<PAGE>
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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, 1999
Commission File Number: 000-21287
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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 September 3, 1999 was
13,534,442.
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<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 (the "Company") 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's 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 risks and uncertainties on pages 16 through 19, among
other things, should be considered in evaluating the Company's prospects and
future financial performance.
2
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PEERLESS SYSTEMS CORPORATION
INDEX
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PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements Page No.
--------------------
Consolidated Balance Sheets
July 31, 1999 and January 31, 1999............................ 4
Consolidated Statements of Income
Three and Six Month Periods Ended July 31, 1999 and 1998...... 5
Consolidated Statements of Cash Flows
Six Month Periods Ended July 31, 1999 and 1998................ 6
Notes to Consolidated Financial Statements..................... 8
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations......................................... 13
---------------------
PART II - OTHER INFORMATION
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Item 1: Legal Proceedings.............................................. 20
-----------------
Item 4: Submission Of Matters To A Vote Of Security Holders............ 20
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Item 6: Exhibits And Reports On Form 8-k............................... 21
--------------------------------
Signatures.............................................................. 22
TRADEMARKS
Memory Reduction Technology(R) ("MRT"), PEERLESS SYSTEMS(R), PeerlessPowered(R),
WINEXPRESS(R), PeerlessPrint(R) and QuickPrint(R) are registered trademarks of
Peerless Systems Corporation. Camera Page Language), PicturePrint(TM),
Acceleprint(TM) and Synthesys(TM) are trademarks of Peerless Systems Corporation
and are subjects of applications pending for registration with the United States
Patent and Trademark Office. Imageworks(TM) and Webworks(TM) are trademarks of
Peerless Systems Corporation. Peerless Systems (in English and Japanese
Katakana), Peerless (in logo) and P (in logo) are registered service marks with
the Japanese Patent Office. Peerless(TM) (in logo), P(TM) (in logo), Peerless
Systems(TM), PEERLESSPRINT(TM) and PEERLESSPAGE(TM) (all in English and Japanese
Katakana) are trademarks 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 in all cases, their respective companies claim these designations
as trademarks or registered trademarks.
3
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,756 $ 5,744
Short term investments 16,423 16,158
Trade accounts receivable, net 8,387 9,940
Unbilled receivables 6,239 2,994
Deferred tax asset 2,615 2,615
Prepaid expenses and other current assets 820 632
------- -------
Total current assets 42,240 38,083
Investments 1,011 4,605
Property and equipment, net 6,271 5,374
Other assets 2,675 2,603
------- -------
Total assets $52,197 $50,665
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,150 $ 893
Accrued wages 1,282 1,557
Accrued compensated absences 948 784
Other current liabilities 2,208 867
Income taxes payable 185 788
Deferred rent, current portion 95 76
Deferred revenue, current portion 409 1,533
Note payable to stockholder - 350
------- -------
Total current liabilities 6,277 6,848
Deferred rent 396 431
Deferred revenue 400 800
------- -------
Total liabilities 7,073 8,079
------- -------
Stockholders' equity:
Common stock, $.001 par value, 30,000 shares authorized, 13,479 and 11,948
shares issued and outstanding at July 31, 1999 and January 31, 1999,
respectively 13 12
Additional paid-in capital 46,955 39,348
Convertible preferred stock Series A - 3,217
Convertible preferred stock Series B - 3,520
Deferred compensation (155) (188)
Accumulated deficit (1,689) (3,323)
------- -------
Total stockholders' equity 45,124 42,586
------- -------
Total liabilities and stockholders' equity $52,197 $50,665
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
PEERLESS SYSTEMS CORPORATIONS
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------------------- ----------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $10,512 $9,229 $20,372 $19,049
Cost of revenues 3,207 3,120 6,292 6,915
------- ------ ------- -------
Gross margin 7,305 6,109 14,080 12,134
------- ------ ------- -------
Operating expenses:
Research and development 2,248 2,238 4,400 4,317
Sales and marketing 1,444 1,062 2,779 2,115
General and administrative 1,257 1,500 2,981 2,608
Other-non recurring costs (Note 6) 2,014 - 2,014 -
------- ------ ------- -------
Total operating expenses 6,963 4,800 12,174 9,040
------- ------ ------- -------
Income from operations 342 1,309 1,906 3,094
Interest income, net 304 332 606 688
------- ------ ------- -------
Income before income taxes 646 1,641 2,512 3,782
Provision for income taxes 226 548 879 1,263
------- ------ ------- -------
Net income $ 420 $1,093 $ 1,633 $ 2,519
======= ====== ======= =======
Net income per common share $ 0.03 $ 0.09 $ 0.13 $ 0.22
======= ====== ======= =======
Net income per common share -
assuming dilution $ 0.03 $ 0.08 $ 0.11 $ 0.18
======= ====== ======= =======
Weighted average common shares
outstanding 12,675 11,675 12,345 11,597
======= ======= ======= =======
Weighted average common shares
outstanding and dilutive shares 14,475 14,365 14,383 14,295
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
-------------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,633 $ 2,519
