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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
January 31, 1997 000-21287
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PEERLESS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 95-3732595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
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2381 ROSECRANS AVENUE, EL SEGUNDO, CA 90245
(Address of principal executive offices, including zip code)
(310) 536-0908
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Acts: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the Nasdaq National Market on April 16, 1997, was
approximately $103,458,000.
The number of shares of Common Stock outstanding as of April 16, 1997 was
10,515,938.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Peerless Systems Corporation Proxy Statement relating
to the annual meeting of stockholders to be held on June 12, 1997 (the "Proxy
Statement") are incorporated by reference into Part III of this Annual Report
on Form 10-K.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual performance and results of operations may
differ materially from those projected or discussed in the forward-looking
statements due to certain risks and uncertainties. Information concerning
certain risks and uncertainties is contained in the Company's Prospectus,
dated September 25, 1996, and filed with the Securities and Exchange
Commission, as well as in the section entitled "Business--Risk Factors" below.
The forward-looking statements contained herein represent the Company's
judgment as of the date of this report, and the Company cautions readers not
to place undue reliance on such statements.
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PART I
ITEM 1 -- BUSINESS.
Peerless Systems Corporation ("Peerless" or the "Company") is a leading
provider of software-based embedded imaging systems to original equipment
manufacturers ("OEMs") of digital document products. Digital document products
include printers, copiers, fax machines, scanners and emerging color products,
as well as multifunction products ("MFPs") that perform a combination of these
imaging functions. In order to process digital text and graphics, digital
document products rely on a core set of imaging software and supporting
electronics, collectively known as an embedded imaging system. The Peerless
family of products and engineering services provides advanced embedded imaging
technologies that enable the Company's OEM customers to develop digital
printers, copiers and MFPs quickly and cost effectively. The Company markets
its solutions directly to OEM customers such as Adobe, Canon, IBM and Xerox.
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 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
is emerging. To date, a majority of embedded imaging systems have been
developed and produced internally by digital document product manufacturers
such as Hewlett-Packard ("HP"), Xerox and Canon. The market for embedded
imaging systems represents a small portion of the worldwide market for digital
document products which the Company estimates, based in part upon data and
projections provided by International Data Corporation ("IDC"), to have been
approximately $24 billion in 1995.
Developments in the Digital Document Products Market
Rapid changes in technology and end-user requirements have created increased
challenges for digital document product manufacturers, particularly in the
area of embedded imaging systems. These changes include increased technical
complexity, the increased role of networking, the emergence of MFPs and the
demand for color imaging. As a result, OEMs increasingly are relying on
outside embedded imaging systems suppliers to provide their embedded imaging
system solutions.
Increased Technical Complexity. Initially, the software written for embedded
imaging systems supported only monochrome, single-function, low-resolution
capabilities. This software was relatively simple and resided on a low-end 8-
bit microprocessor platform. However, as technology and end-user requirements
have evolved, the embedded imaging task has become significantly more complex.
Today, digital imaging engines operate at resolutions of 600 dots per inch or
more, require the support of a variety of document handling options, operate
at increased speeds and are beginning to offer high-quality color output. In
addition, computers and applications software create increasingly
sophisticated documents that incorporate complex graphical content. The data
files for these digital documents can be very large and, if left in raw form,
can overwhelm the memory and processing
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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 data files,
which can result in reduced image quality. The increased complexity of digital
document products, the rapid pace of technological change and the increased
memory requirements have created increased challenges for digital document
product manufacturers, particularly in the core areas of image processing and
operating system architecture.
Increased Role of Networking. Within the office environment, digital
document products increasingly are deployed in a networked configuration.
According to projections by IDC, 62% of laser printers sold in the United
States in 1995 were estimated to have been connected to enterprise networks,
and this percentage is expected to increase to 78% by 1999. See "Risk
Factors--Developing Markets" for a discussion of this forward-looking
statement. Because multiple local area network protocols and network operating
systems are deployed in the corporate network environment, networked digital
document products must support a broad array of networking technologies to
maximize accessibility by various user groups. The network environment is also
changing rapidly and becoming increasingly complex, with a growing requirement
for remote network management that extends across both local area networks and
wide area networks. In addition, because the majority of office digital
document products are networked, the image processing intelligence may be
partitioned and located anywhere within the network: at the site of document
or image origination; at a server; or, as is typically the case today, inside
the digital document product itself. In some instances, such as printing to a
remote location, it can be advantageous to perform image pre-processing and
compression at the document origination site, prior to transmission over
usage-sensitive facilities. In order to accommodate the emerging needs of the
networked office environment, an optimal embedded imaging system must employ a
modular architecture capable of serving and managing distributed corporate
resources.
Emergence of Multifunction Products. The advent of MFPs has eroded the
boundaries between the previously distinct printer, copier, fax and scanner
market sectors. MFPs, ranging from small home products to large office
devices, offer several of these functions for significantly less cost than
would otherwise be incurred by purchasing these products separately. Each of
the dominant vendors in the printer, copier and fax markets now has introduced
MFPs, which have required each of them to broaden its imaging expertise. At
the same time, the need for concurrent processing of multiple digital document
product functions has created the need for real-time, multitasking operating
system support.
Demand for Color Imaging. Although many office computers have color
displays, and the graphical content available to office users via the World
Wide Web and advanced office applications make heavy use of color, most
digital document products found in today's office environment generate
monochrome output. In the 1990s, color laser printers have been introduced
into the office marketplace. Many of these have been limited by unit costs in
excess of $7,500, printing speeds measured in minutes per page for complex
images, and output that does not support photo quality requirements. In the
small office/home office market, most inkjet printers now support color but
are typically limited by output speeds of one or less pages per minute.
Although digital document engine manufacturers have developed contone
(photoquality) hardware technology that is now capable of supporting high
speed photoquality color printing, the output produced by today's digital
document products, in many cases, continues to be limited by existing embedded
imaging systems. Today's embedded imaging systems are challenged by the
transition from monochrome to contone color output because the simultaneous
implementation of four planes of color coupled with up to eight bits per pixel
increases the digital document data stream by a factor of up to 32. As a
result, there is a need for embedded imaging systems that can support the
accelerated performance requirements of color output.
Increased Reliance on Outsourcing. In addition to the engineering challenges
generated by changing technology, digital document product manufacturers
increasingly are subject to a variety of market pressures. Competition in the
marketplace, coupled with end-user demand for greater performance at reduced
cost and shortening product life cycles, has created a growing need to reduce
time-to-market and engineering costs. Digital document product manufacturers
increasingly are electing to outsource imaging software and supporting
electronics design to embedded imaging systems suppliers in order to include
new imaging technologies and
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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 this trend towards outsourcing. As digital document product
manufacturers move to incorporate imaging technologies from outside suppliers,
their internal resources are freed to focus on their core competencies in
product differentiation, marketing and distribution. Additionally, there has
been no established comprehensive embedded imaging system standard for the
digital document product industry to date. However, as the digital document
product market sectors converge and as the complexity of imaging technology
intensifies, the Company believes digital document product manufacturers will
realize a significant competitive advantage by utilizing a single open
embedded imaging system standard across all digital document product market
sectors. See "Competition" and "Risk Factors--Technological Change; Dependence
on the Digital Document Product Market" for a discussion of these forward-
looking statements.
PEERLESS PRODUCTS AND SOLUTIONS
Peerless is a leading provider of embedded imaging systems for the digital
document product market. The Company's family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's OEM customers to develop digital printers, copiers and MFPs quickly
and cost effectively. The Company delivers its products to its OEM customers
in two ways: licensing of the Company's standard imaging products for the OEM
customer's internal product development; and turnkey product development
whereby the Company provides the additional engineering services necessary to
integrate the appropriate standard products into a complete embedded imaging
system solution optimized to the OEM's specific requirements.
Products and Services
The Company has designed its embedded imaging technology with a modular
architecture that addresses a broad spectrum of digital document product
technologies and that may be tailored to an individual OEM's requirements.
Peerless offers its OEMs the flexibility to optimize solutions for color,
networking support, languages or multifunction features for their digital
document products as their needs dictate. Peerless also offers engineering
services to allow OEMs to outsource the development of the entire embedded
imaging system for a digital document product. The Company's products include
the following technologies and services:
Operating System. PeerlessPage is a complete imaging operating system
including a high performance real time operating system kernel, printing
engine driver, object-based image processing model, graphics library, font
management, hard disk management, print job management and user control panel
interface. The scalable nature of the Company's technology enables it to serve
both the low cost and high performance sectors of the market. The multitasking
operating system also enables the Company to manage concurrent processing of
digital document product tasks for the MFP marketplace. Furthermore, the
Company's 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 are currently under development to
support the unique requirements of contone color printers, including contone
image processing and industry standard color matching support. Extensions to
support MFPs are under development to provide scanner management, electronic
collation, and print, copy and fax multitasking capability.
Page Description Languages. The Company provides its OEMs with page
description languages ("PDLs") that conform to the most widely used standards
today, Adobe's PostScript Software and Hewlett-Packard's Printer Control
Language ("PCL"). The Company offers PeerlessPrint technology, which emulates
Hewlett-Packard's PCL. The Company provides a complete range of printing
language products, including PeerlessPrint5E, which provides compatibility
with HP's PCL 5e language utilized in their LaserJet 4, 5P, 5L and 5Si line of
laser printer products, as well as enhancements to support higher resolutions
and added paper handling options. PeerlessPrint5C is designed to provide
compatibility with HP's PCL 5C utilized in its Color LaserJet color laser and
high-end inkjet products. Under development is PeerlessPrint6, which will
provide
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compatibility with HP's latest PCL 6 language utilized in its LaserJet 5 laser
printer. As a third-party co-developer, the Company provides an optimized,
high performance integration of Adobe PostScript language into the
PeerlessPage system for customers that separately license PostScript from
Adobe Systems Incorporated ("Adobe"). The Company's WinEXPRESS and Color
WinEXPRESS languages, also under development, are being designed to provide an
intelligent windows-based printing solution for low cost monochrome and color
printers and MFPs.
PC Software. The Company currently is developing PeerlessPrint drivers that
are being designed to optimize the network printing process under Windows 95
and Windows 3.1 environments.
ASICs and Integrated Processors. The Company designs application specific
integrated circuit ("ASIC") solutions for the digital document product
marketplace that provide a silicon-based implementation of key components of
its imaging software. The Company has designed an integrated processor
combining its basic digital document product functionality with an industry-
standard 32-bit microprocessor. For the high performance sector of the market,
the Company offers specialized co-processors that accelerate the Peerless
imaging software and incorporate controller functionality and imaging features
to provide both cost savings and performance enhancements. The Company's
QuickPrint line of imaging ASIC co-processors integrates basic components of
the Company's imaging system into a silicon solution to reduce product costs
and enhance performance. The QuickPrint 1600 incorporates Peerless' object-
based imaging technology for monochrome printing solutions. The QuickPrint
1700 incorporates the latest object-based imaging technology and supports non-
contone color printing solutions. The Company currently is developing the
QuickPrint Color 1800, which is being designed to incorporate the Company's
contone imaging model to significantly reduce the memory and processing power
required for contone color laser printers and enhance printing of grey scale
images in monochrome printers. The MC68322 integrated processor was developed
in conjunction with Motorola to provide a single silicon solution for low cost
laser printers and MFPs.
Networking Technology. The Company has designed a standardized networking
interface, the Peerless Standard Input/Output ("PSIO") interface, to enable
its digital document product OEMs to reduce custom development costs for their
networking solutions. In addition, Peerless supports a broad array of
networking protocols, allowing its OEM customers to address the majority of
end-user networking requirements. To accommodate the need for remote network
management of digital document products over LANs and across wide area
networks, including intranets, the Company supplies management information
block ("MIB") tables that may be utilized by open industry-standard network
management systems.
Engineering Services. For those OEMs that wish to outsource the development
of some or all of the embedded imaging system for a digital document product,
the Company offers engineering services. This can include controller design
and custom engineering for vendor-specific features that complement the
Company's standard imaging products.
SOLUTIONS
The Company's products can be integrated to provide a wide range of scalable
solutions:
Monochrome Solution. The Company's monochrome solution targets low cost,
networkable office laser printers with printing speeds from 1 to 40 pages per
minute and printing resolutions from 600 to 1200 dots per inch. The Company's
contone imaging technology, currently under development, will be utilized to
provide photographic quality image printing on future monochrome products.
Multifunction Solution. The Company's MFP imaging solutions target OEM
requirements from lower cost networkable inkjet and laser-based MFP products,
currently under development, to high speed copier-based MFP products. These
solutions combine the Company's networkable imaging products with MFP-specific
extensions to facilitate printing, copying, faxing and scanning by the same
digital document product. The Company's solutions provide multifunction
capability, but the Company does not provide stand-alone fax or copier
solutions. Solutions support printing speeds from 1 to 40 pages per minute.
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Color Solution. The Company's color imaging solutions target OEM
requirements for a broad range of color imaging devices. These solutions have
been designed to support color printing speeds from 1 to 10 pages per minute,
400 to 1200 dots per inch resolution and photographic contone color quality.
The Company's proprietary object-based image processing technology reduces
memory requirements for printing contone pages while simultaneously
accelerating the document production process and increasing print quality. In
February 1997, the Company released its first color embedded imaging system to
an OEM customer.
TECHNOLOGY
The Company strives to develop for the embedded imaging systems marketplace
unique technologies that provide meaningful improvements in performance and
cost for Peerless' OEMs. The Company's embedded imaging system solution is
based on its proprietary, object-based image processing technology, which can
reduce the size of digital document product imaging files with virtually no
noticeable loss of visual quality. This proprietary technology enables the
Company's OEM customers to reduce memory cost and increase print quality and
speed while eliminating or reducing the need for the use of a compression
technology. When optimized, this component of the embedded imaging system can
provide significant cost savings and performance differentiation to digital
document product manufacturers. The Company incorporates complementary
technologies, or makes its technologies compatible with third-party
technologies, in order to provide its customers with a more comprehensive
imaging solution.
