificates for the shares of Parent Common Stock and that there
will be placed on the certificates for the shares of Parent Common Stock, or
any substitutions therefor, a legend stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
(THE ACQUISITION OF AUCO, INC. PURSUANT TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT "), APPLIES AND
MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE
LIMITATIONS OF SUCH RULE 145, OR UPON RECEIPT BY PEERLESS CORPORATION OF
AN OPINION OF COUNSEL ACCEPTABLE TO IT THAT SOME OTHER EXEMPTION FROM
REGISTRATION UNDER THE ACT IS AVAILABLE, OR PURSUANT TO A REGISTRATION
STATEMENT UNDER THE ACT.
Parent agrees to remove such legend to the extent that such shares evidenced
by such certificates may properly be sold by me pursuant to this Agreement.
I also understand that unless a sale or transfer is made in conformity with
the provisions of Rule 145, or pursuant to a registration statement, Parent
reserves the right to put the following legend on the certificates issued to my
transferee:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED FROM A PERSON
WHO RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933, APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933,
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933.
I. I hereby agree that, for a period of one (1) year following the Effective
Time (as defined in the Merger Agreement) of the Merger, I will obtain an
agreement similar to this Agreement from each transferee of the shares of
Parent Common Stock sold or otherwise transferred by me, but only if such sale
or transfer is effected other than in a transaction involving a registered
public offering or as a sale pursuant to Rule 145.
It is understood and agreed that this Agreement will terminate and be of no
further force and effect and the legends set forth above will be removed by
delivery of substitute certificates without such legends, and the related
transfer restrictions shall be lifted forthwith, when: (i) my shares of Parent
Common Stock shall have been registered under the Securities Act for sale,
transfer, or other disposition by me or on my behalf, (ii) I am not at the time
an "affiliate" of Parent and have held the shares of Parent Common Stock for at
least one (1) year (or such other period as may be prescribed by the Securities
Act and the rules and regulations promulgated thereunder) and Parent has filed
with the SEC all of the reports it is required to file under the Securities
Exchange Act of 1934, as amended, during the period from the Effective Time (as
defined in the Merger Agreement) of the Merger to the date of termination of
this Agreement, or (iii) Parent shall have received a letter from the staff of
the SEC, or an opinion of counsel acceptable to Parent, to the effect that the
stock transfer restrictions and the legend are not required.
This Agreement may be executed in two or more counterparts, each of which
shall constitute one in the same instrument.
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This Agreement shall be binding on my heirs, legal representatives, and
successors.
Very truly yours,
------------------------------------
Name***:
Title:
Accepted this 6th day of April, 1999
PEERLESS SYSTEMS CORPORATION
By:
-----------------------------------
Name:
Title:
- --------
*** In the event this undertaking covers shares held jointly or held
individually by related parties who will sign this together, each joint or
related party shall sign.
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<PAGE>
EXHIBIT F-2 TO THE MERGER AGREEMENT
FORM OF PARENT AFFILIATE LETTER
Peerless Systems Corporation
2381 Rosecrans Avenue, Suite 400
El Segundo, California 90245
April 6, 1999
Ladies and Gentlemen:
I am a holder of shares of common stock ("Parent Common Stock") of Peerless
Systems Corporation, a Delaware corporation ("Parent"). I am aware that
pursuant to the terms of the Agreement and Plan of Reorganization and Merger,
dated as of April 6, 1999 (the "Merger Agreement") by and among Parent, Auco
Merger Sub, Inc. ("Sub") and AUCO, Inc., a California corporation (the
"Company"), Sub will merge with and into the Company, with the Company
continuing as the surviving corporation (the "Merger"), and each of the shares
of common stock of the Company outstanding as of the Effective Time (as defined
in the Merger Agreement) of the Merger shall be converted into shares of Parent
Common Stock.
I have been advised that as of the date hereof, I may be deemed an
"affiliate" of the Company or of Parent as the term "affiliate" is used in and
for purposes of Accounting Series, Releases 130 and 135, as amended, of the
Commission, although nothing contained herein should be construed as an
admission of such fact.
I understand that it is a condition precedent to the obligations of each of
Parent and the Company to consummate the Merger that it has received a letter
from Parent's independent accountants to the effect that the Merger may be ac
counted for as a pooling of interests. I further understand that in order for
the Merger to be accounted for as a pooling of interests, affiliates of Parent
and the Company must not reduce their interests in or risk relative to their
ownership of the shares of capital stock of either Parent or the Company owned
by them for a certain time period prior to and following the Merger.
As an inducement to Parent to consummate the Merger, I represent to and
covenant with Parent that, during the period starting 35 days prior to the
Effective Time and ending after such time as combined financial results
(including combined sales and net income) covering at least 30 days of combined
operations of the Company and Parent have been published by Parent, in the form
of a quarterly earnings report, an effective registration statement filed with
the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any
other public filing or announcement which includes such combined results of
operations (such period is referred to herein as the "Pooling Period"), sell,
transfer or otherwise dispose of or reduce my risk (as contemplated by the SEC
Accounting Series Release No. 135) with respect to any shares of the capital
stock of either the Company or Parent that I may hold, and (ii) I will not
sell, transfer or otherwise dispose of or reduce my risk (as contemplated by
SEC Accounting Series Release No. 135) with respect to any shares of the
capital stock of Parent that I may hold.
This Agreement may be executed in two or more counterparts, each of which
shall constitute one in the same instrument.
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This Agreement shall be binding on my heirs, legal representatives, and
successors.
Very truly yours,
Name:
----------------------------------
Accepted this 6th day of April, 1999
PEERLESS SYSTEMS CORPORATION
By:
-----------------------------------
Name:
Title:
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EXHIBIT G TO THE MERGER AGREEMENT
FORM OF NON COMPETITION AGREEMENT
This Non Competition Agreement (this "Agreement") is and entered into as of
April 6, 1999 between Peerless Systems Corporation, a Delaware corporation
("Parent") and [ ] (the "Principal").
WHEREAS, AUCO, Inc., a California corporation (the "Company"), has entered
into an Agreement and Plan of Reorganization and Merger, dated of even date
herewith (the "Merger Agreement"), with Parent and Auco Merger Sub, Inc., a
Delaware corporation ("Auco Merger Sub"), whereby Auco Merger Sub will merge
with and into the Company (the "Merger"), and the Company will become a wholly
owned subsidiary of Parent;
WHEREAS, the Company engages in the development and sale of computer
software for the primary purpose of allowing printers to connect to and operate
through computer networks, either through servers or by a direct connection
between the printer and the network (the "Business"), and Principal currently
is a key employee of the Company;
WHEREAS, Principal has specialized knowledge of the business of the Company,
including, without limitation, knowledge of business relationships, lines of
business, markets, key personnel, profitability and other confidential
information, as well as substantial technical, business and financial expertise
and extensive experience in a wide range of activities that will affect and
constitute the Business;
WHEREAS, Parent and the Company would be irreparably harmed and impaired if
Principal were to engage, directly or indirectly, in any activity competing
with the Business or disclose in violation of this Agreement, or make
unauthorized use of, any confidential information concerning the Business;
WHEREAS, Principal recognizes that Parent and the Company are entitled to
protection from such use of the specialized knowledge of Principal; and
WHEREAS, in partial consideration for Parent entering into the Merger
Agreement which provides for, among other things, issuance of common stock of
Parent to Principal in exchange for all of Principal's stock in the Company,
Principal is entering into this Agreement.
NOW, THEREFORE, subject to the successful closing of the Merger (which
closing is a condition precedent to the effectiveness of this Agreement), and
in consideration of the mutual representations, warranties, covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, as of the Effective
Time (as defined in the Merger Agreement), the Parties, intending to be legally
bound, hereby agree as follows:
1. Covenant Not to Compete. For and in consideration of the benefits derived
directly and indirectly from this Agreement, the Principal covenants and agrees
with Parent that for the period commencing on the date hereof and ending on the
second anniversary of the Effective Time (such period being referred to herein
as the "Covenant Period"), the Principal and any Principal Affiliate (as
defined below) shall not in North America or Asia (the "Non Compete Region"),
directly or indirectly, (i) engage in the Business which is currently engaged
in by the Company as of the date of this Agreement; (ii) enter the employ of,
or render any services to or for any entity that is engaged in the Business
(provided that the Principal may provide services as an employee, consultant or
otherwise to any part of such entity that is not engaged in the Business,
including engagement in the Business by virtue of the Principals provision of
services to such entity), and (iii) become interested in any such entity in any
capacity, including as an individual, partner, officer, director, principal,
agent, trustee or consultant; provided, however, that Principal may own,
directly or indirectly, solely as an investment, securities of any entity
traded on any national securities exchange or automated quotation system if
Principal, individually or in the aggregate, is not a controlling Person of, or
a member of a group which controls, such entity and does not, directly or
indirectly, "beneficially own" (as defined in Rule 13d-3 of the
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Securities Exchange Act of 1934, as amended, without regard to the 60 day
period referred to in Rule 13d-3(d)(1)(i)) 5% or more of any class of
securities of such entity. In addition, and without limiting the foregoing, for
the Covenant Period, neither Principal nor any Principal Affiliate shall,
within the Non Compete Region engage or participate in any effort or act to
induce or solicit any of the customers, suppliers, associates, employees or
independent contractors of the Company or the Business to cease doing business,
or to discontinue such person's association or employment, with the Company or
the Business for any reason. Notwithstanding the foregoing, this covenant not
to compete shall terminate in the event that Parent terminates the employment
of Principal without cause, as conclusively determined by Parent or if
Principal terminates his employment for Good Reason (as defined below). Nothing
herein contained shall establish an employment agreement, right or entitlement
on the part of Principal.
