<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
COMMISSION FILE NUMBER: 000-21287
- --------------------------------------------------------------------------------
PEERLESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 95-3732595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
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 [_]
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 31, 1998 WAS
10,980,426.
================================================================================
<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 which are subject to the "safe harbor" created by those
sections. The forward-looking statements include, but are not limited to,
statements related to industry trends and future growth in the markets for
digital document products, embedded imaging systems and enterprise networks;
Peerless Systems Corporation's ("the Company's") strategies for reducing its
customers' costs and time-to-market; the Company's product development efforts;
the effect of GAAP accounting pronouncements on the Company's recognition of
revenues; the Company's future research and development; business trends; and
future quarterly profitability. Discussions containing such forward-looking
statements may be found in "Management Discussion and Analysis of Financial
Condition and Results of Operations." These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in such forward-looking statements. The Company disclaims
any obligation to update these forward-looking statements as a result of
subsequent events. The business risks on pages 13 through 15, among other
things, should be considered in evaluating the Company's prospects and future
financial performance.
2
<PAGE>
PEERLESS SYSTEMS CORPORATION
INDEX
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------
Item 1: FINANCIAL STATEMENTS Page No.
--------------------
<C> <S> <C>
Balance Sheets
July 31, 1998 and January 31, 1998................................. 4
Statements of Operations
Three and Six Month Periods Ended July 31, 1998 and 1997........... 5
Statements of Cash Flows
Six Month Periods Ended July 31, 1998 and 1997..................... 6
Notes to Financial Statements........................................ 8
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS..............................................11
---------------------
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------------
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................16
---------------------------------------------------
Item 6: EXHIBITS AND REPORTS ON FORM 8-K.....................................16
--------------------------------
Signatures .....................................................................18
</TABLE>
TRADEMARKS
Memory Reduction Technology(R) (MRT(R)) is a registered trademark of Peerless
Systems Corporation. AccelePrint/TM/, PEERLESS SYSTEMS/TM/, WINEXPRESS/TM/,
PeerlessPrint/TM/ and QuickPrint/TM/ are trademarks of Peerless Systems
Corporation and are subjects of applications pending for registration with the
United States Patent and Trademark Office. Peerless Systems/TM/ (in English and
Japanese Katakana), PEERLESS/TM/ (in logo) and P/TM/ (in logo) are trademarks
and service marks of Peerless Systems Corporation and are subjects of
applications pending for registration with the Japanese Patent Office. This Form
10-Q also refers to various products and companies by their trademark names. In
most, if not all cases, these designations are claimed as trademarks or
registered trademarks by their respective companies.
3
<PAGE>
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1: Financial Statements
--------------------
PEERLESS SYSTEMS CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
--------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,161 $ 3,199
Short term investments 13,003 16,982
Trade accounts receivable, net 6,474 5,577
Unbilled receivables 2,554 1,386
Deferred tax asset 1,544 1,544
Prepaid expenses and other current assets 1,317 892
------- -------
Total current assets 35,053 29,580
Investments 2,505 5,501
Property and equipment, net 5,348 4,426
Deferred tax asset 249 249
Other assets 268 339
------- -------
Total assets $43,423 $40,095
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 678 $ 1,149
Accrued wages 973 1,065
Accrued compensated absences 618 501
Other current liabilities 712 468
Income taxes payable 88 406
Deferred revenue 2,337 2,278
------- -------
Total current liabilities 5,406 5,867
Deferred rent 391 421
------- -------
Total liabilities 5,797 6,288
------- -------
Stockholders' equity:
Common stock 11 11
Additional paid-in capital 38,883 37,952
Deferred compensation (214) (275)
Accumulated deficit (1,054) (3,881)
------- -------
Total stockholders' equity 37,626 33,807
------- -------
Total liabilities and stockholders' equity $43,423 $40,095
======= =======
</TABLE>
The following notes are an integral part of these financial statements.