Object-Based Image Processing. Most embedded imaging systems utilize similar
methods of processing document imaging information. They convert a file that
represents a document page into a bitmap and then process all page elements as
a collection of pixels. Because bitmaps generate large files, the image
processing task can become time-consuming, requiring subsequent document pages
to be stored in memory while previous pages are being processed. To
accommodate memory limitations, file compression technologies are often
utilized. These compression technologies frequently result in a loss of
clarity and detail in the printed document and require significant processing
power.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a page image as a collection of pixels, the Peerless
object-based image processing technology recognizes basic imaging elements in
the document, differentiating between text, line art and photographs much as
the human eye does. Peerless' software then creates a display list of image
objects as an intermediate representation of the document to be printed. This
display list is a more concise means of representing the imaging information
of the document, enabling complex imaging data to be processed more quickly
and with less memory, typically without resorting to compression techniques
that degrade the image. For high performance applications, the display list
can be processed in real time with assistance from a Peerless-designed
graphics co-processor embedded in the digital document product. Because
Peerless technology can enable the page image to be processed in real time,
concurrent with the transmission of the document print file, memory
requirements can be reduced and performance can be enhanced. Furthermore, the
image quality or resolution can be reduced to accommodate limitations in the
digital document product's memory, or progressively enhanced by installation
of additional digital document product memory. The Company's object-based
image processing technology provides more significant benefits as the image
processing workload increases, which occurs with increased resolution or a
transition from monochrome to color. The Company holds two patents in the
United States covering certain aspects of its object-based imaging approach.
Systems Architecture. The Company has developed standardized interfaces for
the Company's family of products that enable the Company's imaging solution to
be ported to a variety of platforms, languages and applications. For example,
the standardized PeerlessPage interface provides the ability to support
multiple printing languages, and the PeerlessPage Imaging Operating System is
both platform- and device-independent and able to accommodate a variety of
print engines and controller architectures. The Company has also developed an
applications interface that enables the support of features such as spooling,
stored macros, stored forms, electronic collation and stapling.
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Technology Partners. The Company has established relationships that permit
it to offer to its customers complementary technologies through technology
partners. For example, Peerless has licensed (for internal development
purposes) the right to use Adobe's PostScript Software to enable the Company's
products to be used with Adobe's PostScript Software, and the Company's
relationship with Adobe permits the Company to offer a convenient and
optimized Adobe PostScript-enabled solution. Furthermore, the Company has a
relationship with Emulex that enables the Company to support network printing
under a wide range of networking technologies. In addition, the Company
incorporates font rasterizers into its imaging solution to enable its OEMs to
license font technology from providers such as Agfa and Bitstream.
In October 1996, the Company entered into an agreement with a major
developer and manufacturer of specialized processor chips relating to the
licensing of Peerless technologies and engagement of Peerless technical
personnel for engineering development services. Pursuant to the agreement, the
Company is entitled to engineering service payments, development license fees
and prepayment of royalty guarantees. The agreement provides that the
manufacturer may terminate the relationship for any reason upon 60 days'
notice and with notice in the event of a material breach. If the agreement is
terminated for a material breach by the Company, the manufacturer is entitled
to a return of the substantial majority of the licensing fees previously paid,
other than those attributable to per unit royalties. No assurance can be given
as to the ability of the Company to perform in accordance with the terms of
the agreement or as to the ability or willingness of the manufacturer to
continue developing, marketing and selling proposed products covered by the
agreement. The termination of the agreement or the inability or unwillingness
of the Company or the manufacturer to perform in accordance with the terms of
the agreement or as presently anticipated by the Company would have a material
adverse effect on the Company's future prospects and operating results.
CUSTOMERS AND MARKETS
CUSTOMERS
Peerless markets its imaging products to OEMs manufacturing digital document
products for the high performance sector of the office market and to
semiconductor OEMs in the low cost sector of the office and personal use
market. With the exception of Adobe, the Company has derived substantially all
of its revenues in recent years from direct sales to digital document product
OEMs, including Canon, IBM and Xerox.
MARKETS
High Performance Digital Document Product Market. The high performance
sector of the digital document product market is characterized by digital
document products ranging in price from approximately $1,000 to in excess of
$50,000 each. These products typically offer high performance differentiated
by customized features. In many cases, digital document product manufacturers
demand turnkey, customized embedded imaging solutions that include imaging
software, controller design and network interface card design. As a result of
these unique requirements, Peerless typically addresses the high performance
sector of the digital document product market via direct OEM relationships
with individual digital document product manufacturers. The Company's major
digital document product manufacturer customers, based on percentage of total
revenues, in the fiscal years ended January 31, 1997 and December 31, 1995,
included: Canon, with 19% and 22%, respectively; IBM, with 19% and 15%,
respectively; Xerox, with 7% and 25%, respectively; and Adobe, with 14% and
7%, respectively. Many of the services and licensing arrangements with the
Company's OEMs are provided on a project-by-project basis, are terminable with
limited or no notice and, in certain instances, are not governed by long-term
agreements.
Small Office/Home Office Market. The low cost sector of the digital document
product market, sometimes called the Small Office/Home Office ("SOHO") market,
is characterized by digital document products with prices under $1,000 that
typically emphasize price/performance over customized features. In most
instances, it is not cost effective for digital document product manufacturers
to invest in a customized embedded imaging
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solution in addressing this market. For the SOHO market, Peerless has designed
a family of ASICs that embed basic components of the Company's imaging
software into semiconductor firmware. Peerless has licensed these designs to
semiconductor manufacturers, such as Motorola, that have the rights to
manufacture and sell these ASICs directly to digital document product
manufacturers. Motorola sells a Peerless-based printing ASIC, the 68322, and
pays Peerless a royalty on each ASIC sold. See "Risk Factors--Dependence on
Sole Source Providers."
SALES AND MARKETING
The Company markets its products to the leading OEMs that sell digital
document products into the worldwide market. The Company directs most of its
sales efforts through a sales office in Japan and its headquarters in
California. Sales to European digital document products manufacturers are
conducted out of the Company's California headquarters.
The Company markets directly to OEMs and through focused public relations
and branding programs. Direct OEM marketing consists of development of sales
collateral, mailers, trade show attendance and sales support. The Company
focuses its public relations effort on media read by OEM customers. The
Company directs its branding programs at building the Company's brand
awareness. These programs consist of public relations and Peerless product
branding on its silicon and software products.
PRODUCT DEVELOPMENT AND ENGINEERING SERVICES
The Company's product development activities are located at the Company's
headquarters in El Segundo, California. These activities primarily consist of
new product development, enhancement of existing products, product testing and
technical documentation development. Accordingly, the Company's engineering
personnel are divided into two primary development areas: research and
development, which focuses on development and enhancement of the Company's
core technologies; and engineering services, which focuses on customized
design activities.
The Company's research and development efforts focus on ongoing development
of the Company's product family, including MFP and advanced color imaging
technologies. In addition, as applications evolve and become standardized, the
research and development efforts harness the expertise acquired from the
performance of engineering services to add standard application modules to the
Company's product family.
The Company's engineering services personnel work closely with OEMs that
desire a turnkey solution, developing customized interfaces and applications
specific to individual OEMs. The Company typically receives a fee for such
engineering services. As part of its corporate strategy, the Company leverages
its engineering services capability, to penetrate emerging market sectors
where applications and interfaces have not fully evolved. As market sectors
mature and applications become standardized, the engineering services
requirement typically diminishes.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
patent, copyright, trade secret and trademark laws, nondisclosure and other
contractual restrictions. The Company holds two patents issued in the United
States, one of which is also issued in France, Germany and Great Britain. The
issued patents relate to techniques developed by the Company for generating
output for continuous synchronous raster output devices, such as laser
printers, using a smaller amount of memory than would be required without
using the Company's technology. One of the two U.S. patents was issued on
March 26, 1996 and the other patent was issued on April 16, 1996. The patent
term of the U.S. patents is 17 years from the issue date subject to the
payment of required maintenance fees. The patents granted in Great Britain,
France and Germany were issued on February 14, 1996. The term of the European
patents is 20 years from the filing date of August 2, 1991, subject to an
opposition period that will
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expire November 14, 1996 and payment of required renewal fees. The Company has
one patent application pending in Japan and six patent applications pending in
the United States. There can be no assurance that patents held by the Company
will not be challenged or invalidated, that patents will issue from any of the
Company's pending applications or that any claims allowed from existing or
pending patents will be of sufficient scope or strength (or issue in the
countries where products incorporating the Company's technology may be sold)
to provide meaningful protection or any commercial advantage to the Company.
In any event, effective protection of intellectual property rights may be
unavailable or limited in certain countries. The status of United States
patent protection in the software industry is not well defined and will evolve
as the United States Patent and Trademark Office grants additional patents.
Patents have been granted to fundamental technologies in software after the
development of an industry around such technologies and patents may be issued
to third parties that relate to fundamental technologies related to the
Company's technology.
As part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, OEMs and strategic
partners and limits access to and distribution of its software and other
proprietary information. Despite these efforts, the Company may be unable to
effectively protect its proprietary rights and, in any event, enforcement of
the Company's proprietary rights may be expensive. The Company's source code
also is protected as a trade secret. However, the Company from time to time
licenses its source code to OEMs, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology increasingly may become the subject of infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, regardless of merit, could
be time consuming, result in costly litigation, cause product shipment delays
or require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse
affect on the Company's operating results. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In
addition, the Company may lack sufficient resources to initiate a meritorious
claim. In the event of an adverse ruling in any litigation regarding
intellectual property, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to
infringing or substituted technology. The failure of the Company to develop,
or license on acceptable terms, a substitute technology if required could have
a material adverse effect on the Company's operating results.
COMPETITION
The market for embedded imaging systems for digital document products is
highly competitive and characterized by continuous pressure to enhance
performance, to introduce new features and to accelerate the release of new
products. The Company competes on the basis of technology expertise, product
functionality, development time and price. The Company's technology and
services primarily compete with solutions developed internally by OEMs.
Virtually all of the Company's OEMs have significant investments in their
existing solutions and have the substantial resources necessary to enhance
existing products and to develop future products. These OEMs have or may
develop competing embedded imaging systems technologies and may implement
these systems into their products, thereby replacing the Company's current or
proposed technologies, eliminating a need for the Company's services and
products and limiting future opportunities for the Company. The Company
therefore is required to persuade these OEMs to outsource the development of
their embedded imaging systems and to provide products and solutions to these
OEMs that cost-effectively compete favorably
9
<PAGE>
with their internally developed products. The Company also competes with
software and engineering services provided in the digital document product
marketplace by other systems suppliers to OEMs. In this regard, the Company
competes with, among others, Xionics Document Technologies with respect to MFP
embedded systems and Electronics for Imaging with respect to color
technologies.
As the industry continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance
or functionality. The Company anticipates increasing competition for its color
products under development, particularly as new competitors develop and enter
products in this market. Some of the Company's existing competitors, many of
its potential competitors and virtually all of the Company's OEMs have
substantially greater financial, technical, marketing and sales resources than
the Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the amount of royalties received
on new licenses and to reduce the cost of its engineering services in order to
maintain existing business and generate additional product licensing revenues,
which could reduce profit margins and result in losses and a decrease in
market share. No assurance can be given as to the ability of the Company to
compete favorably with the internal development capabilities of its current
and prospective OEM customers or with other third-party embedded imaging
system suppliers, and the inability to do so would have a material adverse
effect on the Company's operating results.
EMPLOYEES
As of January 31, 1997, the Company had a total of approximately 96
employees and 9 independent contractors. None of the Company's employees is
represented by a labor union, and the Company has never experienced any work
stoppage. The Company considers its relations with its employees to be good.
RISK FACTORS
Investors in the Company should be aware of the following risks and
uncertainties that could materially affect the Company's results of operations
and the market for the Company's securities.
History of Operating Losses; Accumulated Deficit. The Company has been
profitable only since the quarter ended December 31, 1995. The Company
recognized net losses of approximately $639,000 and $1.2 million for the
fiscal years ended December 31, 1995 and 1994, respectively. The Company's
historical losses have resulted in an accumulated deficit of approximately
$8.8 million as of January 31, 1997. Although the Company reported net income
of approximately $4.4 million for the fiscal year ended January 31, 1997,
there can be no assurance that the Company will maintain profitability on a
quarterly or annual basis in the future.
Potential Fluctuations in Quarterly Results; Seasonality; Revenue
Reporting. The Company in the past has experienced, and in the future may
experience, significant fluctuations in quarterly operating results that have
been and may be caused by many factors including: initiation or termination of
arrangements between the Company and its existing and potential OEM customers;
the timing of introductions of new products or product enhancements by the
Company, its OEMs and their competitors; the phase-out or early termination of
OEM products incorporating the Company's technology; the size and timing of
engineering services contracts, one-time software licensing transactions and
recurring licensing fees; the size and timing of and fluctuations in end-user
demand for the OEM products incorporating the Company's technology;
inventories of digital document products carried by the OEMs' distributors
that exceed current or projected end-user demand; performance by the Company
and its OEM customers pursuant to their plans and agreements; seasonal trends;
the mix of services provided or products sold and the gross margins
attributable to such services or products; competition and pricing; customer
order deferrals in anticipation of new products or product enhancements;
industry and technology developments; changes in the Company's operating
expenses: software bugs, product delays or other product quality problems;
currency fluctuations; and general economic conditions. For example, in recent
quarters the Company's quarterly revenues have been significantly affected by
the timing of one-time licensing transactions, by decreases in recurring
product licensing revenues resulting from the phase-out by the Company's
10
<PAGE>
OEMs of products incorporating the Company's technology and by variations in
end-user demand. The Company expects that its operating results will continue
to fluctuate significantly in the future as a result of these and other
factors.