For purposes of this Agreement, Principal shall have "Good Reason" to
terminate his employment with the Company following the occurrence of any of
the following events, without the Company's written consent thereto; provided,
that Principal shall have given Company written notice specifying the conduct
alleged to have constituted such Good Reason and the Company shall have failed
to cure such conduct, if curable, within fifteen (15) days following receipt of
such notice:
(A) Any failure to elect or reelect or otherwise to maintain Principal
in his current office or position, or a substantially equivalent office or
position, of or with the Company;
(B) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties of Principal at
or with the Company;
(C) A reduction in Principal's base salary with the Company;
(D) If the Company requires Principal to have his primary location of
work changed to any location that is outside the Redwood City, California
area; or
(E) Without limiting the generality or effect of the foregoing, if there
any material breach of this Agreement by the Company or any successor to
the Company.
For purposes of this Agreement: (i) control or participation in any
competing business shall be deemed to include (but shall not be limited to)
ownership in excess of five percent (5%) of the aggregate capital stock of such
competing business, and (ii) the term "Principal Affiliate" shall include any
individual, partnership, joint venture, corporation, trust, unincorporated
organization or other entity that as of the date of the Merger Agreement or
during the term of this Agreement, directly or indirectly through one or more
intermediaries, is controlled by the Principal or any relative or spouse of the
Principal who has the same home as the Principal.
2. Confidential Information. The Principal hereby agrees not to disclose to
any person, other than: (i) to an employee of Parent (or customers, vendors or
others in furtherance of Parent's business interests), (ii) with the consent of
Parent, or (iii) as required by law, any trade secrets or confidential
information of Parent or the Business with respect to any of Parent's or the
Business' trademarks, service marks, licenses, lines of business, markets, key
personnel, profitability, services, systems, business development techniques or
plans, customers and business relationships, methods of operation, and training
and policy materials (collectively, the "Confidential Information"); provided,
however, that the Confidential Information shall not include any information
known generally to the public or in the software industry (other than as a
result of unauthorized disclosure by the Principal).
3. Other Matters.
a. In the event that any regulatory, administrative, or judicial proceedings
are commenced regarding this Agreement, the parties hereto agree to give each
other notice thereof and to cooperate fully in any such proceedings, provided,
however, that such cooperation shall not preclude either party from taking an
adverse position to the other party in such proceeding.
b. Each of the Principal and the Company acknowledges and agrees that this
Agreement is reasonable and valid in geographical and temporal scope and in all
other respects.
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4. Remedies. The Principal acknowledges that it would be difficult to
measure damage to Parent from any breach by the Principal of the covenants set
forth in Sections 1 and 2 hereof, that injury to Parent from any such breach
would be impossible to calculate, and that money damages would therefore be an
inadequate remedy for any such breach. Accordingly, the Principal agrees that
if the Principal breaches any provision of Sections 1 and 2 hereof, Parent
shall be entitled, in addition to all other remedies it may have, to
injunctions or other appropriate orders to restrain any such breach by the
Principal, without showing or proving any actual damage sustained by Parent,
and the Principal agrees to waive any requirement for the securing or the
posting of any bond in connection with such relief.
5. Successors; Binding Agreement.
This Agreement and all rights of Parent hereunder shall inure to the benefit
of, and be enforceable by, Parent and its successors and assigns.
6. Notice. All notices and other communications provided for in this
Agreement shall be sufficient if given in writing and delivered personally, by
overnight delivery service, by confirmed telecopy transmission, or by
registered or certified mail, return receipt requested, postage prepaid, as
follows (or to such other addressee or address as may be set forth in a notice
given in such manner):
If to Parent:
Peerless Systems Corporation
2381 Rosecrans Avenue, Suite 400
El Segundo, California 90245
Telephone: 310-536-0908
Telecopier: 310-536-0058
Attention: Edward Gavaldon
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 220
Palo Alto, California 94301
Telephone: 650-470-4500
Telecopier: 650-470-4570
Attention: Gregory Smith, Esq.
If to the Principal:
[ ]
[ ]
[ ]
Telephone: [ ]
Telecopier: [ ]
Attention: [ ]
With a copy to:
Coblentz, Patch, Duffy & Bass, LLP
222 Kearny Street, 7th Floor
San Francisco, California 94108
Telephone: 415-391-4800
Telecopier: 415-989-1663
Attention: Paul Escobosa, Esq.
All such notices shall be deemed to have been given on the date delivered or
telecopied in the manner provided for above.
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<PAGE>
7. Modification; Entire Agreement.
a. No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
Parent and the Principal. No waiver by any party hereto at the time of any
breach by another party hereto of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time.
b. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by any party hereto
which are not set forth expressly in this Agreement. This Agreement constitutes
the full and entire understanding and agreement between the parties with regard
to the subject hereof.
8. Governing Law. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of California
without regard to the principles of conflicts of laws thereof.
9. Severability; Waiver.
a. The restrictions against competition and disclosure of information set
forth in Sections 1 and 2 hereof are considered by the parties hereto to be
reasonable for the purposes of protecting the Business. However, if any such
restriction is found by any court of competent jurisdiction to be unenforceable
because it extends for too long a period of time or over too great a range of
activities or in too broad a geographic area, it shall be interpreted (but only
with respect to such jurisdiction) to extend only over the maximum period of
time, range of activities or geographic area as to which it may be enforceable
in such jurisdiction.
b. The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
c. No delay or omission by Parent in exercising any right under this
Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by Parent on any one occasion shall be effective only in that
instance and shall not be construed as a bar to or waiver of any right on any
other occasion.
10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
PRINCIPAL
----------------------------------------
Paul Kwan
PEERLESS SYSTEMS CORPORATION
By:
------------------------------------
Name:
Title:
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10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
PRINCIPAL
----------------------------------------
Adam Au
PEERLESS SYSTEMS CORPORATION
By:
------------------------------------
Name:
Title:
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EXHIBIT H
FORM OF OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1. Each of Parent and Sub is validly existing and in good standing under the
laws of the State of Delaware. Parent has all requisite corporate power and
authority to own, operate and lease its properties and to carry on its
business as now being conducted.
2. Each of Parent and Sub has all requisite corporate power and corporate
authority to execute and deliver the Merger Agreement and to consummate the
transactions contemplated thereby. The execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated thereby
have been duly and validly authorized by the Board of Directors of each of
Parent and Sub, and no other corporate proceedings on the part of each of
Parent or Sub is necessary for the execution and delivery by each of Parent
and Sub of the Merger Agreement, and the performance by each of Parent and
Sub of its obligations thereunder. The Merger Agreement has been duly
executed and delivered by each of Parent and Sub, and constitutes a valid
and binding obligation of each of Parent and Sub, enforceable against each
of Parent and Sub in accordance with its terms, except that: (i) such
enforcement may be subject to applicable bankruptcy, insolvency or other
similar laws, now or hereafter in effect, affecting creditors' rights
generally, (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought, and (iii) no view is expressed with respect to the Registration
Rights Agreement.
3. To the best of our knowledge, and except as set forth in the schedules and
exhibits to the Merger Agreement, all consents, approvals and
authorizations of and filings with any Governmental Entity with respect to
any Applicable Laws required on the part of Parent or Sub in connection
with the valid execution and delivery of the Merger Agreement, or the
consummation of the transactions contemplated thereby, have been obtained
or made. "Applicable Laws" shall mean the General Corporation Law of the
State of Delaware and those laws, rules and regulations of the State of
California and the United States of America, which, in our experience, are
normally applicable to transactions of the type contemplated by the Merger
Agreement.
4. Except as disclosed in the schedules and exhibits to the Merger Agreement,
neither the performance, execution and delivery of the Merger Agreement by
Parent and Sub, nor the consummation by Parent and Sub of the transactions
contemplated thereby, nor compliance by Parent and Sub with any of the
provisions thereof, will result in any of the following: (i) a violation of
the Certificate of Incorporation or bylaws of Parent or Sub, (ii) to our
knowledge, a default or event that, with notice or lapse of time, or both,
would constitute a default, breach or violation of any Applicable Contract,
(iii) to our knowledge, an event that would permit any person or entity to
terminate any Applicable Contract or to accelerate the maturity of any
obligation of Parent or Sub, (iv) to our knowledge, a violation or breach
of any Applicable Laws, or (v) to our knowledge, a violation of any
Applicable Orders. For purposes of this opinion, (A) "Applicable Contracts"
shall mean those agreements or instruments set forth on Schedule I to this
opinion; such agreements and instruments have been identified to us as all
the Merger Agreements and instruments which are material to the business,
properties or financial condition or results of operations of Parent and
Sub, and (B) "Applicable Orders" shall mean any writ, injunction or decree
of any court or governmental instrumentality to which Parent or Sub is a
party or by which any of its properties or assets is bound, and which is
identified on Schedule II to this opinion.
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EXHIBIT I TO THE MERGER AGREEMENT
FORM OF EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between AUCO (the "Company"), a California
corporation, and Adam Au (the "Executive") will become effective upon the later
date by which both parties sign this agreement ("Agreement").
R E C I T A L S
A. The Executive is currently employed as the President of the Company and
has made and is expected to continue to make major contributions to the short
and long term profitability, growth and financial strength of the Company;
B. The Company is currently contemplating a merger with Peerless Systems
Corporation ("Merger");
C. The Company desires to assure itself of both present and future
continuity of management in light of the Merger and subsequent to the Merger;
and
D. The Company desires to provide additional inducement for the Executive
to continue to remain in the ongoing employ of the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. At Will Employment. Subject to the terms and conditions of this
Agreement, the Company agrees to continue to employ Executive on an at will
basis and Executive agrees to remain in the employ of the Company on an at will
basis. With respect to periods following the Merger, references to the
"Company" shall include the surviving corporate parent in the Merger.
2. Position. During his employment with the Company, Executive agrees to
serve the Company, and the Company shall employ Executive as Vice President and
General Manager, Networking Division or in such other comparable or superior
executive capacity or capacities as may be specified from time to time by the
Chief Executive Officer of the Company.
3. Operation Dates of Agreement; and Duties.
(a) Operative Dates of Agreement. This Agreement shall be effective
and binding immediately upon its execution, but, anything in this Agreement to
the contrary notwithstanding, this Agreement shall not be operative unless and
until the Merger is consummated. Upon the closing of the Merger, without
further action, this Agreement shall become immediately operative. After the
operative date, this Agreement shall continue in effect during Executive's
employment with the Company up until the second (2nd) anniversary of the
closing date of the Merger, at which time this Agreement shall automatically
terminate without further action.