4
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------------------------ --------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product licensing $ 5,624 $ 3,758 $10,466 $ 7,273
Engineering services and maintenance 2,830 2,201 6,417 3,814
------- ------- ------- -------
Total revenues 8,454 5,959 16,883 11,087
------- ------- ------- -------
Cost of revenues:
Product licensing 36 35 71 70
Engineering services and maintenance 2,431 1,932 5,536 3,392
------- ------- ------- -------
Total cost of revenues 2,467 1,967 5,607 3,462
------- ------- ------- -------
Gross margin 5,987 3,992 11,276 7,625
------- ------- ------- -------
Operating expenses:
Research and development 1,838 1,042 3,546 2,112
Sales and marketing 952 892 1,866 1,777
General and administrative 1,290 703 2,203 1,419
------- ------- ------- -------
Total operating expenses 4,080 2,637 7,615 5,308
------- ------- ------- -------
Income from operations 1,907 1,355 3,661 2,317
Interest income, net 333 332 688 653
------- ------- ------- -------
Income before income taxes 2,240 1,687 4,349 2,970
Provision for income taxes 784 641 1,522 1,129
------- ------- ------- -------
Net income $ 1,456 $ 1,046 $ 2,827 $ 1,841
======= ======= ======= =======
Net income per common share $ 0.13 $ 0.10 $ 0.26 $ 0.17
======= ======= ======= =======
Net income per common share -
assuming dilution $ 0.12 $ 0.09 $ 0.24 $ 0.16
======= ======= ======= =======
Weighted average common shares
outstanding 10,847 10,510 10,769 10,529
======= ======= ======= =======
Weighted average common shares
outstanding and dilutive shares 11,891 11,635 11,838 11,635
======= ======= ======= =======
</TABLE>
The following notes are an integral part of these financial statements.
5
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
---------------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,827 $ 1,841
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 458 317
Amortization of deferred compensation 61 60
Compensation expense on common stock issued to employees 123 -
Changes in operating assets and liabilities:
Trade accounts receivable (897) (233)
Unbilled receivables (1,168) (770)
Prepaid expenses and other current assets (425) (348)
Other assets - (27)
Accounts payable (471) (101)
Accrued wages (92) (74)
Accrued compensated absences 117 160
Other current liabilities 244 143
Income taxes payable (30) 943
Deferred rent (318) 183
Deferred revenue 59 509
------- --------
Net cash provided by operating activities 488 2,603
------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,360) (440)
Purchases of held-to-maturity securities - (18,738)
Purchases of available-for-sale securities (2,974) -
Proceeds from held-to-maturity securities 7,000 1,000
Proceeds from available-for-sale securities 3,000 -
------- --------
Net cash provided (used) by investing activities 5,666 (18,178)
------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 190 197
Proceeds from exercise of common stock options 618 179
------- --------
Net cash provided by financing activities 808 376
------- --------
Net increase in cash and cash equivalents 6,962 (15,199)
Cash and cash equivalents, beginning of period 3,199 24,162
------- --------
Cash and cash equivalents, end of period $10,161 $ 8,963
======= ========
</TABLE>
The following notes are an integral part of these financial statements.
6
<PAGE>
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
---------------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 1,390 $ 59
======= =======
Interest $ - $ -
======= =======
Supplemental schedule of noncash investing and financing activities:
Common stock issued to employees $ 123
=======
</TABLE>
The following notes are an integral part of these financial statements.
7
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
- ------
The accompanying unaudited financial statements of Peerless Systems
Corporation (the "Company") have been prepared pursuant to the rules of the
Securities and Exchange Commission (the "SEC") for quarterly reports on Form 10-
Q and do not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements and notes
herein are unaudited, but in the opinion of management, include all the
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows of
the Company. These statements should be read in conjunction with the audited
financial statements and notes thereto for the years ended January 31, 1998 and
1997 and the year ended December 31, 1995, included in the Company's annual
report filed on Form 10-K with the SEC on April 24, 1998. The results of
operations for the interim periods shown herein are not necessarily indicative
of the results to be expected for any future interim period or for the entire
year.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
- ------
Revenue Recognition:
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
which supersedes Statement of Position 91-1, "Software Revenue Recognition."
SOP 97-2, and amendments thereto, provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions
and is effective for transactions entered into in years beginning after December
15, 1997. The Company adopted SOP 97-2 for all transactions on or after
February 1, 1998.
In accordance with SOP 97-2, the Company recognizes development license
revenue from the licensing of source code for the Company's standard products
upon shipment and customer acceptance of the source code if no significant
modification or customization of the software is required and collection of the
resulting receivable is probable. If modification or customization is essential
to the functionality of the software, revenue is recognized ratably over the
services performed or deferred until the modification is complete. Recurring
product licensing revenues are generally recognized when the Company's OEM
customers ship products that incorporate the Company's technology. In certain
cases, the guaranteed, non-refundable portion of the recurring product licensing
revenue is reported as royalty revenue upon receipt by the Company.