A substantial portion of the Company's costs and expenses is related to
costs of engineering services and maintenance, other personnel costs, product
development, facilities and marketing programs. The level of spending for such
costs and expenses cannot be adjusted quickly and is based, in significant
part, on the Company's expectations of future revenues and anticipated OEM
commitments. If such commitments do not materialize or are terminated or, in
any event, if revenues are below expectations, the Company's quarterly and
annual operating results will be adversely affected, which could have a
material adverse effect on the price of the Company's Common Stock. The
Company in the past has experienced, and in the future may experience,
significant fluctuations in quarterly engineering services results that have
been and may be caused by many factors including: an increase in the estimated
hours to completion associated with a particular engineering services project;
cancellation or redirection of engineering services projects by the Company's
OEMs; and delays in the availability or stability of third-party technology
that the Company's OEMs are also incorporating into the same product for which
the Company is performing engineering services. For example, if the estimated
hours to completion associated with a particular engineering services project
increases during the course of the project, the estimated percentage that has
been completed will subsequently decrease, and the portion of the total fixed
engineering services project revenue that the Company will be able to
recognize at that point in time will decrease as a result. For these and other
reasons, it is likely that in future quarters the Company's operating results
from time to time may be below the expectations of public market analysts and
investors, which also could have a material adverse effect on the price of the
Company's Common Stock. In addition, the Company's net income has in the past
and may in the future be affected by non-recurring accounting benefits
associated with the Company's net operating losses.
The Company believes that its business may be subject to seasonal trends. In
the digital document product industry, it is not unusual for vendors to
experience an increase in demand in the fourth calendar quarter followed by a
significant decrease in the following quarter. As a result, the Company's
product licensing revenues associated with unit shipments by its OEMs may be
subject to similar fluctuations, although no assurance can be given that the
Company's OEMs will experience such fluctuations or as to the effect of such
fluctuations, if any, on the Company's revenues. In addition, because one or
more key OEM transactions, milestones or OEM product shipments that are
scheduled to be realized by the Company or its OEMs at the end of a quarter
may be delayed until the beginning of the next quarter, quarterly revenues are
subject to significant fluctuations.
In October 1996, the Company entered into an agreement with a major
developer and manufacturer of specialized processor chips relating to the
licensing of Peerless technologies and engagement of Peerless technical
personnel for engineering development services. Pursuant to the agreement, the
Company is entitled to engineering service payments, development license fees
and prepayment of royalty guarantees. The agreement provides that the
manufacturer may terminate the relationship for any reason upon 60 days'
notice and with notice in the event of a material breach. If the agreement is
terminated for a material breach by the Company, the manufacturer is entitled
to a return of the substantial majority of the licensing fees previously paid,
other than those attributable to per unit royalties. No assurance can be given
as to the ability of the Company to perform in accordance with the terms of
the agreement or as to the ability or willingness of the manufacturer to
continue developing, marketing and selling proposed products covered by the
agreement. Thus, the achievement of, or failure to achieve, certain milestones
under this agreement, the development and sale of, or failure to develop and
sell, products under this agreement, or the termination, with or without a
material breach, of this agreement, may cause the Company's revenues to
fluctuate significantly from quarter to quarter.
The recurring product licensing revenues reported by the Company are
dependent on the timing and accuracy of product sales reports received from
the Company's OEM customers. These reports are provided only on a calendar
quarter basis and, in any event, are subject to delay and potential revision
by the OEM. Therefore, the Company is required to estimate all of the
recurring product licensing revenues for the last month of each quarter and to
further estimate all of its quarterly revenues from an OEM when the report
from such OEM is not
11
<PAGE>
received in a timely manner. As a result, the Company may be unable to
estimate such revenues accurately prior to public announcement of the
Company's quarterly results. In such event, the Company subsequently may be
required to restate its recognized revenues or adjust revenues for subsequent
periods, which could have a material adverse effect on the Company's operating
results.
Dependence on Market Success of Third Parties. With the exception of Adobe,
substantially all of the Company's revenues in recent years have been derived
from OEMs. The Company's revenues are dependent upon, among other things, the
ability and willingness of these OEMs to timely develop and promote digital
document products that incorporate the Company's technology. The ability and
willingness of these OEMs to do so is based upon a number of factors, such as:
the timely development by the Company and the OEMs of new products with new
functionality, increased speed and enhanced performance at acceptable prices
to end users; development costs of the OEMs; licensing and engineering fees of
the Company; compatibility with emerging industry standards; technological
advances; patent and other intellectual property issues; competition
generally; and overall economic conditions. Many of these factors are beyond
the control of the Company and, to a lesser extent, also may be beyond the
control of any of the OEMs. Many of these OEMs are concurrently developing and
promoting products that do not incorporate the Company's technology. In such
cases, the OEMs may have profitability or other incentives to promote internal
solutions or competing products in lieu of products incorporating the
Company's technology. No assurance can be given as to the ability or
willingness of the Company's OEMs to continue developing, marketing and
selling products incorporating the Company's technology. Since the Company's
business is entirely dependent on its relationships with its OEMs, the
inability or unwillingness of any of the Company's significant OEMs to
continue its relationship with the Company and to develop and promote products
incorporating the Company's technology would have a material adverse effect on
the Company's operating results.
Concentration of Revenues. Revenues from the Company's top four customers
accounted for approximately 61% and 74% of the Company's total revenues for
the fiscal years ended January 31, 1997 and December 31, 1995, respectively,
and the Company anticipates that its revenues in the future will be similarly
concentrated with a limited number of customers. The Company's 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 the Company's
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. There presently are only a limited number of customers in the
digital document product market to which the Company markets its technology
and services. Therefore, the ability of the Company to replace a lost customer
or offset a significant decrease in the revenues from a customer may be
significantly limited. In addition, the Company's larger customers at times
have required that the Company offer new technology directly to them prior to
offering it to other customers and have attempted to restrict the Company from
licensing the technology utilized by these customers to customers developing
potentially competing products. Although the Company has not granted exclusive
rights with respect to its core technologies, the Company has granted
exclusive rights in unusual circumstances with respect to derivative software
developed by the Company in support of a specific customer's proprietary
products or technologies. No assurance can be given, however, that the Company
will not, in the future, grant broader exclusive rights to its technology in
order to enter into a licensing agreement with a customer, or that an
unwillingness to grant such exclusive rights will prevent the Company from
entering into such a licensing agreement. The Company also is subject to a
credit risk associated with the concentration of its accounts receivable from
these customers. No assurance can be given as to the ability or willingness of
any of the Company's customers to continue utilizing the Company's services
and technology consistent with past practice or at all, or as to the ability
of the Company in the future to sell its services and technology consistent
with past practice or at all to its existing or new customers. Any significant
decrease in sales of products by, or a reduction in licensing or engineering
services to, the Company's larger customers, any failure of the Company to
replace its existing customers or to enter into relationships with new
customers in accordance with the Company's expectations, or any delay in or
failure to make the payments due to the Company from such customers could have
a material adverse effect on the Company's operating results.
12
<PAGE>
Technological Change; Dependence on the Digital Document Product Market. The
market for the Company's products and services is characterized by rapidly
changing technology, evolving industry standards and needs, and frequent new
product introductions. The Company currently derives substantially all of its
revenues from the licensing of technology and the sale of related engineering
services that enable the printing and imaging of digital documents, and the
Company anticipates that these sources of revenue will continue to account for
substantially all of the Company's revenues for the foreseeable future. The
Company and its OEMs are required to develop and release in a regular and
timely manner new digital document products with increased speed, enhanced
resolution, reduced memory requirements, multifunction capability, network
compatibility and color imaging. The acceptable amount of time to develop
these products is continuing to decrease, which increases the complexity for
and costs to the Company and its OEMs. In addition, the Company, its OEMs and
their competitors from time to time may announce new products, capabilities or
technologies that may replace or shorten the life cycles of the OEM products
incorporating the Company's technology. The Company's success will depend on,
among other things: market acceptance of the Company's technology and the
digital document products of the Company's OEM customers; the ability of the
Company and its OEM customers to meet industry changes and market demands in a
timely manner; achievement of new design wins by the Company followed by the
OEMs' development of associated new digital document products; and the regular
and continued introduction of new and enhanced technology and services by the
Company and its OEMs on a timely and cost-effective basis. There can be no
assurance that the products and technology of competitors of the Company or
its OEMs will not render the Company's technology or its OEMs' products
noncompetitive or obsolete. Any failure by the Company or its OEMs to
anticipate or respond adequately to the rapidly changing technology and
evolving industry standards and needs, or any significant delay in development
or introduction of new and enhanced products and services, could result in a
loss of competitiveness or revenues, which could have a material adverse
effect on the Company's operating results.
Product Development; Product Delays. The Company in the past has experienced
delays in product development, and the Company may experience similar delays
in the future. Prior delays have resulted from numerous factors such as
changing OEM product specifications, difficulties in hiring and retaining
necessary personnel, difficulties in reallocating engineering resources and
other resource limitations, difficulties with independent contractors,
changing market or competitive product requirements and unanticipated
engineering complexity. In addition, the Company's software and hardware have
in the past and may in the future contain undetected errors or failures that
become evident upon product introduction or as product production volumes
increase. There can be no assurance, despite testing by the Company and its
OEMs, that errors will not be found, that the Company will not experience
development challenges resulting in unanticipated problems or delays in the
acceptance of products by the Company's OEMs or shipment of the OEMs'
products, or that the Company's new products and technology will meet
performance specifications under all conditions or for all anticipated
applications. Given the short product life cycles in the digital document
products market, any delay or unanticipated difficulty associated with new
product introductions or product enhancements could have a material adverse
effect on the Company's operating results.
Developing Markets. A substantial portion of the Company's recent
development efforts has been directed at the development of new embedded
imaging technologies, particularly for MFP and color products. The market for
these products is new and rapidly evolving. The Company's OEMs currently are
selling monochrome network printers and MFPs incorporating the Company's
technology. Although certain of the Company's color technology currently is
available to OEM customers, once an agreement with an OEM is entered into, the
color technology must undergo further development, or customization, before it
can be incorporated into an OEM's specific digital document product. The
Company's OEMs have not yet shipped any color products incorporating the
Company's color technology. The Company's future success will be dependent to
a significant degree upon broad market acceptance of the technology under
development, particularly its MFP and color technology. This success will be
dependent in part on the ability of the Company's OEMs to develop new products
that provide the functionality, performance, speed and network connectivity
demanded by the market at acceptable prices, and to convince end users to
adopt MFP, color printing and other products for office and desktop use. There
can be no assurance that: the market for MFP, color printing and other
products proposed by the Company will
13
<PAGE>
develop; the Company will be able to offer in a timely manner, if at all, its
new technology; the Company's OEM customers will choose the Company's
technology for use in their MFPs, color printers or other products; the
Company's OEM customers will be successful in developing such MFPs, color
printers and other products; or such products will gain market acceptance. The
failure of any of these events to occur would have a material adverse effect
on the Company's operating results.
Dependence on Adobe Relationships. The Company has a set of relationships
with Adobe that address many critical aspects of the Company's OEM customers'
needs. The Company has licensed (for internal development purposes) from Adobe
the right to use Adobe's PostScript(R) Software to enable the Company's
products to be used with Adobe's PostScript Software, has licensed to Adobe
several of the Company's technologies and has developed technologies for Adobe
for which the Company receives royalties and engineering services fees, and is
currently seeking to license color matching technology from Adobe. A number of
the agreements governing relationships with Adobe are in the process of being
finalized, and no assurances can be given that such agreements will be
finalized in accordance with the parties' current intent or at all. The
Company derives significant revenue and significant competitive and cost
advantages from its relationship with Adobe. Therefore, the termination or
limitation of the Company's relationships with Adobe would have a material
adverse effect on the Company's operating results.
Dependence on Sole Source Providers. The Company is dependent on two
independent parties, Motorola and Intel, each of which provides unique
application specific integrated circuits ("ASICs") incorporating the Company's
imaging technology to certain of the Company's OEMs. In addition, the Company
is dependent upon Emulex and Digital Products Incorporated to provide network
interface cards incorporating the Company's technology to the Company's OEMs.
These sole source providers are subject to materials shortages, excess demand,
reduction in capacity and/or other factors that may disrupt the flow of goods
to the Company's customers and thereby adversely affect the Company's customer
relationships. Any such disruption could limit or delay production or shipment
of the products incorporating the Company's technology, which could have a
material adverse effect on the Company's operating results.
Dependence on Key Personnel. The Company is largely dependent upon the
skills and efforts of its senior management and other officers and key
employees. The Company believes that its future success will depend in large
part upon its ability to attract and retain highly skilled managerial,
engineering, sales, marketing and operations personnel, many of whom are in
great demand. Competition for such personnel recently has increased
significantly. The Company does not maintain any key person life insurance
policies. The loss of key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect on the Company's
operating results.
International Activities. Revenues from sales to the Company's customers
outside the United States accounted for 38%, 41% and 26% of the Company's
total revenues for the fiscal years ended January 31, 1997, December 31, 1995
and December 31, 1994, respectively. Therefore, the Company is substantially
dependent on its international business activities. Further, the Company
expects that sales to customers located outside the United States may increase
in absolute dollars in the future. The international market for products
incorporating the Company's technology is highly competitive, and the Company
expects to face substantial competition in this market from established and
emerging companies and technologies developed internally by its OEM customers.