(b) Duties. During his employment under this Agreement, and except
for illness, reasonable vacation periods and reasonable leaves of absence,
Executive shall devote his best efforts and substantially all his business
time, attention, skill and efforts to the business and affairs of the Company
and its affiliated companies, as such business and affairs exist immediately
following consummation of the Merger and as they may be hereafter changed or
added to, under and pursuant to the general direction of the Board of Directors
of the Company; provided, however, that, with the approval of the Chief
Executive Officer of the Company (which shall not be unreasonably withheld),
Executive may serve, or continue to serve, on the boards of directors of, or
hold any other offices or positions in, companies or organizations which, in
such officer's judgment, will not present any conflict of interest with the
Company or any of its subsidiaries or affiliates or divisions, or materially
affect the performance of Executive's duties pursuant to this Agreement. The
Company shall retain full direction and control of the means and methods by
which Executive performs the services for which he is employed hereunder. The
services which are to be performed by Executive hereunder are to be
substantially rendered in the State of California.
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4. Compensation and Reimbursement of Expenses; Other Benefits;
(a) Compensation. During his employment under this Agreement,
Executive shall be paid a salary at the rate of one hundred seventy-five
thousand dollars ($175,000.00) per year, or such higher salary as may be from
time to time approved by the Board of Directors (or any duly authorized
committee thereof) of the Company ("Base Salary"), plus such additional
incentive compensation, if any, as may be voted to him yearly by the Board of
Directors (or any duly authorized committee thereof).
(b) Reimbursement of Expenses. The Company shall pay or reimburse
Executive, in accordance with its normal policies and practices, for all
reasonable travel and other expenses incurred by Executive in performing his
obligations under this Agreement.
(c) Other Benefits. During the period of employment under this
Agreement, Executive shall be entitled to receive all other benefits of
employment generally available to other members of the Company's management and
those benefits for which executives are or shall become eligible, when and as
he becomes eligible therefor, such as three weeks of paid vacation.
(d) Stock Options. Executive shall be granted an option with respect
to 100,000 shares of Peerless Systems Corporation ("Peerless") common stock
(the "Base Amount") which is to vest over a four year period as follows: one
quarter ( 1/4) or twenty-five thousand (25,000) shares shall vest one year from
the closing date of the Merger, and the remaining three quarters ( 3/4) or
seventy-five thousand (75,000) shares will vest on a pro rata basis monthly
over the ensuing thirty-six (36) months. The grant will be effective upon the
closing of the Merger, and the exercise price shall be equal to the closing
price of the common stock of Peerless on the Nasdaq National Market on the
business day immediately following consummation of the Merger. Executive shall
also be eligible for an annual "refresher" grant of stock options equal to
twenty-five percent (25%) of the Base Amount in accordance with Peerless'
policies and procedures.
(e) Bonus. Executive shall also be eligible to receive an annual
bonus, up to a maximum of one hundred thousand dollars ($100,000), based upon
earnings per share goals for the entire company, as may be determined by the
Board of Directors of the Company.
5. Termination.
(a) For Cause. Notwithstanding anything herein to the contrary, and
specifically reiterating the at will nature of Executive's employment, which
can be terminated by either Executive or Company for any reason or no reason
without advance notice, the Company may, without liability, also terminate
Executive's employment hereunder for Cause (as defined herein) at any time upon
written notice from the Board of Directors (or any duly authorized committee
thereof). As used herein, Cause shall mean the occurrence of any of the
following events: (i) Executive's conviction of or guilty plea to the
commission of an act or acts constituting a felony under the laws of the United
States or any state thereof; (ii) action by Executive toward the Company
involving personal dishonesty, theft or fraud in connection with Executive's
duties as an officer of the Company; or (iii) Executive's willful failure to
abide by or follow lawful directions of the Board of Directors that is not
cured after notice to the Executive. If the Company terminates Executive's
employment for Cause, Executive's right to compensation under this Agreement
will terminate as of the date of such termination and all of the Company's
obligations hereunder shall immediately cease and terminate, except that
Executive shall be entitled to receive all compensation to which he is due
under federal and state law or pursuant to Company policy up through and
including the date of termination.
(b) Death. If Executive's employment hereunder is terminated by
reason of Executive's death, Executive's (or Executive's estate's) right to
compensation under this Agreement will terminate as of the date of such
termination and all of the Company's obligations hereunder shall immediately
cease and terminate, except that Executive's estate will be entitled to
received all compensation to which Executive is due under federal and state law
or pursuant to Company policy up through and including the date of termination.
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(c) Disability. If the Company terminates Executive's employment by
reason of Executive's Disability (as defined herein), Executive's right to
benefits under this Agreement will terminate as of the date of such termination
and all of the Company's obligations hereunder shall immediately cease and
terminate, except that Executive shall be entitled to receive all compensation
to which Executive is due under federal and state law or pursuant to Company
policy up through and including the date of termination. As used herein,
Executive's Disability shall mean that, due to physical or mental illness,
Executive shall have been absent from his duties hereunder on a full time basis
for 180 consecutive days, and within 30 days after written notice of
termination is given (which may occur before or after the end of such 180-day
period) Executive shall not have returned to the performance of his duties
hereunder on a full-time basis.
(d) Termination by the Company other than for Cause, Death, or
Disability, or Termination by Executive for Good Reason. If the Company
terminates Executive's employment for any reason other than for cause, death or
disability, pursuant to Sections 5(a)-(c) above, or Executive terminates his
employment for Good Reason (as defined herein) then, notwithstanding anything
herein to the contrary and in complete satisfaction and discharge of all of its
obligations to Executive hereunder, Executive shall be entitled to receive all
compensation to which Executive is due under the terms of this Agreement as if
the Executive had remained in the employment of the Company during the term of
this Agreement as set forth in Section 3(a) hereof. For purposes of this
Agreement, Executive shall have "Good Reason" to terminate his employment with
the Company following the occurrence of any of the following events, without
Executive's written consent thereto, provided, that Executive shall have given
Company written notice specifying the conduct alleged to have constituted such
Good Reason and Company has failed to cure such conduct, if curable, within
fifteen (15) days following receipt of such notice:
(A) Any failure to elect or reelect or otherwise to maintain
Executive in the office or the position, or a substantially equivalent
office or position, of or with the Company, as described in Paragraph 2;
(B) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties described in
Paragraph 3(b);
(C) A reduction in Executive's Base Salary described in Paragraph
4(a);
(D) The COmpany requires the Executive to have his principal
location of work changed to any location that is outside the Redwood City,
California area; or
(E) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor.
(e) Termination by Executive other than for Good Reason. If Executive
terminates his employment hereunder for any reason other than for Good Reason,
Executive shall be entitled to receive all compensation to which Executive is
due under federal and state law or pursuant to Company policy up through and
including the date of termination.
6. Obligations of Executive During and After Employment.
(a) Executive agrees that during his employment under this Agreement,
he will engage in no other business activities, directly or indirectly, which
are or may be competitive with or which might place him in a competing position
to that of the Company, or any affiliated company, without the prior written
consent of the Chief Executive Officer of the Company.
(b) Executive acknowledges and agrees that (i) during the course of
his employment Executive will have produced and/or have access to confidential
information, records, notebooks, data, formulae, specifications, trade secrets,
customer lists and secret inventions and processes of Company and its
affiliated companies, and (ii) the unauthorized use or sale of any of such
confidential or proprietary information at any time would constitute unfair
competition with Company. Executive promises and agrees not to engage in any
unfair competition with Company either during or after the term of this
Agreement. Therefore, during and
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subsequent to his employment by Company, or by an affiliated company, Executive
agrees to hold in confidence and not, directly or indirectly, disclose, use,
copy or make lists of any such information, except to the extent expressly
authorized by Company in writing. All records, files, drawings, documents,
equipment, and the like, or copies thereof, relating to Company's business, or
the business of an affiliated company, which Executive shall prepare, or use,
or come into contact with, shall be and remain the sole property of Company, or
of an affiliated company, and shall not be removed (except to allow Executive
to perform his responsibilities hereunder while traveling for business purposes
or otherwise working away from his office) from the Company's or the affiliated
company's premises without its prior written consent, and shall be promptly
returned to Company upon termination of employment with Company and its
affiliated companies. This paragraph 6(b) shall survive the termination or
expiration of this Agreement.
7. General Provisions.
(a) Executive's rights and obligations under this Agreement shall not
be transferable by assignment or otherwise, nor shall Executive's rights be
subject to encumbrance or subject to the claims of Company's creditors. Nothing
in this Agreement shall prevent the consolidation of Company with, or its
merger into, any other corporation, or the sale by Company of all or
substantially all of its properties or assets; and this Agreement shall inure
to the benefit of, be binding upon and be enforceable by, any successor
surviving or resulting corporation, or other entity to which such assets shall
be transferred. This Agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company.
(b) This Agreement and the rights of Executive with respect to the
benefits of employment referred to in Paragraph 4 constitute the entire
agreement between the parties hereto in respect of the employment of Executive
by Company. This Agreement supersedes and replaces all other prior oral and
written agreements, understandings, commitments, and practices between the
parties.
(c) Any dispute, controversy or claim arising under or in connection
with this Agreement, or the breach hereof, shall be settled exclusively by
arbitration in accordance with the Rules of the American Arbitration
Association then in effect. Judgment upon the award rendered by the arbitrator
may be entered in any court of competent jurisdiction. Any arbitration held
pursuant to this paragraph in connection with any termination of Executive's
employment shall take place in Northern California at the earliest possible
date. If any proceeding is necessary to enforce or interpret the terms of this
Agreement, or to recover damages for breach thereof, the prevailing party shall
be entitled to reasonable attorneys fees and necessary costs and disbursements.