Future Developments:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that such
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. Management is currently evaluating the requirements of SFAS 131 and the
impact that adoption of SFAS 131 will have on the financial statements of the
Company.
8
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives will be recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. The
Company does not believe that the adoption of SFAS 133 will have a material
impact on the financial statements of the Company.
NOTE 3 INVESTMENTS
- ------
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
---------------- ------------------
<S> <C> <C>
Held-to-maturity securities:
Maturities within one year:
U.S. government debt securities $ 7,000 $ 6,007
Corporate debt securities 1,000 3,979
Certificates of deposit 2,000
------- -------
8,000 11,986
Maturities after one year
through five years:
U.S. government debt securities 2,505 5,501
------- -------
10,505 17,487
------- -------
Available-for-sale securities:
Maturities within one year:
Corporate debt securities 4,003 2,996
U.S. government debt securities 1,000
------- -------
5,003 2,996
Maturities after ten years:
Other debt securities - 2,000
------- -------
5,003 4,996
------- -------
Total investments $15,508 $22,483
------- -------
</TABLE>
The fair value of held-to-maturity securities at July 31, 1998 and January
31, 1998 approximated amortized cost. Unrealized gains or losses on available-
for-sale securities were immaterial for all periods presented.
9
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Note 4 NET INCOME PER COMMON SHARE
- ------
Net income per common share is calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31,
----------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------
NET PER-SHARE NET PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income available to the common
stockholders $2,827 10,769 $0.26 $1,841 10,529 $0.17
===== =====
EFFECT OF DILUTIVE SECURITIES
Common stock options - 1,069 - 1,106
------ ------ ------ ------
DILUTED EPS
Net income available to common
stockholders and assumed conversions $2,827 11,838 $0.24 $1,841 11,635 $0.16
====== ====== ===== ====== ====== =====
<CAPTION>
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------
NET PER-SHARE NET PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income available to the common
stockholders $1,456 10,847 $0.13 $1,046 10,510 $0.10
===== =====
EFFECT OF DILUTIVE SECURITIES
Common stock options - 1,044 - 1,125
------ ------ ------ ------
DILUTED EPS
Net income available to common
stockholders and assumed conversions $1,456 11,891 $0.12 $1,046 11,635 $0.09
====== ====== ===== ====== ====== =====
</TABLE>
10
<PAGE>
PEERLESS SYSTEMS CORPORATION
================================================================================
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
This report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements as a result of certain
factors included in this report.
OVERVIEW
The Company, founded in April 1982, is a leading provider of software-based
embedded imaging systems to original equipment manufacturers ("OEMs") of digital
document products. Digital document products include printers, copiers, fax
machines and scanners, as well as multifunction products ("MFPs") that perform a
combination of these imaging functions. In order to process digital text and
graphics, digital document products rely on a core set of imaging software and
supporting electronics, collectively known as an embedded imaging system.
Peerless' technology and engineering services provide advanced imaging solutions
that enable the Company's OEMs to develop digital printers, copiers and MFPs
quickly and cost effectively.
The Company's customers currently include, among others, Adobe and Rockwell
and OEM customers Canon, IBM, Minolta and Ricoh. 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 may be
similarly concentrated.
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time licensing fees for source code. 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
negotiates minimum recurring license fee requirements from current OEMs,
generally over four to six quarters, which minimizes exposure to OEM products
that may lack market acceptance. The Company's development licensing fees are
paid by OEMs for access to the Company's software, which in turn generates
recurring licensing revenues if the software is incorporated into OEM products
that are subsequently developed and shipped.
The Company's engineering services revenues are derived primarily from
adapting the Company's software and supporting electronics to specific OEM
requirements. The Company provides its engineering services to OEMs seeking an
embedded imaging solution for their digital document products. The Company's
maintenance revenues are derived from software maintenance agreements.
Maintenance revenues constitute a small portion of this revenue category.