Risks inherent in the Company's international business activities also include
currency fluctuations, the imposition of government controls, tailoring of
products to local requirements, trade restrictions, changes in tariffs and
taxes, and the burdens of complying with a wide variety of foreign laws and
regulations, any of which could have a material adverse effect on the
Company's operating results. Although all of the Company's contracts are, and
the Company expects that its future contracts will be, denominated in U.S.
dollars, there can be no assurance that its contracts with international OEM
customers in the future will be denominated in U.S. dollars. In the event that
one or more contracts are denominated in foreign currencies, the Company will
be subject to additional risks associated with currency fluctuations, which
could have a material adverse effect on the Company's operating results.
14
<PAGE>
Volatility of Stock Price. The Company's Common Stock has experienced
significant price volatility and such volatility may occur in the future.
Factors that could affect the trading price of the Common Stock include
variations in quarterly results of operations, announcements of new products
by the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, overall market conditions
and other factors. In addition, the stock market historically has experienced
extreme price and volume fluctuations, which have particularly affected the
market price of securities of many high technology companies and which at
times have been unrelated or disproportionate to the operating performance of
such companies. These market fluctuations may adversely affect the market
price of the Common Stock.
Effect of Anti-Takeover Provisions. Certain provisions of the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws") and
certain provisions of Delaware law could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that investors might be willing to pay in the future for the Company's
Common Stock. These provisions permit the issuance of "blank check" preferred
stock by the Board of Directors without stockholder approval, require super-
majority approval to amend certain provisions in the Charter and Bylaws,
require that all stockholder actions be taken at duly called annual or special
meetings and not by written consent, and impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate action. Furthermore, the Company is subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 could also have the effect of delaying or
preventing a change of control of the Company.
ITEM 2 -- PROPERTIES.
The Company leases its principal facilities, totalling approximately 30,000
square feet, in El Segundo, California. The lease expires in March 2001. The
Company also leases office space in Japan. The Company believes that suitable
additional facilities or alternative space will be available in the future on
commercially reasonable terms as needed.
ITEM 3 -- LEGAL PROCEEDINGS.
The Company is not a party to any material litigation or legal proceedings.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 1997.
15
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
executive officers as of January 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward A. Gavaldon...... 51 President, Chief Executive Officer and Chairman of the Board
Hoshi Printer........... 54 Vice President, Finance and Administration, Chief Financial
Officer and Secretary
Stephen R. Butterfield.. 44 Vice President, Advanced Technology
Reginald Cardin......... 49 Vice President, Engineering
David R. Fournier....... 43 Vice President, Sales and Field Operations
Thomas B. Ruffolo....... 43 Vice President, Marketing
</TABLE>
Edward A. Gavaldon has served the Company as President, Chief Executive
Officer and a director since January 1995 and as Chairman of the Board since
July 1996. Prior to joining the Company, Mr. Gavaldon worked at Xerox
Corporation for 23 years in various positions including: Manager, Strategy and
Programs for Printing Products; Chief Engineer, High Speed Laser Printers;
Vice President, Worldwide Marketing, Laser Printers; and most recently as Vice
President/General Manager in the Desktop Laser Printer Business Unit. Mr.
Gavaldon received an M.B.A. degree from the University of Southern California
and a B.A. degree in economics from the University of California at Los
Angeles.
Hoshi Printer has served the Company as Vice President, Finance and
Administration, Chief Financial Officer and Secretary since June 1996. Prior
to joining the Company, Mr. Printer was Chief Financial Officer of Neuron
Data, a software tools company, from July 1995 to May 1996; Soane
Technologies, a polymer technology company, from July 1994 to June 1995; and
Catalytica, an environmental technology company, from January 1990 to June
1994. Mr. Printer also worked at Xerox Corporation for over 17 years in
various positions including 6 years as Vice President of Finance. Mr. Printer
received an M.B.A. degree from Stanford University.
Stephen R. Butterfield, a co-founder of the Company, has served as the
Company's Vice President, Advanced Technology since April 1982 and as the
Company's Secretary, from April 1982 until July 1996 and as a director until
1992. Prior to founding the Company, Mr. Butterfield held various technical
and management positions at AM Jacquard, an office automation and minicomputer
manufacturer, including Director of Engineering.
Reginald Cardin has served the Company as Vice President, Engineering since
February 1997 and served as Vice President and Chief Technology Officer from
August 1995 to February 1997. Prior to joining the Company, Mr. Cardin worked
at IBM for over 20 years in various positions including Manager, Presentation
Integration and Programming Center Manager, Printing Systems. Mr. Cardin
received a B.A. degree in biology and English from Tufts University.
David R. Fournier has served the Company as Vice President, Sales and Field
Operations since January 1994 and served as Director of Sales from November
1991 to January 1994. Prior to joining the Company, Mr. Fournier held various
sales management positions at Hamilton/Avnet, a semiconductor and computer
systems distribution company, and Wyle Lab, a semiconductor and computer
systems distribution company.
Thomas B. Ruffolo has served the Company as Vice President, Marketing since
August 1994 and as Director of Marketing from August 1991 to August 1994.
Prior to joining the Company, Mr. Ruffolo was Director of Marketing at NewGen
Systems, a page printer manufacturer, which he co-founded in 1988. Mr. Ruffolo
received a B.S. degree in computer science from Colorado State University and
an M.B.A. degree from Pepperdine University.
16
<PAGE>
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "PRLS." The table below sets forth the high and low sales prices for
the Company's Common Stock (as reported on the Nasdaq National Market) during
the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
OF
COMMON STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDING JANUARY 31, 1997:
3rd Quarter (September 25-October 31, 1996)............. $13.00 $10.25
4th Quarter............................................. $23.00 $10.50
</TABLE>
As of April 16, 1997, there were approximately 162 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
during any period for which financial information is provided in this Annual
Report on Form 10-K. Under the terms of the Company's revolving line of
credit, the Company currently is prohibited from paying dividends on its
Common Stock. The Company currently intends to retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future even
after the prohibition on paying dividends under the revolving line of credit
is no longer effective.
17
<PAGE>
ITEM 6 -- SELECTED FINANCIAL DATA.
The statement of operations data for the years ended January 31, 1997 and
December 31, 1995 and 1994 and the balance sheet data at January 31, 1997 and
1996 and December 31, 1995, are derived from, and should be read in
conjunction with, the audited financial statements and notes thereto included
elsewhere in this Form 10-K. The statement of operations data for the years
ended December 31, 1993 and 1992 and the balance sheet data at December 31,
1994, 1993 and 1992 are derived from audited financial statements not included
in this Form 10-K. The Company changed its fiscal year end to January 31
commencing February l, 1996. The data set forth below are qualified in their
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY YEARS ENDED DECEMBER 31,
31, ---------------------------------
1997(1) 1995 1994 1993 1992
---------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product licensing............ $8,322 $4,774 $ 4,394 $ 1,586 $ 1,457
Engineering services and
maintenance................. 7,699 5,639 4,942 3,655 3,477
------ ------ ------- ------- -------
Total revenues............. 16,021 10,413 9,336 5,241 4,934
------ ------ ------- ------- -------
Cost of revenues:
Product licensing............ 144 143 218 341 122
Engineering services and
maintenance................. 6,123 5,111 5,457 5,095 3,229
------ ------ ------- ------- -------
Total cost of revenues..... 6,267 5,254 5,675 5,436 3,351
------ ------ ------- ------- -------
Gross margin............. 9,754 5,159 3,661 (195) 1,583
------ ------ ------- ------- -------
Operating expenses:
Research and development..... 2,701 2,088 1,767 1,766 2,388
Sales and marketing.......... 2,746 2,142 1,878 1,656 1,904
General and administrative... 2,546 1,293 1,000 1,048 1,035
------ ------ ------- ------- -------
Total operating expenses... 7,993 5,523 4,645 4,470 5,327
------ ------ ------- ------- -------
Income (loss) from operations.. 1,761 (364) (984) (4,665) (3,744)
Interest (income) expense, net. (186) 176 118 96 49
------ ------ ------- ------- -------
Income (loss) before income
taxes....................... 1,947 (540) (1,102) (4,761) (3,793)
(Benefit) provision for income
taxes......................... (2,500) 99 124 63 58
------ ------ ------- ------- -------
Net income (loss).............. $4,447 $ (639) $(1,226) $(4,824) $(3,851)
====== ====== ======= ======= =======
Net income (loss) per share
(2)........................... $ 0.57 $(0.17)
====== ======
Shares used in per share
calculation (2)............... 8,078 4,438
====== ======
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
--------------- ---------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $24,162 $ 722 $ 1,184 $ 393 $ 771 $ 540
Working capital
(deficit)............... 25,056 (2,608) (2,307) (3,192) (2,477) (1,734)
Total assets............. 35,109 4,041 4,185 3,541 3,221 2,404
Long-term obligations.... 317 4,286 4,299 2,594 2,296 1,628
Redeemable Preferred
Stock................... -- 5,932 5,931 6,645 6,422 2,789
Total stockholders'
equity (deficit)........ 28,064 (11,867) (11,596) (11,941) (10,528) (5,486)
</TABLE>
- --------
(1) The Company changed its fiscal year end to January 31, beginning February
1, 1996.
(2) See Note 1 of Notes to Financial Statements for a description of the
computation of the net income (loss) per share and the number of shares
used in the per share calculation.
18
<PAGE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company provides software-based embedded imaging systems to OEMs of
digital document products. The Peerless family of products and engineering
services provides advanced embedded imaging technologies that enable the
Company's customers to develop digital printers, copiers and MFPs quickly and
cost effectively. The Company's revenues are comprised of both recurring and
one-time product licensing fees, as well as engineering services and
maintenance fees related to the Company's embedded imaging software and
supporting electronics technologies. The Company changed its fiscal year end
from December 31 to January 31, commencing February 1, 1996, in order to
better align the timing of the Company's financial reporting with the timing
of receipt of royalty information by the Company from its OEMs. Accordingly,
information for the year ended January 31, 1997 is compared with the
information for the year ended December 31, 1995. No analysis is provided for
the month ended January 31, 1996.
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time development licensing fees for source codes.
Recurring licensing revenues are derived from per unit fees paid quarterly by
the Company's OEMs upon shipment or manufacture of products incorporating the
Company's technology. Recurring licensing revenues are derived to a lesser
extent from arrangements in which the Company enables its products to be used
with third-party technology such as certain arrangements with Adobe. The
Company's one-time development licensing fees for source code are paid by OEMs
for access to the Company's software, which in turn generates recurring
licensing revenues if the software is incorporated into OEM products that are
subsequently developed and shipped.
The Company's engineering services revenues are derived primarily from
adapting the Company's software and supporting electronics to specific OEM
requirements. The Company provides its engineering services to OEMs seeking an
embedded imaging solution for their digital document products. The Company's
maintenance revenues are derived from software maintenance agreements.
Maintenance revenues constitute a very small portion of engineering services
and maintenance revenues.
The Company recognizes its recurring product licensing revenues on a royalty
basis generally when the Company's OEM customers ship products that
incorporate the Company's technology. Generally, the Company recognizes its
one-time development licensing revenues for source code upon shipment to and
acceptance by the Company's OEMs. The Company recognizes engineering services
revenues over the course of the development work on a percentage-of-completion
basis. Maintenance revenues are recognized ratably over the term of the
maintenance contract, which generally is 12 months. Licensing revenues are
recognized in accordance with Statement of Position 91-1 "Software Revenue
Recognition." The recurring product licensing revenues reported by the Company
are dependent on the timing and accuracy of product sales reports received
from the Company's OEM customers. These reports are provided only on a
calendar quarter basis and, in any event, are subject to delay and potential
revision by the OEM. Therefore, the Company is required to estimate all of the
recurring product licensing revenues for the last month of each quarter and to
further estimate all of its quarterly revenues from an OEM when the report
from such OEM is not received in a timely manner. As a result, the Company may
be unable to estimate such revenues accurately prior to public announcement of
the Company's quarterly results. In such event, the Company subsequently may
be required to restate its recognized revenues or adjust revenues for
subsequent periods, which could have a material adverse effect on the
Company's operating results.
The Company frequently receives payments from its OEMs in advance of
recognition of the associated revenues and, in many cases, the Company
receives guaranteed minimum payments in advance of per unit licensing
royalties. These amounts are recorded as deferred revenue. Deferred revenue
consists of prepayments of product licensing revenues and payments received in
advance for engineering services and maintenance to be performed.
In October 1996, the Company entered into an agreement with a major
developer and manufacturer of specialized processor chips relating to the
licensing of Peerless technologies and engagement of Peerless
19
<PAGE>
technical personnel for engineering development services. Pursuant to the
agreement, the Company is entitled to engineering service payments,
development license fees and prepayment of royalty guarantees. The Company's
operating results for fiscal 1997 were favorably impacted by revenues received
pursuant to this agreement, and the Company anticipates that revenues from
this agreement will increase significantly in fiscal 1998 compared to fiscal
1997. No assurance can be given as to the ability of the Company to perform in
accordance with the terms of the agreement or as to the ability or willingness
of the manufacturer to continue developing, marketing and selling proposed
products covered by the agreement, which is subject to termination by the
manufacturer upon notice. The failure to achieve certain milestones under this
agreement, the failure to develop or sell products under this agreement or the
termination of this agreement could have a material adverse effect on the
Company's operating results.
The Company's customers currently include, among others, Adobe and OEM
customers Canon, IBM and Xerox. A significant portion of the Company's
revenues in recent years has been concentrated with a limited number of
customers, and the Company anticipates that its revenues in the future will be
similarly concentrated. In the fiscal years ended January 31, 1997 and
December 31, 1995, the Company's top four customers accounted for
approximately 61% and 74% of total revenues, respectively. Revenues from sales
to the Company's customers outside the United States accounted for 38%, 41%
and 26% of the Company's revenues for the fiscal years ended January 31, 1997,
December 31, 1995 and December 31, 1994, respectively. Therefore, the Company
is substantially dependent on its international business activities. Although
all of the Company's contracts are, and the Company expects that its future
contracts will be, denominated in U.S. dollars, there can be no assurance that
its contracts with international customers in the future will be denominated
in U.S. dollars. In the event that one or more contracts are denominated in
foreign currencies, the Company will be subject to additional risks associated
with currency fluctuations, which could have a material adverse effect on the
Company's operating results.