(d) The provisions of this Agreement shall be regarded as divisible,
and if any of said provisions or any part thereof are declared invalid or
unenforceable by a court of competent jurisdiction, the validity and
enforceability of the remainder of such provisions or parts thereof and the
applicability thereof shall not be affected thereby.
(e) This Agreement may not be amended or modified except by a written
instrument executed by Company and Executive.
(f) This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of
California.
(g) If, but for one or more provisions of this Agreement, the Merger
would qualify for "pooling of interests" accounting treatment, then (A) this
Agreement shall, to the extent practicable, be interpreted and/or reduced in
scope or effect to the extent necessary to permit such accounting treatment,
and (B) to the extent that the application of clause (A) of this Section 8(g)
does not preserve the availability of such accounting treatment, then, to the
extent that any provision of this Agreement would disqualify the Merger as a
"pooling" transaction (including, if applicable, the entire Agreement), such
provision shall be null and void as of the effective date hereof. All
determinations under this Section 8(g) shall be made by the accounting firm
whose opinion with respect to "pooling of interests" treatment is required as a
condition to the consummation of the Merger.
A-84
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the date first above written.
Auco, Inc.
By___________________________________
Name:
Title:
Peerless Systems, Inc.
By___________________________________
Name:
Title:
Executive
By___________________________________
Adam Au
A-85
<PAGE>
EXHIBIT J
FORM OF OPINION OF COBLENTZ, PATCH, DUFFY & BASS, LLP
1. The Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of California. The Company has all
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted.
2. The Company has all requisite corporate power and corporate authority to
execute and deliver the Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Merger Agreement and
the consummation of the transactions contemplated thereby have been duly and
validly authorized by the Board of Directors and the shareholders of the
Company, and no other corporate proceedings on the part of the Company are
necessary for the execution and delivery by the Company of the Merger
Agreement, and the performance by the Company of its obligations thereunder.
The Merger Agreement has been duly executed and delivered by the Company,
and constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except that: (i) such
enforcement may be subject to applicable bankruptcy, insolvency or other
similar laws, now or hereafter in effect, affecting creditors' rights
generally, (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought,
and (iii) no view is expressed with respect to the Registration Rights
Agreement.
3. To the best of our knowledge, and except as set forth in the schedules and
exhibits to the Merger Agreement, all consents, approvals and authorizations
of and filings with any Governmental Entity with respect to any applicable
laws required on the part of the Company in connection with the valid
execution and delivery of the Merger Agreement, or the consummation of the
transactions contemplated thereby, have been obtained or made.
4. Except as disclosed in the schedules and exhibits to the Merger Agreement,
neither the performance, execution and delivery of the Merger Agreement by
the Company, nor the consummation by it of the transactions contemplated
thereby, nor compliance by the Company with any of the provisions thereof,
will result in any of the following: (i) a violation of the Articles of
Incorporation or bylaws of the Company, (ii) to our knowledge, a default or
event that, with notice or lapse of time, or both, would constitute a
default, breach or violation of any Material Contract, (iii) to our
knowledge, an event that would permit any person or entity to terminate any
Material Contract or to accelerate the maturity of any obligation of the
Company, (iv) to our knowledge, a violation or breach of any applicable
laws, or (v) to our knowledge, a violation of any applicable orders. For
purposes of this opinion, "Material Contracts" shall mean those agreements
designated as "Material Contracts" in the Company Disclosure Schedule.
5. The authorized capital stock of the Company consists of: (i) 35,000,000
shares of Company Common Stock, of which 3,389,403 shares are issued and
outstanding as of the date hereof, and (ii) 10,000,000 shares of Company
Preferred Stock, of which (A) 3,250,000 have been designated Series A
Preferred Stock, no shares of which are issued and outstanding as of the
date hereof, and (B) 3,000,000 have been designated Series B Preferred
Stock, no shares of which are issued and outstanding as of the date hereof.
As of the date hereof, (i) no Shares are issued and held in the treasury of
the Company, (ii) 3,144,000 shares of Company Common Stock are reserved for
issuance pursuant to outstanding Company Options, and (iii) all shares of
the Company Preferred Stock have been converted to Company Common Stock.
Except as set forth in the Company Disclosure Schedule, all of the
outstanding shares of the Company Common Stock are, and any such shares
which may be issued pursuant to the exercise of outstanding Company Options
will be, when issued in accordance with the respective terms thereof, duly
authorized, validly issued, fully paid and nonassessable. Except as set
forth in the Merger Agreement and in the exhibits and schedules thereto, (i)
there are no shares of capital stock of the Company authorized, issued or
outstanding, (ii) to the best of our knowledge, there are no existing
options, warrants, calls, preemptive
A-86
<PAGE>
rights, Voting Debt or subscriptions or other rights, agreements,
arrangements or commitments of any character, relating to the issued or
unissued capital stock of the Company, obligating the Company to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Company,
or securities convertible into or exchangeable for such shares or equity
interests, or obligating the Company to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement
or commitment, and (iii) to the best of our knowledge, there are no
outstanding contractual obligations of the Company to repurchase, redeem or
otherwise acquire any of its capital stock, or to provide funds to make any
investment (in the form of a loan, capital contribution or otherwise) in any
other entity. Except as set forth in the Merger Agreement or in the exhibits
and schedules thereto, there are no voting trusts or other agreements or
understandings to which the Company is a party with respect to the voting of
the capital stock of the Company. The Company has no Subsidiaries.
6. The Proxy Statement/Prospectus/Consent Solicitation, as of the date it was
mailed to stockholders of Parent and the shareholders of the Company, and as
of the date hereof, appeared on its face to be appropriately responsive in
all material respects to the applicable requirements of the Securities Act
and the Exchange Act and the rules and regulations thereunder, except that,
in each case, we express no opinion or belief as to the financial
statements, schedules and other financial data included or incorporated, or
deemed to be incorporated, by reference therein or excluded therefrom or any
information to the extent it was furnished by or relates to Parent or Sub,
and we do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Proxy
Statement/Prospectus/Consent Solicitation.
In addition, we have participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants of the Company, officers and other representatives of Parent,
counsel for Parent and representatives of the independent public accountants of
Parent, at which the contents of the Proxy Statement/Prospectus/Consent
Solicitation and related matters were discussed and, although we are not
passing upon, and do not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Proxy
Statement/Prospectus/Consent Solicitation and have made no independent check or
verification thereof, on the basis of the foregoing, no facts have come to our
attention that have led us to believe that, insofar as it relates to the
Company, the Proxy Statement/Prospectus/Consent Solicitation as of its date and
the date hereof contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that we express no opinion or
belief with respect to the financial statements, schedules and other financial
data included or incorporated, or deemed to be incorporated, by reference in
the Proxy Statement/Prospectus/Consent Solicitation or the information included
or incorporated, or deemed to be incorporated, by reference in the Proxy
Statement/Prospectus/Consent Solicitation to the extent such information was
furnished by or relates to Parent or Sub.
A-87
<PAGE>
ANNEX B
SHAREHOLDER AGREEMENT
This SHAREHOLDER AGREEMENT (this "Agreement"), dated as of April 6, 1999, by
and between Peerless Systems Corporation, a Delaware corporation ("Parent"),
and Adam Au ("Shareholder").
WITNESSETH:
WHEREAS, concurrently with the execution of this Agreement, Parent, Auco
Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and AUCO, Inc., a California corporation (the "Company"), have
entered into an Agreement and Plan of Reorganization and Merger, dated of even
date herewith (the "Merger Agreement"), pursuant to which Sub will merge with
and into the Company upon the terms and subject to the conditions set forth
therein (the "Merger");
WHEREAS, as of the date hereof, Shareholder is the record and/or Beneficial
Owner (as hereinafter defined) of (i) 3,000,000 shares of the common stock,
$0.001 par value, of the Company (the "Common Stock"), (ii) 763,000 shares of
the preferred stock, $0.001 par value, of the Company (the "Preferred Stock",
and (iii) options to acquire 12,963 shares of Common Stock (collectively, the
"Company Capital Stock");
WHEREAS, as an inducement and a condition to Parent to enter into the Merger
Agreement, Parent has required Shareholder to agree, and Shareholder has
agreed, to enter into this Agreement; and
WHEREAS, upon the terms and subject to the conditions set forth herein,
Shareholder desires to: (i) vote all such Shareholder's shares of Company
Capital Stock in favor of the Merger and the approval and adoption of the
Merger Agreement and to execute a written consent in furtherance thereof, and
(ii) prior to the consummation of the Merger, convert any shares of Preferred
Stock held by such Shareholder into shares of Common Stock.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Merger
Agreement. For purposes of this Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having or sharing, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, voting
power, including the power to vote, or to direct the voting of, such
securities, and/or investment power, including the power to dispose, or to
direct the disposition, of such securities. Without duplicative counting of
the same securities by the same holder, securities Beneficially Owned by a
person include securities Beneficially Owned by all other persons with whom
such person acts in a partnership, limited partnership, syndicate or other
group for the purpose of acquiring, holding, or disposing of securities of
the same issuer.
(b) "Existing Shares" means shares of Common Stock and Preferred Stock
Beneficially Owned by Shareholder as of the date hereof.
(c) "Securities" means the Existing Shares together with any shares of
Common Stock, Preferred Stock or other securities of the Company acquired
by Shareholder in any capacity after the date hereof and prior to the
termination of this Agreement, whether upon the exercise of options,
warrants or other rights to acquire securities of the Company, the
conversion or exchange of convertible or exchangeable securities, or by
means of purchase, dividend, distribution, split-up, recapitalization,
combination, exchange of shares or the like, gift, bequest, inheritance or
as a successor in interest in any capacity or otherwise.