The Company recognizes engineering services revenues over the course of the
development work on a percentage-of-completion basis. Maintenance revenues are
recognized ratably over the term of the maintenance contract, which generally is
twelve months. The Company adopted Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2") for all software licensing transactions
entered into on or after February 1, 1998. In accordance with SOP 97-2, the
Company recognizes development license revenue from the licensing of source code
for the Company's standard products upon shipment and customer acceptance of the
source code if no significant modification or customization of the software is
required and collection of the resulting receivable is probable. If
11
<PAGE>
modification or customization is essential to the functionality of the software,
revenue is recognized ratably over the services performed or deferred until the
modification is complete. Recurring product licensing revenues are generally
recognized when the Company's OEM customers ship products that incorporate the
Company's technology. In certain cases, the guaranteed, non-refundable portion
of the recurring product licensing revenue is reported as royalty revenue upon
receipt by the Company.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JULY 31, 1998 AND 1997
REVENUES. Revenues for the quarter ended July 31, 1998 increased 42% to
---------
$8.5 million from the $6.0 million reported for the same quarter in 1997.
Revenues for the current six month period increased 52% to $16.9 million from
the $11.1 million reported for the six month period ended July 31, 1997. The
increase in revenues was driven by a 50% and 44% increase in product licensing
revenues for the three and six month periods, respectively, and a 29% and 68%
increase in engineering services and maintenance revenues for the three and six
month periods, respectively. Increases in product licensing revenues were
generated by an increase in the shipments and number of products incorporating
Peerless' imaging technology. Most of the licensing growth in the current
fiscal year can be attributed to new monochrome and multi-function printers
introduced by the Company's OEMs during fiscal 1998 and an increase in the
market penetration of existing products. Increases in current quarter licensing
fees were also partially attributable to revenues associated with nonrefundable
minimum royalty payments made on certain end-of-life products. The growth in
engineering services and maintenance revenues to $6.4 million for the first half
of fiscal 1999 from the $3.8 million reported for the same period in fiscal 1998
was generated by increased outsourcing of digital document products by OEMs
during the current period. The increase in current quarter engineering services
revenues was partially attributable to a one-time fee paid by an OEM to cancel
development work on a project.
GROSS MARGIN. The Company's gross margin as a percentage of total revenues
-------------
increased to 71% for the quarter ended July 31, 1998 from 67% for the same
quarter in 1997. The gross margin as a percentage of total revenues decreased
to 67% for the six month period ended July 31, 1998 from the 69% reported for
the comparable period last year. Changes in the gross margin can be primarily
attributed to changes in the revenue mix. Decreases in engineering services and
maintenance revenue as a percentage of total revenues increase the gross margin
percentage as they have higher costs associated with the revenues being
recognized than do product licensing revenues. Engineering services and
maintenance revenues decreased as a percentage of total revenues from 37% for
the quarter ended July 31, 1997 to 34% for the current quarter and increased as
a percentage of revenues for current six month period to 38% of total revenues
from 34% in the prior period.
RESEARCH AND DEVELOPMENT EXPENSES. Peerless continues to invest heavily in
----------------------------------
the future by funding the research and development of new technology solutions.
Research and development expenses increased 76% between the quarters ended July
31, 1998 and 1997 and increased 68% between the fiscal 1999 and 1998 six month
periods. The expense increases resulted primarily from a growth in the
development staff headcount and expenses associated with outside services
purchased. The increased funding was used to, among other things, continue the
development programs associated with the Company's color technology, multi-
function technology, application specific integrated circuit ("ASIC") designs,
and digital photography technology. Management anticipates that research and
development costs will continue to increase in future periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 7%
-----------------------------
between the quarters ended July 31, 1998 and 1997 and increased 5% between the
six month periods then ended. The expense growth related to an increase in the
sales and marketing headcount and a continued emphasis on industry trade shows
and other opportunities to promote the Company's embedded imaging solutions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
------------------------------------
for the quarter ended July 31, 1998 increased $587,000 or 84% from the
comparable period last year and increased $784,000 or 55% between
12
<PAGE>
the two six month periods ended July 31, 1998 and 1997. Contributing to the
expense growth in the current quarter was a one-time charge of $275,000 related
to a proposed transaction that was terminated. The balance of the expense growth
in both the three and six month periods related primarily to an increase in
personnel and expenses necessary to support the growth of the Company's
operations.
INTEREST INCOME. The Company earned net interest income of $333,000 and
----------------
$332,000 in the second quarters of fiscal 1999 and 1998, respectively and
$688,000 and $653,000 in the first six months of fiscal 1999 and 1998,
respectively. Interest income was related to interest and investment income
earned on cash equivalents and investments.