The Company has a history of operating losses, including a cumulative net
loss of $6.3 million for the five-year period ending January 31, 1997, which
have contributed to an accumulated deficit of approximately $8.8 million at
January 31, 1997. Although the Company has reported net income for the fiscal
year ended January 31, 1997, there can be no assurance that the Company will
continue to achieve taxable income in the future. Therefore, the Company
believes that deferred tax assets, including net operating losses and tax
credit carryforwards, may not be utilized in the near term and has recorded a
valuation allowance for a portion of the net deferred income tax asset. The
Company's operating results for fiscal 1997 were favorably affected by a non-
recurring benefit for income taxes of $2.5 million in the fourth quarter of
fiscal 1997.
The Company's cost of revenues includes product licensing costs as well as
engineering services and maintenance costs. Cost of engineering services and
maintenance is comprised primarily of salaries and benefits for engineering
personnel and materials, an allocation of corporate facilities overhead and an
allocation of engineering management and administrative staff expenses.
Maintenance costs constitute a very small portion of engineering services and
maintenance costs. Research and development expenses are comprised primarily
of employee salaries and benefits, an allocation of engineering management and
administrative staff expenses and an allocation of the corporate facilities
overhead. Sales and marketing expenses are comprised primarily of employee
salaries and benefits, commissions and bonuses, advertising and promotional
expenses, the cost of operating the Japan sales office and an allocation of
the corporate facilities overhead. General and administrative expenses are
comprised primarily of salaries and benefits, fees paid to the Company's
external auditors, counsel and other corporate consultants, an allocation of
the corporate facilities overhead and expenses required of a public company.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statements of operations to
total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
REVENUES
--------------------------
YEAR ENDED
JANUARY YEARS ENDED
31, DECEMBER 31,
---------- ---------------
1997 1995 1994
---------- ------ ------
<S> <C> <C> <C>
Revenues:
Product licensing................................. 51.9% 45.8% 47.1%
Engineering services and maintenance.............. 48.1 54.2 52.9
----- ------ ------
Total revenues................................... 100.0 100.0 100.0
----- ------ ------
Cost of revenues:
Product licensing................................. 0.9 1.4 2.3
Engineering services and maintenance.............. 38.2 49.1 58.5
----- ------ ------
Total cost of revenues........................... 39.1 50.5 60.8
----- ------ ------
Gross margin..................................... 60.9 49.5 39.2
----- ------ ------
Operating expenses:
Research and development.......................... 16.9 20.0 18.9
Sales and marketing............................... 17.1 20.5 20.1
General and administrative........................ 15.9 12.4 10.7
----- ------ ------
Total operating expenses......................... 49.9 52.9 49.7
----- ------ ------
Income (loss) from operations...................... 11.0 (3.4) (10.5)
Interest (income) expense, net..................... (1.2) 1.7 1.3
----- ------ ------
Income (loss) before income taxes................. 12.2 (5.1) (11.8)
(Benefit) provision for income taxes............... (15.6) 1.0 1.3
----- ------ ------
Net income (loss).................................. 27.8% (6.1)% (13.1)%
===== ====== ======
</TABLE>
YEARS ENDED JANUARY 31, 1997 AND DECEMBER 31, 1995
Revenues for the year ended January 31, 1997 increased 54% to $16.0 million
from $10.4 million for the year ended December 31, 1995. Product licensing
revenues increased 73% to $8.3 million in the year ended January 31, 1997 from
$4.8 million in the year ended December 31, 1995, due to increased shipments
of products that incorporate the Company's technology. Engineering services
and maintenance revenues increased 37% to $7.7 million from $5.6 million due
to an increase in design wins.
The Company's gross margin as a percentage of total revenues increased to
60.9% for the year ended January 31, 1997 from 49.5% for the year ended
December 31, 1995, primarily due to a shift in the Company's revenue mix
toward higher-margin product license fees.
Research and development expenses increased 29% to $2.7 million for the year
ended January 31, 1997 from $2.1 million for the year ended December 31, 1995,
but decreased as a percentage of total revenues to 16.9% from 20.0%. Research
and development expenses increased in absolute dollars primarily due to an
increase in research and development personnel, principally associated with
the Company's color development efforts. The Company anticipates that its
research and development expenses may continue to increase in absolute dollars
as the Company devotes increased efforts to its color products, MFP
technology, PC-based driver software and new page description languages.
Sales and marketing expenses for the year ended January 31, 1997 increased
29% to $2.7 million from $2.1 million for the year ended December 31, 1995,
but decreased as a percentage of total revenues to 17.1% from 20.5%. The
increase in absolute dollars was primarily due to hiring of additional sales
and marketing personnel
21
<PAGE>
and added promotional activities. The Company anticipates that its sales and
marketing expenses may continue to increase in absolute dollars as additional
sales and marketing personnel are hired to allow the Company to address new
market opportunities.
General and administrative expenses for the year ended January 31, 1997
increased 92% to $2.5 million from $1.3 million for the year ended December
31, 1995, and increased as a percentage of total revenues to 15.9% from 12.4%.
The increases primarily were due to the hiring of additional management and
administrative personnel and the enhancement of information systems support.
The Company anticipates that its general and administrative expenses may
increase in absolute dollars to the extent its business grows and as a result
of expenses related to being a public company.
Due to a reduction in the valuation allowance during the current year, the
Company's financial statements reflect a benefit for income taxes rather than
a provision for income taxes. As of January 31, 1997, the Company had net
operating loss carryforwards for federal and state tax purposes of
approximately $3.6 million and $1.0 million respectively. The Company also had
approximately $1.5 million of tax credits available to offset future federal
taxes otherwise payable and approximately $512,000 to offset future state
taxes otherwise payable. When available net operating losses and tax credits
are fully utilized, the Company will be subject to an estimated annual tax
rate in the range of 35% to 40%.
The Company anticipates the recognition of deferred compensation expense of
$452,000 for the difference between the exercise price and the deemed fair
value of the Company's Common Stock for options to purchase 525,000 shares of
Common Stock granted during the year ended January 31, 1997. Of the total
expense, the Company recognized $106,000 as a compensation expense during the
year ended January 31, 1997. The remaining deferred compensation expense will
be amortized over the ensuing two- to 84-month periods of the options.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues increased to $10.4 million in 1995 from $9.3 million in 1994, with
product licensing revenues increasing to $4.8 million in 1995 from $4.4
million in 1994. The increase from 1994 to 1995 was primarily due to a number
of one-time software licenses that were entered into during 1995. The
Company's engineering services and maintenance revenues increased to $5.6
million in 1995 from $4.9 million in 1994, primarily due to additional custom
design projects.
The Company's gross margin as a percentage of total revenues increased to
49.5% in 1995 from 39.2% in 1994, primarily due to increases in the gross
margin associated with engineering services and maintenance revenues in both
1994 and 1995. In addition, cost of revenues decreased as products on which
the Company paid a per unit royalty were phased out, and as engineering
services costs were leveraged over a larger number of design projects.
Research and development expenses increased 17% to $2.1 million in 1995 from
$1.8 million in 1994, primarily due to the initiation of color technology
development efforts.
Sales and marketing expenses increased 11% to $2.1 million in 1995 from $1.9
million in 1994, primarily due to the hiring of additional sales staff and
added trade show and promotional activity as the Company's color technology
development efforts were announced.
General and administrative expenses increased 30% to $1.3 million in 1995
from $1.0 million in 1994, primarily due to hiring of additional management
personnel.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity include cash and cash
equivalents of $24.2 million at January 31, 1997, consisting primarily of
proceeds from the Company's initial public offering in September 1996. An
additional $5.0 million was available under a revolving line of credit,
collateralized by the Company's assets. The interest rate on this line of
credit is the bank's prime rate (8.25% at January 31, 1997) plus 2%. At
January 31, 1997, the Company had no obligations outstanding under the line of
credit.
22
<PAGE>
In the fiscal year ended January 31, 1997, net cash provided by operating
activities was $1.0 million, compared to net cash used by operating activities
of $1.3 million and $571,000 for the fiscal years ended December 31, 1995 and
December 31, 1994, respectively. Net cash provided by operating activities
during the year ended January 31, 1997 consisted primarily of income from
operations.
In the fiscal years ended January 31, 1997, December 31, 1995 and December
31, 1994, the Company's investing activities consisted primarily of purchases
of property and equipment. The Company's principal capital commitment as of
January 31, 1997 was $293,000 on the lease on its premises in El Segundo.
The Company currently believes that the net proceeds from the Company's
initial public offering in September 1996, together with funds from current
and anticipated operations, will be sufficient to meet the Company's working
capital and capital expenditure requirements for at least the next 12 months.
This forward-looking statement is subject to uncertainty and, in any event,
there can be no assurance that the Company will not decide to raise additional
capital prior to such time. New debt or equity financing may be required in
the future to fund the Company's operations. There can be no assurance that
such additional financing will be available when needed or, if available, will
be on satisfactory terms. In order to raise capital, the Company may issue
debt or equity securities senior to the outstanding Common Stock, which could
result in substantial dilution to the Company's existing stockholders.
FUTURE DEVELOPMENTS
In fiscal 1998, the Company will adopt Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing Financial Assets
and Extinguishments of Liabilities". Management does not believe that adoption
of this accounting standard will have a material impact on the financial
statements of the Company.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on page F-1.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
23
<PAGE>
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item, insofar as it relates to the
Company's directors, will be contained under the captions "Election of
Directors" and "Section 16 Beneficial Ownership Reporting Compliance" in the
Proxy Statement and is incorporated herein by reference. The information
relating to the Company's executive officers is contained in Part I, Item 4 of
this report.
ITEM 11 -- EXECUTIVE COMPENSATION.
The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation" and is incorporated
herein by reference.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the Proxy
Statement under the caption "Certain Transactions" and is incorporated herein
by reference.
24
<PAGE>
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS FORM 10-K:
(1) Index to Financial Statements
Report of Coopers & Lybrand L.L.P., Independent Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules:
The following financial statement schedule of Peerless Systems
Corporation is filed as part of this Report and should be read in
conjunction with the Financial Statements of Peerless Systems
Corporation.
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<C> <S> <C>
II Valuation and Qualifying Accounts........................... S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Financial Statements or Notes thereto.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended January 31, 1997.
(C) EXHIBITS. The following exhibits are filed as part of, or incorporated
by reference into, this Form 10-K.
EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1(1) Certificate of Incorporation of the Company.
3.2(1) Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(1) Amended and Restated Investor Rights Agreement dated October 6,
1995.
10.1(1) Form of Indemnity Agreement.
10.2(1)(2) 1992 Stock Option Plan (the "Option Plan"), as amended.
10.3(1)(2) 1996 Equity Incentive Plan.
10.4(1)(2) Form of Incentive Stock Option
10.5(1)(2) Form of Nonstatutory Stock Option.
10.6(1)(2) 1996 Employee Stock Purchase Plan.
10.7(1) Third Party Development and License Agreement (the "Adobe Third
Party License"), dated September 18, 1992 between the Registrant
and Adobe Systems Incorporated ("Adobe")
10.8(1)(3) Reference Post Appendix #2 to the Adobe Third Party License, dated
February 11, 1993
10.9(1) Amendment No. 1 to the Adobe Third Party License, dated November
29, 1993
10.10(1)(3) PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Registrant and Adobe
10.11(1)(3) Amendment No. 1 to the PCL License, dated October 31, 1993
10.12(1)(3) Letter Modification to the PCL License, dated August 5, 1994
10.13(1)(3) Addendum No. 1 to the PCL License, dated March 31, 1995
10.14(1)(3) Letter Modification to the PCL License, dated August 30, 1995
10.15(1) Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated February
6, 1992
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.16(1) First Amendment to Office Lease dated December 1, 1995 between
the Company and Continental Development Corporation
10.17(1) Amended and Restated Investor Rights Agreement, dated October 6,
1995
10.18(1)(2) Employment Agreement with Lauren Shaw
10.19(1)(2) Employment Agreement with Edward Gavaldon
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney. Reference is made to page 27.
</TABLE>
- --------
(1) Incorporated by reference from the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 333-09357), as amended.
(2) Management contract or compensatory plan or arrangement.
(3) Subject to Confidential Treatment Order.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
April, 1997.