B-1
<PAGE>
Section 2. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER. Shareholder
represents and warrants to Parent as follows:
(a) Ownership of Shares. Shareholder (together with Share holder's
spouse, if Shareholder is an individual) is the sole record owner and
Shareholder is the sole Beneficial Owner of the number of shares of Common
Stock and Preferred Stock and options set forth opposite such Shareholder's
name on Exhibit A hereto. Shareholder has, subject to the terms of this
Agreement, sole voting power and sole power to issue instructions with
respect to the matters set forth in this Agreement, sole power of
disposition, sole power of conversion, sole power to demand appraisal
rights and sole power to agree to all of the matters set forth in this
Agreement, in each case with respect to all of the Existing Shares with no
limitations, qualifications or restrictions on such rights. Shareholder is
not the record or Beneficial Owner of any securities of the Company on the
date hereof other than the shares of Common Stock and Preferred Stock set
forth on Exhibit A and the options to purchase shares of Common Stock, if
any, specified on Exhibit A.
(b) Power; Binding Agreement. Shareholder has the legal capacity, power
and authority to enter into and perform all of Shareholder's obligations
under this Agreement. This Agreement has been duly and validly executed and
delivered by Shareholder and constitutes a valid and binding agreement of
Shareholder, enforceable against Shareholder in accordance with its terms
except that: (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) No Conflicts. Except as disclosed in the Merger Agreement, no filing
with, and no permit, authorization, consent or approval of, any state or
federal public body or authority (a "Governmental Entity") is necessary for
the execution of this Agreement by Shareholder and the consummation by
Shareholder of the transactions contemplated hereby. None of the execution
and delivery of this Agreement by Shareholder, the consummation by
Shareholder of the transactions contemplated hereby or compliance by
Shareholder with any of the provisions hereof shall: (i) conflict with or
result in any breach of any organizational documents applicable to
Shareholder, (ii) result in a violation or breach of, or constitute (with
or without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which Shareholder is a party or by which Shareholder or any of
its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to Shareholder or any of Shareholder's properties or assets.
(d) No Encumbrance. Except as permitted by this Agreement, the Existing
Shares are now and, at all times during the term hereof, and the Securities
will be, held by Shareholder or by a nominee or custodian for the benefit
of Shareholder, free and clear of all mortgages, claims, charges, liens,
security interests, pledges or options, proxies, voting trusts or
agreements, understandings or arrangements or any other rights whatsoever
other than restrictions arising under applicable law.
(e) No Finder's Fees. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial adviser's or
other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of
Shareholder.
(f) Reliance by Parent. Shareholder understands and acknowledges that
Parent is entering into the Merger Agreement in reliance upon Shareholder's
execution and delivery of this Agreement.
B-2
<PAGE>
Section 3. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby
represents and warrants to Shareholder as follows:
(a) Power; Binding Agreement. Parent has the corporate power and
authority to enter into and perform all of its obligations under this
Agreement. This Agreement has been duly and validly executed and delivered
by Parent and constitutes a valid and binding agreement of Parent,
enforceable against Parent in accordance with its terms, except that: (i)
such enforcement may be subject to applicable bankruptcy, insolvency or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought.
(b) No Conflicts. Except as disclosed in the Merger Agreement, no filing
with, and no permit, authorization, consent or approval of, any
Governmental Entity is necessary for the execution of this Agreement by
Parent and the consummation by Parent of the transactions contemplated
hereby, and none of the execution and delivery of this Agreement by each of
Parent, the consummation by each of Parent of the transactions contemplated
hereby or compliance by each of Parent with any of the provisions hereof
shall: (i) conflict with or result in any breach of any organizational
documents applicable to Parent, (ii) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, loan agreement, bond, mortgage, indenture, license,
contract, commitment, arrangement, understanding, agreement or other
instrument or obligation of any kind to which Parent is a party or by which
Parent or any of its properties or assets may be bound, or (iii) violate
any order, writ, injunction, decree, judgment, order, statute, rule or
regulation applicable to Parent or any of its properties or assets.
Section 4. CERTAIN PROHIBITED TRANSFERS. Prior to the termination of this
Agreement, Shareholder agrees not to, directly or indirectly:
(a) except distributions to the partners, members, or other equity
holders, as applicable, of Shareholder, offer for sale, sell, transfer,
tender, pledge, encumber, assign or otherwise dispose of, or enter into any
contract, option or other arrangement or understanding with respect to or
consent to the offer for sale, sale, transfer, tender, pledge, encumbrance,
assignment or other disposition of any or all of the Securities or any
interest therein, unless the transferee agrees to be bound by the
provisions contained in this Agreement;
(b) grant any proxy, power of attorney, deposit any of the Securities
into a voting trust or enter into a voting agreement or arrangement with
respect to the Securities except as provided in or to facilitate this
Agreement; or
(c) take any other action that would make any representation or warranty
of Shareholder contained herein untrue or incorrect or have the effect of
preventing or disabling Shareholder from performing its obligations under
this Agreement.
Section 5. VOTING OF SECURITIES. Shareholder hereby agrees that, during the
period commencing on the date hereof and continuing until the first to occur
of: (a) the Effective Time, or (b) termination of this Agreement in accordance
with its terms, in connection with the Consent Solicitation, or any other
meeting of shareholders of the Company or consent solicitation with respect to
the Company Capital Stock, Shareholder will vote or consent (or cause to be
voted or consented) the Securities:
(A) in favor of the adoption of the Merger Agreement and the
approval of the Merger and the other transactions contemplated by the
Merger Agreement and this Agreement and any actions required in
furtherance thereof and hereof; and
B-3
<PAGE>
(B) against any action or agreement that would result in a breach in
any respect of any covenant, representation or warranty or any other
obligation or agreement of the Company contained in the Merger
Agreement; and
Section 6. STOP TRANSFER.
(a) Shareholder hereby agrees and covenants that it will not request
that the Company register the transfer of any certificate or uncertificated
interest representing any of the Securities, unless such transfer is made
in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any change in
the Common Stock or Preferred Stock by reason of any stock dividend, split,
recapitalization, combination, exchange of share or the like other than
pursuant to the Merger, the term "Existing Shares" will be deemed to refer
to and include the shares of Common Stock and Preferred Stock as well as
all such stock dividends and distributions and any shares into which or for
which any or all of the Securities may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of this
Agreement.
Section 7. CONVERSION OF PREFERRED STOCK. On or prior to the Effective Time,
Shareholder shall deliver or cause to be delivered to the Company all shares of
Preferred Stock Beneficially Owned by such Shareholder, together with written
instructions directing the Company to cause such shares to be converted into
shares of Common Stock in accordance with the applicable provisions of the
Company's Articles of Incorporation and in full satisfaction of all rights
pertaining to such shares of Preferred Stock, such conversion to be effective
no later than the business day immediately preceding the Effective Time of the
Merger.
Section 8. CONSENT SOLICITATION; FILING WITH SECRETARY. Promptly following
receipt thereof, Shareholder shall promptly execute and file such Shareholder's
written consent to the Merger with the Secretary of the Company in accordance
with the terms of the Consent Solicitation.
Section 9. COMMERCIALLY REASONABLE EFFORTS. Subject to the terms and
conditions of this Agreement, Shareholder agrees to use its or his commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement and the Merger Agreement. Shareholder shall
promptly consult with Parent and provide any necessary information and material
with respect to all filings made by such party with any Governmental Entity in
connection with this Agreement and the Merger Agreement and the transactions
contemplated hereby and thereby.
Section 10. NO SOLICITATION. Shareholder will notify Parent immediately if
any proposals are received by, any information is requested from, or any
negotiations or discussions are sought to be initiated or continued with such
Shareholder or Shareholder's investment bankers, attorneys, accountants or
other agents, in each case in connection with any Acquisition Proposal,
indicating, in connection with such notice, the name of the person or entity
making such Acquisition Proposal and the terms and conditions of any proposals
or offers. Shareholder agrees to immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal and to keep Parent
informed, on a current basis, of the status and terms of any Acquisition
Proposal. Shareholder will not, and will use its best efforts to ensure that
Shareholder's investment bankers, attorneys, accountants and other agents do
not, directly or indirectly: (i) initiate, solicit or encourage, or take any
action to facilitate the making of, any offer or proposal that constitutes or
is reasonably likely to lead to any Acquisition Proposal, (ii) enter into any
agreement with respect to any Acquisition Proposal, or (iii) in the event of an
unsolicited written Acquisition Proposal engage in negotiations or discussions
with, or provide any information or data to, any person (other than Parent, any
of its affiliates or representatives and except for information which has been
previously publicly disseminated by the Company) relating to any Acquisition
Proposal. The obligations provided for in this section shall become effective
immediately following the execution and delivery of this Agreement by the
parties hereto.
B-4
<PAGE>
Section 11. TERMINATION. This Agreement shall terminate upon the earliest to
occur of: (a) the termination of the Merger Agreement pursuant to its terms, or
(b) the written agreement of the parties hereto to terminate this Agreement, or
(c) the consummation of the Merger in accordance with the terms of the Merger
Agreement.
Section 12. MISCELLANEOUS.
(a) Entire Agreement. This Agreement (including the documents and
instruments referred to herein): (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof.
(b) Successors and Assigns. This Agreement shall not be assigned by
operation of law or otherwise, except that Parent may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder
to any direct or indirect wholly or majority owned subsidiary or affiliate
of Parent. This Agreement and the obligations set forth herein shall be
binding upon each party's respective heirs, beneficiaries, executors,
representatives and permitted assigns.
(c) Amendment and Modification. This Agreement may not be amended,
altered, supplemented or otherwise modified or terminated except upon the
execution and delivery of a written agreement executed by the parties
hereto.
(d) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon: (i) transmitter's confirmation of a
receipt of a facsimile transmission, (ii) confirmed delivery by a standard
overnight carrier or when delivered by hand or (iii) the expiration of five
business days after the day when mailed by certified or registered mail,
postage prepaid, addressed at the following addresses (or at such other
address for a party as shall be specified by like notice):
If to Parent, to:
Peerless Systems Corporation
2381 Rosecrans Avenue, Suite 400
El Segundo, California 90245
Attention: Edward Gavaldon
Facsimile: 310-536-0058
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 220
Palo Alto, California 94301
Attention: Gregory Smith, Esq.
Facsimile: 650-470-4570
If to Shareholder, to:
Adam Au
c/o AUCO, Inc.