INCOME TAX PROVISIONS. The provisions for income taxes for all periods
----------------------
presented are based on the estimated annual effective tax rate and include
current federal, state and foreign income taxes. The effective tax rates for
the periods differ from the federal statutory rate primarily as a result of
foreign and state income tax provisions noted above offset by foreign and
research and experimentation credits. The Company periodically evaluates the
sufficiency of its deferred tax asset valuation allowance, which is adjusted as
deemed appropriate based on operating results.
LIQUIDITY AND CAPITAL RESOURCES
Compared to January 31, 1998, total assets grew 8% to $43.4 million and
stockholders' equity grew 11% to $37.6 million. The Company's cash and short-
term investment portfolio totaled $23.2 million at July 31, 1998 and the current
ratio was 6.5:1. The Company generated $488,000 in cash from operations during
the six month period ended July 31, 1998 and $2.6 million in cash from
operations during the six month period ended July 31, 1997.
Net cash provided by investing activities during the six month periods
ended July 31, 1998 was $5.7 million and was comprised primarily of purchases of
and proceeds from held-to-maturity and available-for-sale securities. Additions
to property and equipment during the six months ended July 31, 1998 totaled $1.4
million and related primarily to asset purchases associated with growth in
headcount. Net cash used by investing activities of $18.2 million during the
six months ended July 31, 1997 was comprised primarily of purchases of held-to-
maturity securities.
Net cash provided by financing activities in the six month periods ended
July 31, 1998 and 1997 was $808,000 and $376,000, respectively. This cash
resulted from the issuance of shares of common stock as performance awards and
under the Company's employee stock purchase plan, as well as the exercise of
common stock options.
During the current quarter, the Company had available a $2.0 million
revolving line of credit with a bank, which was collateralized by substantially
all assets of the Company. The line expired in May 1998 and has not been
renewed. The Company is currently evaluating proposals for a new line with
additional borrowing capacity.
CERTAIN BUSINESS RISKS
Although the Company has been profitable since the quarter ended December
31, 1995, there can be no assurance that the Company will maintain
profitability, or growth in profitability, on a quarterly basis or achieve
profitability on an annual basis in the future. The success of the Company and
its business strategy is dependent upon, among other things, the ability and
willingness of the Company's OEM customers to timely develop and promote digital
document products that incorporate the Company's technology. The Company's
revenues are concentrated among a limited number of OEM customers and management
believes that future revenues may be similarly concentrated. Consequently, any
significant decrease in product sales or reduction in licensing or
13
<PAGE>
engineering services with a large OEM customer could have a material adverse
effect on the Company's operating results.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and needs, frequent new product
introductions and diminishing time frames within which to develop new products.
The failure of the Company and its OEM customers to meet these needs on a timely
basis or to anticipate or respond to rapidly changing technology could result in
a loss of competitiveness or revenues, which would have a material adverse
effect on the Company's operating results. Unit shipment reports received after
the end of the current quarter from the Company's OEMs revealed a mixed pattern
of shipments by market segment. Additionally, engineering services revenue in
the second quarter of fiscal 1999 was affected by design changes as well as
technical complexity. At present, the Company believes these business trends
are likely to dampen quarterly revenue growth from previous rates for the
remainder of fiscal 1999 and into fiscal 2000. As a result, it is likely that
quarterly profitability will be below prior year results for the remainder of
fiscal year ending January 31, 1999, and into fiscal year ending January 31,
2000.
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.
In the past, the Company, in a few instances, has been required to estimate 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 revenue
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.
During the past year, the Asian economy has experienced a downturn. As a
result, some members of the imaging industry have recently reported negative
financial impacts attributable to a decrease in demand from Asian customers.
Peerless' Asian customers are comprised primarily of companies headquartered in
Japan. The Japanese customers sell products containing Peerless' technology
primarily in North American and European marketplaces. Although the Company's
revenues have not been materially impacted by the decline in the Asian economy,
there can be no assurance that revenues from Asian customers will not decline in
future quarters.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company will be required to modify
certain support software so that its computer systems will properly utilize
dates beyond December 31, 1999. Management believes that the Company's
engineering and development tools will not be impacted by the Year 2000 Issue as
they are not date sensitive. The Company believes that the exposure, if any, to
contingencies related to the Year 2000 Issue for products developed for OEMs is
not material.