PEERLESS SYSTEMS CORPORATION
By: /s/ Hoshi Printer
-----------------------------------
Hoshi Printer
Chief Financial Officer and
Secretary
(duly authorized representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edward A. Galvadon President, Chief Executive April 25, 1997
____________________________________ Officer and Chairman of the
Edward A. Gavaldon Board (Principal Executive
Officer)
/s/ Hoshi Printer Chief Financial Officer and April 25, 1997
____________________________________ Secretary (Principal
Hoshi Printer Financial and Accounting
Officer)
/s/ Robert G. Barrett Director April 25, 1997
____________________________________
Robert G. Barrett
/s/ Paul D. Levy Director April 25, 1997
____________________________________
Paul D. Levy
/s/ Robert L. North Director April 25, 1997
____________________________________
Robert L. North
</TABLE>
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent Accountants................ F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Peerless Systems Corporation
We have audited the accompanying balance sheets of Peerless Systems
Corporation as of January 31, 1997 and 1996, and December 31, 1995 and the
related statements of operations, stockholders' equity (deficit), and cash
flows for the year ended January 31, 1997, the one month period ended January
31, 1996 and for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peerless Systems Corporation
at January 31, 1997 and 1996, and December 31, 1995, and the results of its
operations and its cash flows for the year ended January 31, 1997, the one
month period ended January 31, 1996 and for the years ended December 31, 1995
and 1994, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
April 17, 1997
F-2
<PAGE>
PEERLESS SYSTEMS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31,
----------------- DECEMBER 31,
1997 1996 1995
------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $24,162 $ 722 $ 1,184
Short term investments....................... 2,000
Trade accounts receivable, less allowance for
doubtful accounts of $100, $0, and $0 at
January 31, 1997 and 1996 and December 31,
1995, respectively.......................... 3,314 2,013 1,746
Unbilled receivables......................... 363 245 211
Prepaid expenses and other current assets.... 253 102 103
Deferred tax asset........................... 1,692
------- -------- --------
Total current assets....................... 31,784 3,082 3,244
Property and equipment, net................... 1,665 532 509
Other assets.................................. 453 427 432
Deferred tax asset............................ 1,207
------- -------- --------
Total assets............................... $35,109 $ 4,041 $ 4,185
======= ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 568 $ 431 $ 395
Accrued wages................................ 711 623 594
Accrued compensated absences................. 345 310 352
Other current liabilities.................... 437 209 74
Obligations under capital leases, current
portion..................................... 154 154
Deferred rent, current portion............... 76 76 76
Deferred revenue, current portion............ 4,591 3,887 3,906
------- -------- --------
Total current liabilities.................. 6,728 5,690 5,551
Convertible notes payable..................... 3,070 3,070
Obligations under capital leases.............. 141 141
Deferred rent................................. 217 291 299
Deferred revenue.............................. 100 784 789
------- -------- --------
Total liabilities.......................... 7,045 9,976 9,850
------- -------- --------
Commitments and contingencies (Note 6)
Series A convertible, redeemable preferred
stock, 3,472 shares authorized, 1,111 shares
issued and outstanding at January 31, 1996
and December 31, 1995, (aggregate liquidation
value of $1,667 at January 31, 1996 and
December 31, 1995)........................... 2,482 2,482
------- -------- --------
Series B convertible, redeemable preferred
stock, 6,400 shares authorized, 1,501 shares
issued and outstanding at January 31, 1996
and December 31, 1995, (aggregate liquidation
value of $2,327, at January 31, 1996 and
December 31, 1995)........................... 3,450 3,449
------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 5,000 shares
authorized, no shares issued or outstanding
Common stock, $.001 par value, 30,000 shares
authorized 10,484, 2,837 and 2,837 shares
issued and outstanding at January 31, 1997
and 1996 and December 31, 1995, respectively. 10 3 3
Additional paid-in capital.................... 37,225 1,394 1,394
Deferred compensation......................... (346)
Accumulated deficit........................... (8,825) (13,264) (12,993)
------- -------- --------
Total stockholders' equity (deficit)......... 28,064 (11,867) (11,596)
------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................... $35,109 $ 4,041 $ 4,185
======= ======== ========
</TABLE>
The following notes are an integral part of these financial statements.
F-3
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED MONTH ENDED DECEMBER 31,
JANUARY 31, JANUARY 31, ----------------
1997 1996 1995 1994
----------- ----------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product licensing................. $ 8,322 $ 329 $ 4,774 $ 4,394
Engineering services and
maintenance...................... 7,699 396 5,639 4,942
------- ----- ------- -------
Total revenues.................. 16,021 725 10,413 9,336
------- ----- ------- -------
Cost of revenues:
Product licensing................. 144 5 143 218
Engineering services and
maintenance...................... 6,123 564 5,111 5,457
------- ----- ------- -------
Total cost of revenues.......... 6,267 569 5,254 5,675
------- ----- ------- -------
Gross margin........................ 9,754 156 5,159 3,661
------- ----- ------- -------
Operating expenses:
Research and development.......... 2,701 127 2,088 1,767
Sales and marketing............... 2,746 156 2,142 1,878
General and administrative........ 2,546 119 1,293 1,000
------- ----- ------- -------
Total operating expenses........ 7,993 402 5,523 4,645
------- ----- ------- -------
Income (loss) from operations....... 1,761 (246) (364) (984)
Interest expense (income), net...... (186) 17 176 118
------- ----- ------- -------
Income (loss) before income taxes... 1,947 (263) (540) (1,102)
Provision (benefit) for income
taxes.............................. (2,500) 7 99 124
------- ----- ------- -------
Net income (loss)............... $ 4,447 $(270) $ (639) $(1,226)
======= ===== ======= =======
Net income (loss) per share:
Primary............................. $ 0.57 $ (0.17) $ (0.33)
======= ======= =======
Fully diluted....................... $ 0.46 $ (0.17) $ (0.33)
======= ======= =======
Weighted average number of common
and common
equivalent shares outstanding:
Primary............................. 8,078 4,438 4,373
======= ======= =======
Fully diluted....................... 9,893 4,438 4,373
======= ======= =======
</TABLE>
The following notes are an integral part of the these financial statements.
F-4
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
--------- ------ ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1993................... 2,600 $ 3 $ 199 $(10,730) $(10,528)
Issuance of common
stock for cash........ 35 36 36
Net loss............... (1,226) (1,226)
Increase in redemption
value of Series A and
Series B Preferred
Stock................. (223) (223)
------ --- ------- ----- -------- --------
Balances, December 31,
1994................... 2,635 3 235 (12,179) (11,941)
Issuance of common
stock for cash........ 202 270 270
Net loss............... (639) (639)
Increase in redemption
value of Series A and
Series B Preferred
Stock................. (175) (175)
Decrease in redemption
value of Series A
Preferred Stock....... 889 889
------ --- ------- ----- -------- --------
Balances, December 31,
1995................... 2,837 3 1,394 (12,993) (11,596)
Net loss............... (270) (270)
Increase in redemption
value of Series A and
Series B Preferred
Stock................. (1) (1)
------ --- ------- ----- -------- --------
Balances, January 31,
1996................... 2,837 3 1,394 (13,264) (11,867)
Issuance of common
stock for cash, less
issuance costs of
$1,302................ 2,698 3 26,292 26,295
Exercise of stock
options............... 150 149 149
Conversion of
convertible notes
payable to shares of
common stock, less
unamortized issuance
costs of $68.......... 1,169 1 3,001 3,002
Conversion of Series A
and Series B preferred
stock to shares of
common stock.......... 2,647 3 5,937 5,940
Conversion of warrants
to shares of common
stock................. 983
Deferred compensation
related to grant of
stock options......... 452 $(452)
Amortization of
deferred compensation. 106 106
Net income............. 4,447 4,447
Increase in redemption
value of Series A and
Series B Preferred
Stock................. (8) (8)
------ --- ------- ----- -------- --------
Balances, January 31,
1997................... 10,484 $10 $37,225 $(346) $ (8,825) $ 28,064
====== === ======= ===== ======== ========
</TABLE>
The following notes are an integral part of these financial statements.
F-5
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED MONTH ENDED DECEMBER 31,
JANUARY JANUARY 31, ----------------
31, 1997 1996 1995 1994
---------- ----------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 4,447 $ (270) $ (639) $(1,226)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization...... 426 15 203 156
Amortization of deferred
compensation...................... 106
Changes in operating assets and
liabilities:
Trade accounts receivable........ (1,301) (267) 735 (917)
Unbilled receivables............. (118) (34) (200) 26
Prepaid expenses and other
current assets.................. (151) 1 63 46
Deferred income tax benefit...... (2,899) -- --
Other assets..................... 62 5 (241) 30
Accounts payable................. 137 36 (117) 119
Accrued wages.................... 88 29 24 88
Accrued compensated absences..... 35 (42) 37 121
Other current liabilities........ 228 135 (231) 192
Deferred rent.................... (74) (8) (203) (200)
Deferred revenue................. 20 (24) (767) 994
------- ------ ------- -------
Net cash provided (used) by
operating activities........... 1,006 (424) (1,336) (571)
------- ------ ------- -------
Cash flows from investing activities:
Purchases of property and equipment.. (1,105) (38) (47) (39)
Purchase of short-term investments... ( 2,000)
Purchase of software license......... (250)
------- ------ ------- -------
Net cash used by investing
activities..................... (3,355) (38) (47) (39)
------- ------ ------- -------
Cash flows from financing activities:
Principal payments of long-term debt. (74)
Proceeds from issuance of common
stock............................... 26,295 270 36
Exercise of stock options............ 149
Proceeds from issuance of convertible
notes payable....................... 3,070
Net (payments) borrowings on line of
credit.............................. (1,095) 270
Payments on obligations under capital
leases.............................. (655) (71)
------- ------ ------- -------
Net cash provided by financing
activities..................... 25,789 2,174 232
------- ------ ------- -------
Net increase (decrease) in cash
and cash equivalents........... 23,440 (462) 791 (378)
Cash and cash equivalents, beginning
of period............................ 722 1,184 393 771
------- ------ ------- -------
Cash and cash equivalents, end of
period............................... $24,162 $ 722 $ 1,184 $ 393
======= ====== ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes....................... $ 321 $ -- $ 111 $ 124
======= ====== ======= =======
Interest........................... $ 250 $ -- $ 175 $ 119
======= ====== ======= =======
Supplemental schedule of noncash
investing and financing activities:
Increase in redemption value of
Series A and Series B Preferred
Stock............................... $ 8 $ 1 $ 175 $ 223
======= ====== ======= =======
Conversion of convertible notes
payable to shares of common stock,
less unamortized issuance costs of
$68................................. $ 3,002
=======
Conversion of Series A and Series B
Preferred Stock to shares of common
stock............................... $ 5,940
=======
Security deposits applied to fixed
asset purchases..................... $ 94
=======
Software and equipment acquired under
capital lease obligations........... $ 360 $ 366
======= =======
Deferred compensation related to
grant of stock options.............. $ 452
=======
Decrease in redemption value of
Series A Preferred Stock............ $ 889
=======
</TABLE>
The following notes are an integral part of these financial statements.
F-6
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
Peerless Systems Corporation ("Peerless" or the "Company") was incorporated
in the State of California in April 1982. Peerless develops and licenses
embedded imaging software and supporting electronic technologies and provides
custom engineering services to Original Equipment Manufacturers ("OEMs"),
located primarily in the United States and Japan. These OEMs sell monochrome
printers, as well as multifunction products which combine printer, fax, copier
and scanner capabilities. The Company changed its fiscal year end from
December 31 to January 31, commencing February 1, 1996. Upon the closing of
the Company's initial public offering in September 1996, the Company
reincorporated in the state of Delaware and changed the par value of its
common stock to $0.001 per share. The accompanying balance sheets and
statements of shareholders' equity (deficit) have been retroactively
reclassified to reflect this change in par value.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Short-Term Investments:
Short-term investments include debt securities that the Company has
classified as available-for-sale. Available-for-sale securities are carried at
fair value. Unrealized gains and losses, if material, are reported as a
separate component of stockholders' equity (deficit). Realized gains and
losses and declines in value judged to be other than temporary are included in
interest expense, net.
All available-for-sale securities mature in the year 2031. The Company
intends to sell the securities in less than one year, therefore, these
securities have been classified as short term. There were no gross unrealized
gains or losses on available-for-sale securities for the year ended January
31, 1997.
Property and Equipment:
Property and equipment, including any assets under capital leases, are
stated at cost, less accumulated depreciation and amortization. Depreciation
on property and equipment is calculated using the straight-line method over
estimated useful lives of 5-10 years, and over the lesser of the term of the
lease or the estimated useful life of the leasehold improvements and assets
under capital leases. Maintenance and repairs are expensed as incurred, while
renewals and betterments are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation or amortization, and any resulting gain or loss is
included in operations.
Capitalization of Software Development Costs:
The Company follows the working model approach to determine technological
feasibility of its products. Costs that are incurred subsequent to
establishing technological feasibility are immaterial and, therefore, the
Company expenses all costs associated with the development of its products as
such costs are incurred.
F-7
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue Recognition:
Development license revenue from the licensing of source code of the
Company's standard products to customers is recognized upon shipment and
customer acceptance. Recurring licensing revenue is recognized on a royalty
basis generally when the Company's OEM customers ship their products
incorporating Peerless' technology to their end-user customers.
The Company also enters into engineering services contracts with OEMs to
adapt the Company's software and supporting electronics 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.
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 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.
2-for-3 Reverse Stock Split:
On July 25,1996 the Board of Directors approved a 2-for-3 reverse split of
the then outstanding common stock, Series A and Series B Preferred Stock,
stock options and warrants. All share and per share amounts have been adjusted
to give retroactive effect to this reverse split for all periods presented.
Net Income (Loss) Per Common Share:
Net income (loss) per common share is based on reported net income (loss),
with such reported net income (loss) adjusted for accretion of the Series A
and B Preferred Stock and interest on convertible notes payable. The resulting
amount is presented in the table below as income (loss) applicable to common
stock.