386 Main Street
Redwood City, California 94063
Facsimile: 650-568-6101
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Brooks Stough, Esq.
Facsimile: 650-321-2800
B-5
<PAGE>
and to:
Coblentz, Patch, Duffy & Bass
222 Kearny Street, 7th Floor
San Francisco, California 94108
Attention: Paul Escobosa, Esq.
Facsimile: 415-989-1663
(e) Severability. Any term or provision of this Agreement which is held
to be invalid, illegal or unenforceable in any respect in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of such
invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the
validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be
only so broad as is enforceable.
(f) Specific Performance. Each of the parties hereto recognizes and
acknowledges a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damages for which it
would not have an adequate remedy at law for money, damages, and therefore
in the event of any such breach the aggrieved party shall be entitled to
the remedy of specified performance of such covenants and agreements and
injunctive and other equitable relief in addition to any other remedy to
which it may be entitled, at law or in equity.
(g) No Waiver. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any
other party hereto with its obligations hereunder, and any custom or
practice of the parties at variance with the terms hereof, will not
constitute a waiver by such party of its right to exercise any such or
other right, power or remedy or to demand such compliance.
(h) No Third Party Beneficiaries. This Agreement is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder.
(i) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California, without giving effect
to the principles of conflict of law thereof.
(j) Descriptive Headings. The descriptive headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
(k) Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
(l) Further Assurances. From time to time, at any other party's request
and without further consideration, each party hereto shall execute and
deliver such additional documents and take all such further lawful action
as may be necessary or desirable to consummate and make effective, in the
most expeditious manner practicable, the transactions contemplated by this
Agreement.
(m) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
B-6
<PAGE>
IN WITNESS WHEREOF, Parent and Shareholder has caused this Agreement to be
duly executed as of the day and year first written above.
PEERLESS SYSTEMS CORPORATION
By:/s/ Edward A. Gavaldon
---------------------
Name:
Title:
SHAREHOLDER:
/s/ Adam Au
---------------------
Adam Au
B-7
<PAGE>
EXHIBIT A TO SHAREHOLDER AGREEMENT
<TABLE>
<CAPTION>
Type and Class of Securities Number of Shares and Options
---------------------------- ----------------------------
<C> <S>
Common Stock 3,000,000 shares held; options to acquire 12,963 shares
Preferred Stock 763,000 shares held (598,000 shares of Series A
Preferred Stock and 165,000 shares of Series B
Preferred Stock)
</TABLE>
B-8
<PAGE>
SPOUSAL CONSENT
I am the spouse of Adam Au, the Shareholder in the above Agreement. I
understand that I may consult independent legal counsel as to the effect of
this Agreement and the consequences of my execution of this Agreement and, to
the extent I felt it necessary, I have consulted with legal counsel. I hereby
confirm the Agreement and agree that is shall bind my interest in the Existing
Shares.
By: ___________________________
Name: _________________________
B-9
<PAGE>
ANNEX C
April 5, 1999
CONFIDENTIAL
Board of Directors
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Members of the Board:
We understand that Peerless Systems Corporation ("PSC"), Auco Merger Sub,
Inc. ("Merger Sub") and AUCO, Inc. ("Auco") have entered into an Agreement and
Plan of Reorganization and Merger (the "Merger Agreement") dated as of April 5,
1999, which provides, among other things, for the merger (the "Merger") of
Merger Sub with and into Auco. Pursuant to the terms of the Merger Agreement,
all of the issued and outstanding securities of Auco shall be converted into
the right to receive 0.2585 (the "Exchange Ratio") of a fully paid and
nonassessable share of PSC Common Stock. We have assumed that the Merger will
be treated as a "pooling-of-interests" under applicable accounting principles.
The terms and conditions of the Merger are set forth more fully in the Merger
Agreement. You have requested our opinion as to the fairness, from a financial
point of view, to PSC of the Exchange Ratio pursuant to the Merger Agreement.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Dain Rauscher Wessels has
acted as financial advisor to PSC in connection with the Merger and will
receive a fee for our services, including the rendering of this opinion.
Dain Rauscher Wessels (or its predecessor) acted as a managing underwriter
of the initial public offering of PSC. DRW also provides research coverage for
PSC. In the ordinary course of business, Dain Rauscher Wessels acts as a market
maker and broker in the publicly traded securities of PSC and receives
customary compensation in connection therewith and, accordingly, may at any
time hold a long or short position in such securities.
In connection with our review of the Merger, and in arriving at our opinion,
we have: (i) reviewed and analyzed the financial terms of the Merger Agreement;
(ii) reviewed and analyzed certain publicly available financial and other data
with respect to PSC and Auco made available to us from internal records of PSC
and Auco; (iii) conducted discussions with members of the senior management of
Auco and PSC with respect to the business and prospects of Auco; (iv) reviewed
the reported prices and trading activity of Common Stock and similar
information for certain other companies deemed by us to be comparable to Auco;
(v) compared the financial performance of Auco with that of certain other
publicly-traded companies deemed by us to be comparable to Auco; and (vi)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger transactions. In addition, we have conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as we have deemed necessary in arriving at our opinion.
C-1
<PAGE>
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided to us by Auco and PSC (including without limitation the financial
statements and related notes thereto of Auco and PSC), and have not assumed
responsibility for independently verifying and have not independently verified
such information. We have not assumed any responsibility to perform, and have
not performed, an independent evaluation or appraisal of any of the respective
assets or liabilities of Auco or PSC and we have not been furnished with any
such valuations or appraisals. In addition, we have not assumed any obligation
to conduct, and have not conducted, any physical inspection of the property or
facilities of Auco or PSC. Additionally, we have not been asked and did not
consider the possible effects of any litigation, other legal claims or any
other contingent matters.
Our opinion speaks only as of the date hereof, is based on the conditions as
they exist and information which we have been supplied as of the date hereof,
and is without regard to any market, economic, financial, legal or other
circumstance or event of any kind or nature which may exist or occur after such
date. The opinion expressed herein is provided for the information and
assistance of the Board of Directors of PSC in connection with its
consideration of the transaction contemplated by the Merger Agreement and such
opinion does not constitute a recommendation to any stockholder as to how such
stockholder should vote with respect to the Merger. Further, our opinion does
not address the merits of the underlying decision by PSC to engage in such
transaction. In addition, we are not expressing any opinion herein as to the
price at which PSC Common Stock will trade at any point in the future. Except
as provided in our engagement letter, this opinion shall not be published or
otherwise used, nor shall references to us be made, without our prior written
approval, except that PSC may include this opinion in its entirety in any proxy
statement or information statement relating to the Merger sent to PSC's
stockholders.
Based on our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that, as of the date hereof, the Exchange Ratio pursuant to the Merger
Agreement is fair from a financial point of view to PSC.
Very truly yours,
/s/ Dain Rauscher Wessels
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
C-2
<PAGE>
ANNEX D
ACTION BY WRITTEN CONSENT
OF SHAREHOLDERS OF AUCO, INC.
The undersigned shareholder (the "Shareholder"), being the holder of shares
of Common Stock or Preferred Stock, Series A, of AUCO, Inc., a California
corporation (the "Company"), does hereby adopt the following resolutions by
this written consent (the "Written Consent"), pursuant to Section 603 of the
California Corporations Code and the By-laws of the Company:
WHEREAS, the Board of Directors of the Company has approved an Agreement and
Plan of Reorganization and Merger (the "Merger Agreement"), dated as of April
6, 1999 by and among the Company, Peerless Systems Corporation, a Delaware
corporation ("Peerless") and Auco Merger Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of Peerless ("Acquisition Sub") pursuant to which
Acquisition Sub will merge with and into the Company, and pursuant to which the
Company will continue as the surviving company (the "Merger"); and
WHEREAS, the Shareholder has received and reviewed the Proxy
Statement/Prospectus/Information Statement regarding the Merger and the Merger
Agreement that has been provided to the Shareholder concurrently with this form
of Written Consent.
NOW, THEREFORE, BE IT RESOLVED, that the Shareholder hereby consents to the
approval and adoption of the Merger Agreement and the Merger;
FURTHER RESOLVED, that the officers of the Company, or any of them, are
hereby authorized and directed to take any and all actions and do any and all
things on behalf of the Company as may be deemed to be necessary or advisable
to effectuate the transactions contemplated by the foregoing resolution,
including filing reports or applications with any government agency as may be
required by any state or federal law; and
FURTHER RESOLVED, that any and all actions heretofore taken by the officers
of the Company within the terms of the foregoing resolutions are hereby
ratified, approved and confirmed, and declared to be the valid and binding acts
and deeds of the Company, and that the officers of the Company be and they
hereby are authorized, directed and empowered to do all such other acts and
things and to execute and deliver all such certificates or other documents and
to take such other action as they deem necessary or desirable to carry out the
purposes and intent of the above resolutions.
SHAREHOLDER: NUMBERS OF SHARES HELD:
- ------------------------------------- -------------------------------------
(Signature) Shares of Common Stock
- ------------------------------------- -------------------------------------
(Other Signature, if required) Shares of Preferred Stock
- -------------------------------------
(Please Print or Type Name)
- -------------------------------------
(Date)
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.
D-1
<PAGE>
[FORM OF PROXY]
ANNEX E
PROXY
PEERLESS SYSTEMS CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 10, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of PEERLESS SYSTEMS CORPORATION, a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement/Prospectus/ Information Statement, each dated
May 7, 1999 and hereby appoints Edward A. Gavaldon, proxy and attorney-in-fact,
with full power to him of substitution, on behalf of the undersigned, to
represent the undersigned at the Special Meeting of Stockholders of PEERLESS
SYSTEMS CORPORATION to be held at 2381 Rosecrans Avenue, El Segundo, California
90245 at 2:00 p.m., local time, and at any adjournment or adjournments thereof,
and to vote all shares of Common Stock that the undersigned would be entitled
to vote if then and there personally present, on all matters set forth on the
reverse side hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATION IS INDICATED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE PROPOSAL. SUBSEQUENT TO MAILING
THIS PROXY CARD, IF THE HOLDER OF THE SHARES REPRESENTED BY THIS PROXY WISHES
TO REVOKE OR CHANGE SUCH HOLDER'S VOTE, THE HOLDER MAY DO SO BY (1) SUBMITTING
WRITTEN NOTICE TO THE COMPANY, (2) REQUESTING AND THEN SUBMITTING A NEW, LATER
DATED PROXY CARD, OR (3) ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
SEE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE REVERSE
SIDE
E-1
<PAGE>
Please
mark votes X
as in this
example
The undersigned acknowledges receipt of the Notice of Special Meeting and
Proxy Statement/Prospectus/ Information Statement dated May 7, 1999.