To date, the Company has spent approximately $50,000 for Year 2000 software
upgrades. Management is currently developing a plan that would include
independent validation of the Company's Year 2000 assessment procedures,
initiating formal communications with all of its significant vendors, large
customers and development partners to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year 2000
Issues. The estimated cost to complete the project is not expected to have a
material effect on the
14
<PAGE>
financial position or results of operations of the Company. The Company will
utilize both internal and external resources for Year 2000 software
modifications.
The Company presently believes that with the identified modifications, the
Year 2000 Issue can be mitigated. However, if the modifications are not made,
or are not completed timely, the Year 2000 Issue could have a material impact on
the operations of the Company. Further, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company intends to, but has not yet established a
contingency plan detailing actions that will be taken in the event that the
assessment of the Year 2000 Issue is not completed on a timely basis.
Also inherent in the Company's business are additional risks, which include
but are not limited to: competition in the market of embedded imaging systems
for digital document products, including internal development by OEMs; potential
fluctuation in quarterly results, including factors such as the duration of
contractual arrangements and product life-cycles; the Company's dependence on
the success of its OEMs; risks associated with the development of products,
whether such delays are within the control of the Company or not; risks
associated in developing products for new and rapidly developing markets, to
which the Company has directed a substantial portion of its recent development
efforts; dependence on sole source providers; uncertainties regarding protection
of intellectual property rights, including the potential for trademark and
patent infringement litigation; dependence on key personnel; and risks
associated with the Company's international business activities, which account
for a substantial portion of revenues.
15
<PAGE>
PART II - OTHER INFORMATION
================================================================================
ITEM 1: LEGAL PROCEEDINGS
-----------------
None
Item 2: CHANGES IN SECURITIES
---------------------
None
Item 3: DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its annual stockholders meeting on June 18, 1998. A copy of
the certified list of stockholders was presented at the meeting.
The Inspector of Election reported that 9,245,342 shares out of a total of
10,794,747 issued and outstanding shares of Common Stock were represented in
person or by proxy at the meeting. Each share of Common Stock was entitled to
one vote.
The stockholders voted on the following matters:
1) Election of Directors: Edward A. Gavaldon, Robert G. Barrett, Robert L.
North, and Robert V. Adams were nominated and elected as directors,
representing the Board of Directors in its entirety. The votes were
counted as follows:
<TABLE>
<CAPTION>
Votes Votes Votes Votes
For Against Withheld Abstaining
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Edward A. Gavaldon 9,240,056 5,286 - -
Robert G. Barrett 9,240,056 5,286 - -
Robert L. North 9,240,056 5,286 - -
Robert V. Adams 9,139,787 105,555 - -
</TABLE>
2) Approval of the 1996 Equity Incentive Plan, As Amended: The amendment
increases the number of shares authorized for issuance under the Plan
from a total of 1,266,666 shares to 2,466,666 shares. The 1996 Equity
Incentive Plan, as amended, was approved by a vote of 4,252,918 votes
for and 3,120,996 votes against with 19,294 votes abstaining.
3) Ratification of Selection of Independent Auditors: The selection of
Coopers & Lybrand L.L.P. as the independent auditors was ratified by a
vote of 9,240,629 votes for and 3,123 votes against with 1,590 votes
abstaining.
16
<PAGE>
Item 5: OTHER INFORMATION
-----------------
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
PEERLESS SYSTEMS CORPORATION
<TABLE>
<S> <C>
By: /s/ Edward Gavaldon Date: September 9, 1998
------------------------------------------------------------
Edward Gavaldon
Chairman of the Board, President and Chief Executive Officer
By: /s/ Hoshi Printer Date: September 9, 1998
-------------------------------------------------------------
Hoshi Printer
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 10,161
<SECURITIES> 15,508
<RECEIVABLES> 6,574
<ALLOWANCES> (100)
<INVENTORY> 0
<CURRENT-ASSETS> 35,053
<PP&E> 7,011
<DEPRECIATION> (1,663)
<TOTAL-ASSETS> 43,423
<CURRENT-LIABILITIES> 5,406
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 37,615
<TOTAL-LIABILITY-AND-EQUITY> 43,423
<SALES> 16,883
<TOTAL-REVENUES> 16,883
<CGS> 5,607
<TOTAL-COSTS> 5,607
<OTHER-EXPENSES> 7,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (688)
<INCOME-PRETAX> 4,349
<INCOME-TAX> 1,522
<INCOME-CONTINUING> 2,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,827
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.24
</TABLE>