Net income (loss) per share is computed based upon the weighted average
number of common shares outstanding adjusted for certain shares issuable under
other equity securities computed in accordance with Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") Topic 4-D. The SAB requires that
common stock issued by the Company, at prices less than the per share initial
public offering price ($11.00), in the twelve months immediately preceding a
proposed public offering plus the number of common equivalent shares that
become issuable during the same period pursuant to the issuance of warrants or
grant of stock options
F-8
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(using the treasury stock method), convertible notes payable or other
potentially dilutive instruments with per share exercise prices below the per
share initial public offering price be included in the calculation of common
stock and common stock equivalent shares as if they were outstanding for all
periods presented.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED DECEMBER 31,
JANUARY 31, -------------------------------
1997 1995 1994
------------ -------------- ---------------
PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------ ----- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Reported net income (loss)....... $4,447 $ (639) $(1,226)
Adjustment for accretion of
Series A and B Preferred Stock
and interest on convertible
notes........................... 135 (130) (223)
------ ------ -------
Net income (loss) applicable to
common stock and net income
(loss) per common share and
common equivalent share......... $4,582 $ (769) $(1,449)
====== ====== =======
Weighted average number of:
Common shares................... 3,728 2,664 2,599
Common equivalent shares........ 4,350 1,774 1,774
------ ------ -------
Weighted average common shares
and common equivalent shares
outstanding--Primary............ 8,078 $0.57 4,438 $(0.17) 4,373 $(0.33)
------ ----- ------ ------ ------- ------
Other dilutive securities....... 1,815
------
Fully diluted weighted average
commonshares and common
equivalent shares............... 9,893 $0.46 4,438 $(0.17) 4,373 $(0.33)
====== ===== ====== ====== ======= ======
</TABLE>
Common Stock Options:
During 1997, 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 a Company's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them. As allowed in 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 related to its plans. The supplemental disclosure requirements
and further information related to the Company's stock option plans are
presented in Note 9 to the Company's financial statements.
Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
F-9
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
1997 1995
----------- ------------
<S> <C> <C>
Computers and other equipment....................... $ 2,682 $ 798
Furniture........................................... 130 118
Leasehold improvements.............................. 88 23
Software under capital lease obligations............ -- 115
Equipment under capital lease obligations........... -- 251
------- -----
2,900 1,305
Less, accumulated depreciation and amortization..... (1,235) (796)
------- -----
$ 1,665 $ 509
======= =====
</TABLE>
3. Line of Credit:
The Company has a revolving line of credit with a bank, collateralized by
the Company's assets, other than those subject to lease financing agreements.
The maximum amount available under the line of credit is the lesser of $1,500
or a percentage of the Company's outstanding accounts receivable and current
royalty receivables, which amount was $1,173 at January 31, 1997. The interest
rate on this line of credit is the bank's prime interest rate plus 2% (an
effective rate of 10.25% at January 31, 1997). Under the terms of this
agreement, which expires in May 1997, the Company is required to maintain
compliance with certain financial ratios, the most restrictive of which is a
current ratio (as defined in the agreement) of 1:1, and to recognize net
income each fiscal quarter beginning July 31, 1996. As of January 31, 1997,
the Company had no outstanding obligations related to the line of credit.
4. OBLIGATIONS UNDER CAPITAL LEASES:
Obligations under capital leases consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
1997 1995
----------- ------------
<S> <C> <C>
Obligations under capital leases with terms of
eighteen months, bearing an effective interest
rate of 26.97%, paid in October, 1996............. $-- $ 83
Obligations under capital leases with terms of
three years, bearing effective interest rates
ranging from 14.70% to 17.87%, paid in October,
1996.............................................. -- 212
--- -----
-- 295
Less, current portion.............................. -- (154)
--- -----
$-- $ 141
=== =====
</TABLE>
5. CONVERTIBLE NOTES PAYABLE:
In October 1995, the Company issued 7.00% Senior Convertible Subordinated
Debentures ("Debentures"), to holders of the Company's Preferred Stock, with
an aggregate principal amount of $3,070 and a maturity date of June 1, 2001.
The Debentures had a stated interest rate of 7% per annum with interest due
June 1 and December 1 of each year. The Debentures were convertible, at the
option of the holder, to shares of common
F-10
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
stock at a specified conversion price of $2.63 per common share, subject to
dilution adjustments. The Debentures were subordinate to all bank
indebtedness. In September 1996, upon the closing of the Company's initial
public offering, the Debentures automatically converted to 1,169 shares of the
Company's common stock.
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company leases its offices and certain operating equipment under
operating leases that expire through 2001.
Future minimum rental payments under long-term operating leases are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDING JANUARY 31,
------------------
<S> <C>
1998................................ $ 620
1999................................ 620
2000................................ 620
2001................................ 155
Thereafter.......................... --
------
Total............................. $2,015
======
</TABLE>
Total rental expense was $906, $1,059, and $916 for the years ended January
31, 1997, December 31, 1995 and 1994, respectively.
Concentration of Credit Risk:
At January 31, 1997 and December 31, 1995, the Company had cash on deposit
at a bank that was in excess of federally-insured limits. The aggregate excess
amount was $23,981 and $1,164, respectively.
The Company's credit risk in accounts receivable, which are generally not
collateralized, is concentrated with customers which are OEMs of laser
printers and printer peripheral technologies. The accounting loss, should a
customer be unable to meet its obligation to the Company, would be equal to
the recorded accounts receivable. At January 31, 1997 and December 31, 1995,
four customers represented 66% and two customer represented 50% of total
accounts receivable, respectively. For the years ended January 31, 1997 and
December 31, 1995 and 1994, three customers represented 53%, four customers
represented 74% and three customers represented 51% of total revenues,
respectively.
F-11
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES:
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED DECEMBER 31,
JANUARY 31, -------------
1997 1995 1994
----------- ------ ------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 64 $ -- $ --
State............................................ 15 -- --
Foreign.......................................... 320 99 124
-------- ----- ------
399 99 124
-------- ----- ------
Deferred:
Federal.......................................... (2,151) -- --
State............................................ (748) -- --
Foreign.......................................... -- --
-------- ----- ------
(2,899) -- --
-------- ----- ------
$(2,500) $ 99 $ 124
======== ===== ======
</TABLE>
The foreign tax provision is comprised of foreign withholding taxes on
license fees and royalty payments.
Temporary differences that give rise to the deferred tax provision (benefit)
consist of:
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED DECEMBER 31,
JANUARY 31, --------------
1997 1995 1994
----------- ------ -------
<S> <C> <C> <C>
Property and equipment........................... $ 19 $ (19) $ (11)
Accrued liabilities.............................. 13 (42) (40)
Allowance for doubtful accounts.................. (43) -- --
Deferred revenue................................. 149 332 (431)
Deferred expenses................................ 32 (43) (87)
State taxes...................................... 249 -- --
Tax credit carryforwards......................... (497) (253) (1,401)
Net operating loss carryforwards................. 908 (317) 92
Other............................................ (20) 3 36
------- ----- -------
810 (339) (1,842)
Valuation allowance.............................. (3,709) 339 1,842
------- ----- -------
Net deferred income tax provision (benefit).... $(2,899) $ -- $ --
======= ===== =======
</TABLE>
F-12
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Temporary differences which give rise to deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY
31, DECEMBER
1997 31, 1995
------- --------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities..................................... $ 147 $ 150
Allowance for doubtful accounts......................... 43 --
Deferred revenue........................................ 1,874 2,033
Deferred expenses....................................... 127 163
Tax credit carryforwards................................ 2,097 1,654
Net operating loss carryforwards........................ 1,316 2,074
Other................................................... 20 --
------- -------
Total deferred tax assets............................. 5,624 6,074
Deferred tax liability:
Property and equipment.................................. (46) (30)
State taxes............................................. (249) --
------- -------
Total deferred tax liabilities........................ (295) (30)
------- -------
Subtotal................................................ 5,329 6,044
Valuation allowance....................................... (2,430) (6,044)
------- -------
Net deferred income taxes asset....................... $ 2,899 $ --
======= =======
</TABLE>
The Company periodically evaluates the sufficiency of its deferred tax asset
valuation allowance, which is adjusted as deemed appropriate based on
operating results. The valuation allowance was reduced during the year ended
January 31, 1997 based on the reassessment of the recoverability of the
deferred tax asset.
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED DECEMBER 31,
JANUARY 31, ---------------
1997 1995 1994
----------- ------ ------
<S> <C> <C> <C>
Statutory regular federal income tax rate..... 34.0% (34.0)% (34.0)%
Foreign provision............................. 16.4 18.3 11.2
Nondeductible expenses........................ 1.2 3.2 1.1
Foreign tax and research and experimentation
credits...................................... (13.3) (23.4) (74.4)
Change in valuation allowance................. (168.2) 55.7 108.4
Other......................................... 1.5 (1.5) (1.1)
------- ------ ------
(128.4)% 18.3% 11.2%
======= ====== ======
</TABLE>
As of January 31, 1997, the Company had net operating loss carryforwards for
federal and state purposes of approximately $3,594 and $1,016, respectively.
The net operating loss carryforwards begin expiring in 2005 and 1998,
respectively. The Company has research and experimentation credit
carryforwards for federal and state purposes of approximately $858 and $512,
respectively. The research and experimentation credits begin to expire in 2000
for federal purposes. The Company also has foreign tax credits of
approximately $669 for federal purposes, which begin to expire in 1998.
F-13
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. CONVERTIBLE, REDEEMABLE PREFERRED STOCK:
Prior to September 1996, the Company had authorized 15,000 shares of
Preferred Stock, of which 1,736 were designated as Series A Preferred Stock,
1,736 were designated as Series A1 Preferred Stock, 3,200 were designated as
Series B Preferred Stock, 3,200 were designated as Series B1 Preferred Stock,
and 5,128 were undesignated.
During 1991, the Company issued 1,111 shares of Series A Preferred Stock at
a price of $2.25 per share in exchange for $2,500 of cash, less $51 of
offering expenses.
Shares of Series A Preferred Stock were convertible into the Company's
common stock at a rate of $2.22 per share of common stock, subject to anti-
dilution adjustments. Conversion into the Company's common stock could 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 at
least $10,000 of the Company's common stock under the Securities Act of 1933.
Holders of Series A Preferred Stock were entitled to a noncumulative annual
dividend of $0.18 per share, payable only when and as declared by the Board of
Directors out of legally available funds.
Until October 1995, the Company was required to redeem all shares of Series
A Preferred Stock in three equal installments on June 1, 1997, 1998 and 1999
upon the request of a majority of the holders of the outstanding Series A
Preferred Stock received prior to May 1, 1997. The redemption amount was based
on $2.25 per share of Common Stock plus a redemption premium equal to $0.045
per share times the number of calendar quarters that elapsed between March 31,
1991 and the date of redemption. As a result of this provision for a
redemption premium, the Company recorded the incremental increases in Series A
Preferred Stock and charged the like amount to Accumulated Deficit.
As a result of an amendment of the Company's Articles of Incorporation in
1995, the Series A Preferred Stock redemption dates were changed to June 1,
1999, 2000 and 2001, redeemable upon the request of a majority of the holders
of the outstanding Series A Preferred Stock received prior to April 1, 1999
and consent of the holders of a majority of the then outstanding principal
amount of the Debentures (Note 5). All redemption premiums relating to Series
A Preferred Stock were retroactively eliminated. As a result of this
amendment, $889 of accumulated incremental increases to Series A Preferred
Stock relating to redemption premiums, including $150 and $200 recognized in
1995 and 1994, respectively, was added to Additional Paid-In Capital and
charged to Series A Preferred Stock in 1995. The Company continued to accrete
for the difference between the carrying values and the redemption values of
its Series A and B Preferred Stock until September 1996.
During 1993, the Company issued 1,501 shares of Series B Preferred Stock at
a per share price of $2.33 in exchange for $1,435 of convertible notes
payable, including $27 of accrued interest, and $2,055 of cash, less $85 of
offering expenses.
The Company's Series B Preferred Stock had substantially the same rights,
privileges and restrictions as those of Series A Preferred Stock. Shares of
Series B Preferred Stock were convertible into the Company's common stock at a
rate of $2.30 per share of common stock, subject to anti-dilution adjustments,
and would also automatically convert into common stock upon the effective date
of a registration statement relating to a public offering of at least $10,000
of the Company's common stock under the Securities Act of 1933.
In the event of a liquidation, holders of Series A Preferred Stock, and
Series B Preferred Stock were entitled to receive a distribution equal to
$2.25 per share and $2.33 per share, respectively, plus all declared but
unpaid
F-14
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
dividends. Holders of common stock would then participate in the distribution
to the extent of $1,250 on a pro rata basis. Thereafter, proceeds would be
allocated among the holders of common stock and Series A and Series B
Preferred Stock, with the Preferred Stock being treated on an as-converted
basis.
Holders of Series A Preferred Stock and Series B Preferred Stock voted as
separate classes from common stock with respect to elections of the Board of
Directors, and participated in other voting rights of the Company with
Preferred Stock being treated on an as-converted basis. Preferred Stock was
transferable in certain circumstances, subject to a right of first refusal by
the other holders of Preferred Stock.
In September 1996, upon the closing of the Company's initial public
offering, all outstanding shares of Series A Preferred Stock and Series B
Preferred Stock converted to 1,126 and 1,521 shares of the Company's common
stock, respectively.
9. COMMON STOCK, WARRANTS AND STOCK OPTIONS:
Common Stock:
In 1994, the Company adopted an Employee Stock Purchase Plan, under which
employees were offered the opportunity to purchase shares of common stock at a
price of $1.43 per share. Pursuant to this plan which terminated in December
1995, 159 shares of common stock were issued. In addition, not related to this
plan, during 1995 and 1994, the Company issued 27 and 33 shares, respectively,
of common stock at a price of $1.43 per share to certain employees.
Warrants:
Prior to September 1996, the Company issued warrants to purchase common and
preferred stock in connection with various financing transactions, as follows:
<TABLE>
<CAPTION>
PER
NUMBER SHARE
OF EXERCISE EXPIRATION
STOCK CLASS SHARES PRICE DATE(1)
----------- ------ -------- -------------
<S> <C> <C> <C>
Common(2) 67 $4.50 December 1996
Common(3) 517 $1.13 July 1997
Common(4) 27 $1.13 December 1997
Common(4) 13 $2.55 December 1997
Common(5) 365 $1.13 December 1998
Common(6) 31 $1.13 February 2003
Common(7) 5 $2.97 December 1998
Series A Preferred(8) 32 $2.25 July 2001
Series B Preferred(6) 75 $2.33 February 2003
</TABLE>
- --------
(1) All warrants expired on the earlier of the above dates or the closing date
of an initial public offering of the Company's common stock.