Signature(s) ________________________________________________________ Date
NOTE: PLEASE MARK, SIGN, AND DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
To approve the issuance of shares of the Common Stock, par value $0.001 per
share of Peerless Systems Corporation, a Delaware corporation ("Peerless"), to
the shareholders of Anco, Inc., a California corporation ("Anco"), pursuant to
an Agreement and Plan of Reorganization and Merger, dated as of April 6, 1999,
by and among Peerless, Anco and Anco Merger Sub, Inc., a Delaware corporation
and wholly-owned subsidiary of Peerless ("Merger Sub"), providing for the
merger of Merger Sub with and into Anco (the "Merger").
FOR [_] AGAINST [_] ABSTAIN [_]
Note: Please sign exactly as your name appears on your stock certificate. If
the stock is registered in the names of two or more persons, each should sign.
Executors, administrators, trustees, guardians, attorneys and corporate
officers should insert their titles.
- ---------------------------------------- MARK HERE
FOR ADDRESS
- ---------------------------------------- [_] CHANGE AND
- ---------------------------------------- NOTE AT LEFT
E-2
<PAGE>
ANNEX F
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
Section 1300. Shareholder in short-form merger; Purchase at fair market value;
"Dissenting shares"; "Dissenting shareholder"
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Section 1301. Notice to holder of dissenting shares of reorganization approval;
Demand for purchase of shares; Contents of demand
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the
F-1
<PAGE>
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300,subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. Stamping or endorsing dissenting shares
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
Section 1303. Dissenting shareholder entitled to agreed price with interest
thereon;
When price to be paid
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
Section 1304. Action by dissenters to determine whether shares are dissenting
shares or fair market value of dissenting shares or both; Joinder of
shareholders; Consolidation of actions; Determination of issues; Appointment of
appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares
F-2
<PAGE>
as dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. Duty and report of appraisers; Court's confirmation of report;
Determination of fair market value by court; Judgment, and payment; Appeal;
Costs of action
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
Section 1306. Prevention of payment to holders of dissenting shares of fair
market value; Effect
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307. Disposition of dividends upon dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
F-3
<PAGE>
Section 1308. Rights and privileges of dissenting shares; Withdrawal of demand
for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
Section 1309. When dissenting shares lose their status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. Suspension of proceedings for compensation or valuation pending
litigation
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing are organization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
Section 1311. Shares to which chapter inapplicable
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of are organization or merger.
Section 1312. Attack on validity of reorganization or short-form merger; Rights
of shareholders; Burden of proof
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares
F-4
<PAGE>
pursuant to this chapter; but if the shareholder institutes any action to
attack the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for the
shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have
the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder Is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification Of Directors And Officers
Section 145 of the Delaware General Corporation Law permits a Delaware
corporation to indemnify officers, directors, employees and agents for actions
taken in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation, and with respect to any
criminal action, which they had no reasonable cause to believe was unlawful.
The Delaware General Corporation Law provides that a corporation may pay
expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action (upon
receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate), and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The Delaware General Corporation Law provides that
indemnification may be made for any claim, issue or matter as to which a person
has been adjudged by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to the corporation, unless and only to the
extent a court determines that the person is entitled to indemnity for such
expenses as the court deems proper.
The certificate of incorporation of Peerless and the bylaws of Peerless
provide, among other things, that, to the fullest extent authorized by the
Delaware General Corporation Law, Peerless shall indemnify each person who is
or has served as a director or officer of Peerless or any predecessor of
Peerless, or any other enterprise at the request of Peerless or of any
predecessor of Peerless, against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of Peerless. Peerless may also indemnify each of
its employees and agents against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of the fact that
such person is or was an agent of Peerless.
The Delaware General Corporation Law permits a Delaware corporation to
include a provision in its certificate of incorporation eliminating or limiting
the personal liability of any director to the corporation or its stockholders
for monetary damages for a breach of the director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, which
concerns unlawful payments of dividends, stock purchases or redemptions or (iv)
for any transaction from which the director derived an improper personal
benefit. The certificate of incorporation of Peerless contains provisions
limiting the liability of its directors, to the fullest extent currently
permitted by the Delaware General Corporation Law for monetary damages for
breach of their fiduciary duty as directors.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
Peerless has purchased insurance which purports to insure Peerless against
certain costs of indemnification which may be incurred by it pursuant to the
certificate of incorporation of Peerless and the bylaws of Peerless and to
insure the officers and directors of Peerless, and its subsidiary companies,
against certain liabilities incurred by them in the discharge of their
functions as such officers and directors except for liabilities resulting from
their own malfeasance.
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<PAGE>
Item 21. Exhibits
(a) The Registration Statement includes the following Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description Of Exhibit
------- ----------------------
<C> <S>
2.1 * Agreement and Plan or Reorganization and Merger, dated as of April 6,
1999, by and among Peerless, Auco Merger Sub, Inc., and Auco, together
with exhibits thereto filed as Annex A hereto.
2.2 * Shareholder Agreement, dated as of April 6, 1999, between Peerless and
Adam Au filed as Annex B hereto.
3.1 Certificate of Incorporation of Peerless, previously filed as an
exhibit to Amendment No. 1 to Peerless' Registration Statement on Form
S-1 (File No. 333-09357) dated August 28, 1996, and incorporated
herein by reference.
3.2 Amended and Restated Bylaws of the Company, previously filed as an
exhibit to Peerless' Current Report on Form 8-K, dated October 13,
1998, and incorporated herein by reference.
4.1 Rights Agreement Dated as of October 7, 1998, between Peerless and
Norwest Bank Minnesota, N.A. previously filed as an exhibit to
Peerless' Current Report on Form 8-K, dated October 13, 1998, and
incorporated herein by reference.
5.1 * Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, regarding the
legality of the securities being registered hereby.
8.1 * Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, as to certain
United States federal income tax consequences of the merger.
8.2 * Opinion of Gunderson, Dettmer, Stough, Villeneuve & Hachigian LLP, as
to certain United States federal income tax consequences of the
merger.
10.1 Form of Indemnity Agreement, previously filed as an exhibit to
Amendment No. 1 to Peerless' Registration Statement on Form S-1 dated
August 28, 1996, and incorporated herein by reference.
10.2 1992 Stock Option Plan (the "Option Plan"), as amended, previously
filed as an exhibit to Peerless' Registration Statement on Form S-1
dated August 1, 1996, and incorporated herein by reference.
10.3 1996 Equity Incentive Plan, previously filed as an exhibit to
Peerless' Registration Statement on Form S-1 dated August 1, 1996, and
incorporated herein by reference.
10.4 Form of Incentive Stock Option, previously filed as an exhibit to
Peerless' Registration Statement on Form S-1 dated August 1, 1996, and
incorporated herein by reference.
10.5 Form of Nonstatutory Stock Option, previously filed as an exhibit to
Peerless' Registration Statement on Form S-1 dated August 1, 1996, and
incorporated herein by reference.
10.6 1996 Employee Stock Purchase Plan, previously filed as an exhibit to
Peerless' Registration Statement on Form S-1 dated August 1, 1996, and
incorporated herein by reference.
10.7 Third Party Development and License Agreement (the "Adobe Third Party
License"), September 18, 1992 between Peerless and Adobe Systems
Incorporated ("Adobe"), previously filed as an exhibit to Peerless'
Registration Statement on Form S-1 dated August 1, 1996, and
incorporated herein by reference.
10.8 ** Reference Post Appendix #2 to the Adobe Third Party License, dated
February 11, 1993, previously filed as an exhibit to Peerless'
Registration Statement on Form S-1 dated August 1, 1996, and
incorporated herein by reference.
10.9 Amendment No. 1 to the Adobe Third Party License, dated November 29,
1993, previously filed as an exhibit to Peerless' Registration
Statement on Form S-1 dated August 1, 1996, and incorporated herein by
reference.
10.10** PCL Development and License Agreement (the "PCL License"), dated June
14, 1993, between Peerless and Adobe, previously filed as an exhibit
to Peerless' Registration Statement on Form S-1 dated August 1, 1996,
and incorporated herein by reference.
10.11** Amendment No. 1 to the PCL License, dated October 31, 1993, previously
filed as an exhibit to Peerless' Registration Statement on Form S-1
dated August 1, 1996, and incorporated herein by reference.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.12** Letter Modification to the PCL License, dated August 5, 1994,
previously filed as an exhibit to Peerless' Registration Statement on
Form S-1 dated August 1, 1996, and incorporated herein by reference.
10.13** Addendum No. 1 to the PCL License, dated March 31, 1995, previously
filed as an exhibit to Peerless' Registration Statement on Form S-1
dated August 1, 1996, and incorporated herein by reference.
10.14** Letter Modification to the PCL License, dated August 30, 1995,
previously filed as an exhibit to Peerless' Registration Statement on
Form S-1 dated August 1, 1996, and incorporated herein by reference.
10.15 Lease Agreement between Peerless and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated February 6,
1992, previously filed as an exhibit to Peerless' Registration
Statement on Form S-1 dated August 1, 1996, and incorporated herein by
reference.
10.16 First Amendment to Office Lease dated December 1, 1995 between
Peerless and Continental Development Corporation, previously filed as
an exhibit to Amendment No. 1 to Peerless' Registration Statement on
Form S-1 dated August 28, 1996, and incorporated herein by reference.
10.18 Employment Agreement with Lauren Shaw, previously filed as an exhibit
to Amendment No. 2 to Peerless' Registration Statement on Form S-1
dated September 13, 1996, and incorporated herein by reference.
10.19 Employment Agreement with Edward Gavaldon, previously filed as an
exhibit to Amendment No. 2 to Peerless' Registration Statement on Form
S-1 dated September 13, 1996, and incorporated herein by reference.
10.20 Second Amendment to Office Lease dated April 8, 1997 between Peerless
and Continental Development Corporation, previously filed as an
exhibit to Peerless' Current Report on Form 10-K dated April 29, 1997,
and incorporated herein by reference.
10.21 Third Amendment to Office Lease dated December 16, 1997 between
Peerless and Continental Development Corporation, previously filed as
an exhibit to Peerless' Current Report on Form 10-K dated April 24,
1998, and incorporated herein by reference.
10.22 Fourth Amendment to Office Lease dated April 22, 1998, between
Peerless and Continental Development Corporation, previously filed as
an exhibit to Peerless' Current Report on Form 10-K dated April 23,
1999 and incorporated herein by reference.
23.1 * Consent of PricewaterhouseCoopers LLP.
23.2 * Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney, previously filed as an amendment to Peerless'
Registration Statement on Form S-4 dated April 26, 1999, and
incorporated herein by reference.
99.1 * Consent of Dain Rauscher Wessels.
99.2 * Form of Auco Written Consent filed as Annex D hereto.
99.3 * Form of Peerless Proxy Card filed as Annex E hereto.
</TABLE>
- --------
* Filed herewith.
** Under an order granted by the Securities Exchange Commission pursuant to
Rule 406(d) promulgated under the Securities Act, certain portions of this
document have been granted confidential treatment.
II-3
<PAGE>
Item 22. Undertakings
Peerless hereby undertakes that, for purposes of any liability under the
Securities Act of 1933, as amended (the "Securities Act"), each filing of
Peerless' annual report pursuant to section 13(a) or section 15(d) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
Peerless hereby undertakes as follows: that prior to any public reoffering
of the securities registered hereunder through use of a prospectus which is a
part of this Registration Statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
Items of the applicable form.
Peerless undertakes that every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to meet the requirements
of section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Peerless
pursuant to the foregoing provisions, or otherwise, Peerless has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Peerless of expenses incurred or paid by a director, officer or
controlling person of the Registration 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, Peerless 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
Securities Act and will be governed by the final adjudication of such issue.
Peerless hereby undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11,
or 13 of this Form S-4, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
Peerless hereby undertakes to supply by means of a post-effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the registration
statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Peerless has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of El Segundo, State of
California on May 7, 1999.
Peerless Systems Corporation
By: /s/ Edward A. Gavaldon
---------------------------------
Edward A. Gavaldon
Chairman of the Board and
Chief Executive Officer
II-5
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP]
May 7, 1999
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Re: Peerless Systems Corporation Registration on Form S-4
Ladies and Gentlemen:
We have acted as counsel to Peerless Systems Corporation, a Delaware
corporation (the "Company"), in connection with the Company's Registration
Statement on Form S-4 (File No. 333-77049) as filed with the Securities and
Exchange Commission (the "Commission") on April 26, 1999, and Amendment No. 1
to the Registration Statement, filed with the Commission on the date hereof
(such Registration Statement, as so amended, being hereinafter referred to as
the "Registration Statement") for the purpose of registering with the
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
up to 2,500,000 shares (the "Shares") of common stock of the Company, par value
$0.001 per share (the "Common Stock"), issuable pursuant to the Agreement and
Plan of Merger, by and among the Company, Auco Merger Sub, a Delaware
corporation ("Merger Sub"), and Auco, Inc., a California corporation ("Auco"),
dated April 6, 1999 (the "Merger Agreement").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement, (ii) the Merger Agreement, (iii) the Certificate of Incorporation
and Amended and Restated Bylaws of the Company, each as currently in effect,
and (iv) certain resolutions adopted by the Board of Directors of the Company
relating to the issuance of the Shares and certain related matters. We have
also examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company or others, and such other documents, certificates and records as we
have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such documents. In making our examination of
documents executed or to be executed by parties other than the Company, we have
assumed that such parties had or will have the power, corporate or other, to
enter into and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution and
delivery by such parties of such documents and the validity and binding effect
thereof. As to any facts material to the opinions expressed herein which we
have not independently established or verified, we have relied upon statements
and representations of officers and other representatives of the Company and
others.
Members of our firm are admitted to the Bar of the State of Delaware and we
do not purport to be an expert on, or express any opinion concerning, any law
other than the substantive law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, upon consummation of the
merger of Merger Sub with Auco pursuant to the Merger Agreement, and the
issuance of the Shares and delivery of proper stock certificates therefor in
the manner contemplated in the Merger Agreement, the Shares will be validly
issued, fully paid and nonassessable.
<PAGE>
Peerless Systems Corporation
May 7,1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to our firm under the
caption "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are included in the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder.
This opinion is furnished by us, as counsel to the Company, in accordance
with the requirements of Item 601(b)(5) of Regulation S-K under the Securities
Act and, except as provided in the immediately preceding paragraph, is not to
be used, circulated or quoted for any other purpose or otherwise referred to or
relied upon by any other person without the express written permission of the
Company.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP]
May 7, 1999
Peerless Systems Corporation
2381 Rosecrans Avenue, Suite 400
El Segundo, California 90245
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as special counsel to Peerless Systems Corporation, a Delaware
corporation ("Parent") in connection with the preparation of the Registration
Statement on Form S-4 (such Registration Statement being hereinafter referred
to as the "Registration Statement"), to be filed by Parent with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act") on the date hereof, with respect to the
Agreement and Plan of Reorganization and Merger, dated April 6, 1999 (the
"Merger Agreement") among Parent, Auco Merger Sub Inc., a California
corporation and direct, wholly-owned subsidiary of Parent, and AUCO, Inc., a
California corporation.
Capitalized terms used but not otherwise defined herein shall have the same
meanings as set forth in the Registration Statement.
We hereby confirm that, although the discussion set forth in the
Registration Statement under the heading "Certain United States Federal Income
Tax Consequences of the Merger" does not purport to discuss all possible United
States federal income tax consequences applicable to the Merger, in our opinion
such discussion constitutes, in all material respects, a fair and accurate
summary of the United States federal income tax consequences of the Merger to a
holder of Auco Common Stock who participates in the Merger, based upon current
law. There can be no assurances that any of the opinions expressed herein will
be accepted by the Internal Revenue Service or, if challenged, by a court.
We hereby consent to the use of this opinion in connection with the
Registration Statement. We also consent to the use of our name under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder. This opinion is expressed
as of the date hereof and we disclaim any undertaking to advise you of any
subsequent changes of the facts stated or assumed herein or any subsequent
changes in applicable law.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
<PAGE>
EXHIBIT 8.2
[GUNDERSON DETTMER STOUGH VILLENEUVE FRANKLIN & HACHIGIAN, LLP LETTERHEAD]
April 21, 1999
AUCO, INC.
386 Main Street
Redwood City, CA
Gentlemen:
We have acted as special counsel to you, AUCO, Inc. ("Auco"), a California
corporation, in connection with the proposed merger (the "Merger") of Auco
Merger Sub, Inc., a Delaware corporation that is wholly owned by Peerless
Systems Corporation ("Peerless"), with and into Auco. This opinion is being
furnished in connection with the preparation of Peerless' Registration
Statement on Form S-4 (the "Registration Statement") filed on the date hereof
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
Merger.
Capitalized terms used but not otherwise defined herein shall have the same
meanings as set forth in the Registration Statement.
We hereby confirm that, although the discussion set forth in the
Registration Statement under the heading "Certain United States Federal Income
Tax Consequences of the Merger" does not purport to discuss all possible United
States federal income tax consequences applicable to the Merger, in our opinion
such discussion constitutes, in all material respects, a fair and accurate
summary of the United States federal income tax consequences of the Merger to a
holder of Auco Common Stock who participates in the Merger, based upon current
law. There can be no assurances that any of the opinions expressed herein will
be accepted by the Internal Revenue Service or, if challenged, by a court.
We hereby consent to the use of this opinion in connection with the
Registration Statement. We also consent to the use of our name under the
heading "Legal Matters" in the Registration Statement. Any variation or
difference in any fact from those set forth or assumed either herein or in the
Registration Statement may affect the conclusions stated herein. In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act or the rules
and regulations of the Commission thereunder. This opinion is expressed as of
the date hereof and we disclaim any undertaking to advise you of any subsequent
changes of the facts stated or assumed herein or any subsequent changes in
applicable law
Very truly yours,
/s/ Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Peerless Systems Corporation on Form S-4, of our reports dated March 5, 1999,
except for the subsequent event described in Note 14 as to which the date is
April 6, 1999, on our audits of the financial statements and financial statement
schedule of Peerless Systems Corporation as of January 31, 1999 and 1998 and for
the each of the three years in the period ended January 31, 1999, which report
is incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1999. We also consent to the reference to our firm
under the caption "Experts."
PRICEWATERHOUSECOOPERS LLP
Woodland Hills, California
April 23, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated April 2, 1999, except for Note 10 as to which the date is April 6,
1999, on our audit of the financial statements of Auco, Inc. as of December 31,
1998 and 1997 and for the year ended December 31, 1998. We also consent to the
reference to our firm under the caption "Experts."
PRICEWATERHOUSECOOPERS LLP
Woodland Hills, California
April 23, 1999
<PAGE>
EXHIBIT 99.1
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Gentlemen:
We hereby consent to the inclusion of our Fairness Opinion addressed to the
Board of Directors of Peerless Systems Corporation in the Amendment No. 1 to
the Registration Statement on Form S-4 of Peerless Systems Corporation to be
filed in connection with the pending acquisition of AUCO, Inc. by Peerless
Systems Corporation. We also consent to the inclusion in such Form S-4
Registration Statement of references to our firm.
Sincerely,
May 7, 1999 /s/ John Brew
-------------
Managing Director