(2) During 1991, the Company issued warrants to purchase these shares in
connection with the Series A Preferred Stock transaction.
(3) During 1993, the Company issued warrants to purchase 125 shares in
connection with a convertible note payable transaction. The Company had
previously issued warrants to purchase 125 shares in connection with the
same transaction and warrants to purchase 267 shares in connection with a
loan guarantee transaction.
F-15
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) During 1993 and 1994, the Company issued warrants to purchase 27 and 13
shares, respectively, in connection with bank line of credit transactions.
(5) During 1993, the Company issued warrants to purchase these shares in
connection with the Series B Preferred Stock transaction.
(6) During 1993, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
(7) During 1995, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
(8) During 1991, the Company issued warrants to purchase these shares in
connection with an equipment lease transaction.
Through August 1996, no warrants had been exercised, and there was no
imputed value associated with any of the outstanding warrants due to deemed
immateriality as such warrants were issued at exercise prices not less than
the deemed fair market value of the applicable class of stock at the date of
grant.
In September 1996, upon the closing of the Company's initial public
offering, all outstanding warrants were converted to 983 shares of the
Company's common stock on a cashless basis.
Stock Option Plans:
During 1992, the Board of Directors authorized a nonstatutory stock option
program for the purpose of granting options to purchase a total of 222 shares
of the Company's common stock to employees. The Board of Directors reduced the
number of shares authorized to 133 during 1994. Options vest annually, pro
rata over a five-year period, retroactive to the date of hire for each
recipient.
The following represents option activity under the nonstatutory option plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
YEAR ENDED JANUARY 31, 1997 19951994
----------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE NUMBER AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 65 $0.52 88 $0.43 94 $0.44
Options exercised....... (42) $0.53 (13) $0.20
Options forfeited....... (1) $0.53 (10) $0.42 (6) $0.53
----------- --- ---
Options outstanding at
end of period.......... 22 $0.50 65 $0.52 88 $0.43
=========== === ===
Options exercisable at
year-end............... 22 $0.50 46 $0.52 49 $0.43
=========== === ===
Options available for
future grant........... 0 0 0
=========== === ===
Weighted average
remaining contractual
life in years.......... 4
===========
Range of exercise prices
for options outstanding
at year end............ $0.20-$0.53
===========
</TABLE>
F-16
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During 1992, the Board of Directors authorized the 1992 Stock Option Plan
for the purpose of granting options to purchase the Company's common stock to
employees, directors and consultants. The Board of Directors determines the
form, term, option price and conditions under which each option becomes
exercisable. Options to purchase a total of 1,055 shares of common stock have
been authorized by the Board under this plan.
The following represents option activity under the 1992 Stock Option Plan:
<TABLE>
<CAPTION>
YEAR ENDED YEARS ENDED
JANUARY 31, 1997 DECEMBER 31,
---------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............... 774 $1.26 309 $0.92 188 $0.53
Options granted.......... 188 $1.65 503 $1.43 137 $1.43
Options exercised........ (100) $1.19 (3) $0.66 (2) $0.53
Options forfeited........ (52) $1.22 (35) $0.73 (14) $0.56
----------- ----- -----
Options outstanding at
end of period........... 810 $1.36 774 $1.26 309 $0.92
=========== ===== =====
Options exercisable at
year-end................ 301 $1.16 162 $0.88 79 $0.95
=========== ===== =====
Options available for
future grant............ 0 277 411
=========== ===== =====
Weighted average fair
value of options
granted during the year. $1.31 $0.99 $0.92
=========== ===== =====
Weighted average
remaining contractual
life in years........... 8
===========
Range of exercise prices
for options
outstanding at year-end. $0.53-$1.65
===========
</TABLE>
In May 1996, the Board adopted the Company's 1996 Stock Option Plan (the
"1996 Plan"). The Company's 1996 Equity Incentive Plan (the "Incentive Plan")
was adopted by the Board of Directors in July 1996 as an amendment and
restatement of the Company's 1996 Plan. The Board has authorized and reserved
an aggregate of 1,267 shares of Common Stock for issuance under the Incentive
Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options, restricted stock purchase awards and
stock bonuses to employees, directors and consultants. The terms of stock
options granted under the Incentive Plan generally may not exceed 10 years.
The exercise price of options granted under the Incentive Plan is determined
by the Board of Directors, provided that the exercise price for an incentive
stock option cannot be less than 100% of the fair market value of the Common
Stock on the date of the option grant and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Incentive Plan vest at the rate specified in each optionee's option agreement.
F-17
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following represents option activity under the Incentive Plan:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
1997
----------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
<S> <C> <C>
Options outstanding at beginning of period..................... 0 $ 0.00
Options granted with exercise prices below market price on
thedate of grant.............................................. 525 $ 3.49
Options granted with exercise prices equal to market price on
thedate of grant.............................................. 141 $10.74
Options exercised.............................................. (8) $ 3.30
Options forfeited.............................................. (20) $ 3.48
-----
Options outstanding at end of period........................... 638 $ 5.09
=====
Options outstanding at end of period with exercise prices
rangingfrom $3.30 to $4.95.................................... 479 $ 3.30
=====
Options outstanding at end of period with exercise prices
ranging from $8.25 to $13.50.................................. 159 $10.44
=====
Options exercisable at year-end with exercise prices ranging
from $3.30 to $4.95........................................... 16 $ 3.30
=====
Options exercisable at year-end with exercise prices ranging
from $8.25 to $13.50.......................................... 0
=====
Options available for future grant............................. 601
=====
Weighted average fair value of options granted during the year
with exercise prices beloe market price on the date of grant.. $3.58
=====
Weighted average fair value of options granted during the year
with exercise prices equal to market price on the date of
grant......................................................... $7.44
=====
Weighted average remaining contractual life in years for
options with exercise prices ranging from $3.30 to $4.95...... 9
=====
Weighted average remaining contractual life in years for
options with exercise prices ranging from $8.25 to $13.50..... 10
=====
</TABLE>
The Company recognized deferred compensation expense of $452 for the
difference between the exercise price and the deemed fair value of the
Company's common stock at the date of grant for options issued under the
Incentive Plan. Of the total deferred expense, the Company recognized $106 as
a compensation expense during the twelve months ended January 31, 1997. The
remaining deferred compensation expense will be amortized over the vesting
periods of the options, which range from 2 to 84 months.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for the plans. Under SFAS
No. 123, compensation cost would be recognized for the fair value of the
employee's option rights. Had compensation cost for the Company's grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income and earnings per share would have been reduced to the
pro-forma amounts indicated below (in thousands, except per share data). In
determining the fair value, the Company used the Black-Scholes model, assumed
no dividend per year, expected lives ranging from 2 to 10 years, an expected
volatility of 65.2% and a risk free interest rate of 7.0% for all years.
F-18
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR
ENDED
JANUARY YEARS ENDED
31, DECEMBER 31
------- ---------------
1997 1995 1994
------- ------ -------
<S> <C> <C> <C>
Net income (loss) as reported......................... $4,447 $ (639) $(1,226)
====== ====== =======
Proforma.............................................. $3,710 $ (776) $(1,279)
====== ====== =======
Net income (loss) per share as reported:
Primary............................................. $ 0.57 $(0.17) $ (0.33)
====== ====== =======
Fully diluted....................................... $ 0.46 $(0.17) $ (0.33)
====== ====== =======
Proforma:
Primary............................................. $ 0.48 $(0.20) $ (0.34)
====== ====== =======
Fully diluted....................................... $ 0.39 $(0.20) $ (0.34)
====== ====== =======
</TABLE>
Employee Stock Purchase Plan. In July 1996, the Company's Board of Directors
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 300 shares of the Company's Common Stock. Under the Purchase
Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than
27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors and meet
eligibility standards established by the Board of Directors. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by
the Board of Directors, to the purchase of shares of Common Stock. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company
and its affiliates. The Purchase Plan will terminate at the Board of
Directors' discretion. The Company recorded $73 in compensation expense
related to this plan for the year ended January 31, 1997.
10. 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; however, there have been no
contributions to date.
11. RELATED PARTIES:
During the years ended January 31, 1997 and December 31, 1995 and 1994, the
Company recognized revenues of $2,244, $707 and $623, respectively, from
transactions with a shareholder. At January 31, 1997 and December 31, 1995,
the Company had $894 and $1,689, respectively, of deferred revenue relating to
license fees prepaid by this related party. Included in accounts receivable at
January 31, 1997 is $288 due from this related party.
F-19
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. INTERNATIONAL OPERATIONS:
The Company's revenues, which are transacted in U.S. dollars, are derived
from the following geographic regions:
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED DECEMBER 31,
JANUARY 31, --------------
1997 1995 1994
----------- ------- ------
<S> <C> <C> <C>
United States........................................ $ 9,890 $ 6,139 $6,940
Japan................................................ 5,978 4,221 2,253
Other................................................ 153 53 143
------- ------- ------
$16,021 $10,413 $9,336
======= ======= ======
</TABLE>
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Peerless Systems Corporation
Our report on the financial statements of Peerless Systems Corporation is
included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 25 of this Form 10-K.
In our opinion, the financial statements referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Newport Beach, California
April 17, 1997
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES (A) PERIOD
----------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
Reserves deducted from assets to
which they apply:
Allowance for uncollectible
accounts receivables.............. $ $ $ $
Year Ended December 31, 1995
Reserves deducted from assets to
which they apply:
Allowance for uncollectible
accounts receivables.............. $ $ $ $
Month Ended January 31, 1996
Reserves deducted from assets to
which they apply:
Allowance for uncollectible
accounts receivables.............. $ $ $ $
Year Ended January 31, 1997
Reserves deducted from assets to
which they apply:
Allowance for uncollectible
accounts receivables.............. $ $100 $ $100
</TABLE>
- --------
(a) Accounts written off, net of recoveries
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
------- ------- ----
<C> <S> <C>
3.1(1) Certificate of Incorporation of the Company.
3.2(1) Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(1) Amended and Restated Investor Rights Agreement dated
October 6, 1995.
10.1(1) Form of Indemnity Agreement.
10.2(1)(2) 1992 Stock Option Plan (the "Option Plan"),
as amended.
10.3(1)(2) 1996 Equity Incentive Plan.
10.4(1)(2) Form of Incentive Stock Option
10.5(1)(2) Form of Nonstatutory Stock Option.
10.6(1)(2) 1996 Employee Stock Purchase Plan.
10.7(1) Third Party Development and License Agreement (the "Adobe
Third Party License"),
dated September 18, 1992 between the Registrant and Adobe
Systems Incorporated ("Adobe")
10.8(1)(3) Reference Post Appendix #2 to the Adobe Third Party
License, dated February 11, 1993
10.9(1) Amendment No. 1 to the Adobe Third Party License, dated
November 29, 1993
10.10(1)(3) PCL Development and License Agreement (the "PCL License"),
dated June 14, 1993, between the Registrant and Adobe
10.11(1)(3) Amendment No. 1 to the PCL License, dated October 31, 1993
10.12(1)(3) Letter Modification to the PCL License, dated August 5,
1994
10.13(1)(3) Addendum No. 1 to the PCL License, dated March 31, 1995
10.14(1)(3) Letter Modification to the PCL License, dated August 30,
1995
10.15(1) Lease Agreement between the Company and Continental
Development Corporation, dated February 6, 1992, and
Addendum, dated February 6, 1992
10.16(1) First Amendment to Office Lease dated December 1, 1995
between the Company and Continental Development Corporation
10.17(1) Amended and Restated Investor Rights Agreement, dated
October 6, 1995
10.18(1)(2) Employment Agreement with Lauren Shaw
10.19(1)(2) Employment Agreement with Edward Gavaldon
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney. Reference is made to page 28.
</TABLE>
- --------
(1) Incorporated by reference from the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 333-09357), as amended.
(2) Management contract or compensatory plan or arrangement.
(3) Subject to Confidential Treatment Order.
<PAGE>
EXHIBIT 23.1
PEERLESS SYSTEMS CORPORATION
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Peerless Systems Corporation on Form S-8 (File No. 333-13773) of our reports
dated April 17, 1997 on our audits of the financial statements and financial
statement schedule of Peerless Systems Corporation as of January 31, 1997 and
1996 and December 31, 1995 and for the year ended January 31, 1997, the one
month period ended January 31, 1996 and the years ended December 31, 1993 and
1994, which reports are included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Newport Beach, California
April 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1997 DEC-31-1995
<PERIOD-START> FEB-01-1996 JAN-01-1995
<PERIOD-END> JAN-31-1997 DEC-31-1995
<CASH> 24,162 1,184
<SECURITIES> 2,000 0
<RECEIVABLES> 3,414 1,746
<ALLOWANCES> (100) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,991 3,244
<PP&E> 2,900 1,305
<DEPRECIATION> (1,235) (796)
<TOTAL-ASSETS> 35,109 4,185
<CURRENT-LIABILITIES> 6,728 5,551
<BONDS> 0 3,070
0 5,931
0 0
<COMMON> 10 3
<OTHER-SE> 28,054 (11,599)
<TOTAL-LIABILITY-AND-EQUITY> 35,109 4,185
<SALES> 16,021 10,413
<TOTAL-REVENUES> 16,021 10,413
<CGS> 6,267 5,254
<TOTAL-COSTS> 6,267 5,254
<OTHER-EXPENSES> 7,893 5,523
<LOSS-PROVISION> 100 0
<INTEREST-EXPENSE> (186) 176
<INCOME-PRETAX> 1,947 (540)
<INCOME-TAX> (2,500) 99
<INCOME-CONTINUING> 4,447 (639)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,447 (639)
<EPS-PRIMARY> 0.57 (0.17)
<EPS-DILUTED> 0.46 (0.17)
</TABLE>