Adjustments to reconcile net income to net cash provided by
operating activities:
Business combination adjustment (Note 6) 1 -
Depreciation and amortization 712 556
Amortization of investment discounts and premiums (56) (51)
Amortization of deferred compensation 33 61
Compensation expense on common stock issued to employees 48 123
Changes in operating assets and liabilities:
Trade accounts receivable 1,553 (762)
Unbilled receivables (3,245) (1,168)
Income tax receivable - (170)
Prepaid expenses and other current assets (188) (425)
Other assets (156) 11
Accounts payable 257 (543)
Accrued wages (275) (92)
Accrued compensated absences 164 230
Accrued expenses - (125)
Other current liabilities 1,341 244
Income taxes payable (603) (406)
Deferred rent (16) (25)
Deferred revenue (1,524) 78
-------- -------
Net cash (used) provided by operating activities (321) 55
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (900) (1,406)
Purchases of leasehold improvements (625) -
Purchases of available-for-sale securities (12,815) (2,974)
Proceeds from held-to-maturity securities 13,200 7,000
Proceeds from available-for-sale securities 3,000 3,000
-------- -------
Net cash provided by investing activities 1,860 5,620
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 416 192
Proceeds from exercise of common stock options 357 618
Repayment of outstanding note payable to stockholder (300) -
Proceeds from issuance of Convertible preferred stock Series B - 219
-------- -------
Net cash provided by financing activities 473 1,029
-------- -------
Net increase in cash and cash equivalents 2,012 6,704
Cash and cash equivalents, beginning of period 5,744 3,590
-------- -------
Cash and cash equivalents, end of period $ 7,756 $10,294
======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 1,377 $ 1,391
======= =======
Interest $ 15 $ 15
======= =======
Supplemental schedule of noncash investing and financing activities:
Common stock issued to employees $ 48 $ 123
======= =======
Conversion of note payable to stockholder to common stock $ 50
=======
Conversion of Convertible preferred stock Series A to common stock $ 3,217
=======
Conversion of Convertible preferred stock Series B to common stock $ 3,520
=======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements of Peerless
Systems Corporation ("Peerless" or 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
consolidated 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, 1999, 1998 and 1997, included in the Company's
annual report filed on Form 10-K with the SEC on April 26, 1999 and the
unaudited pro forma combined balance sheet as of January 31, 1999 and the pro
forma combined statements of operations for the years ended January 31, 1999,
1998, and 1997 included in the registration statement filed on Form S-4 with the
SEC on April 26, 1999 as amended May 7, 1999. 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.
In June 1999, the Company completed its acquisition of Auco, Inc. ("Auco").
Auco, based in Redwood City, California, develops embedded networking technology
and was privately held prior to the acquisition. As a result of the
acquisition, Auco was renamed Peerless Systems Networking and became a wholly
owned subsidiary of the Company. The Company exchanged 2.5 million shares of
its common stock for all outstanding shares of Auco capital stock on a fully
diluted basis, and its convertible note payable. Each share of Auco was
exchanged for .2585 shares of Peerless common stock. The merger qualified as a
tax-free exchange and was accounted for as a "pooling of interests" under
Accounting Principles Board Opinion No. 16. Accordingly, the Company's
financial statements have been restated to include the results of Auco for all
periods presented.
2. Significant Accounting Policies
Revenue Recognition:
Development license revenues from the licensing of source code or software
development kits for the Company's standard products are recognized upon
delivery of the software 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,
development license revenue is recognized over the course of the modification
work or deferred until the modification is complete.
The Company also enters into engineering services contracts with certain of
its OEMs to provide a turnkey solution, adapting the Company's software and
supporting technologies to specific OEM requirements. Revenues on such turnkey
contracts are recognized over the course of the development work on a
percentage-of-completion basis. The Company provides for any anticipated losses
on such contracts in the period in which such losses are first determinable.
Maintenance revenues are recognized ratably over the term of the maintenance
contract.
In certain cases, the Company enters into agreements with customers that
require guaranteed minimum royalty payments. These payments typically extend
over a period of four to eight quarters. The Company generally recognizes
revenue on delivery, when collection of the resulting receivable is probable and
when the fee is fixed and determinable. In cases where the guaranteed minimum
royalties are not fixed and determinable, revenue is recognized as payments
become due.
Future Developments:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are 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 No. 133 is effective for fiscal years beginning after
June 15, 2000, as amended by SFAS No. 137. The adoption of SFAS No. 133 will not
have a material impact on the Company's results of operations, financial
position or cash flows.
8
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands)
(Unaudited)
3. Investments:
Investments consisted of the following:
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
-------- -----------
<S> <C> <C>
Held-to-maturity securities:
Maturities within one year:
U.S. government debt securities $ 2,500 $ 5,503
------- -------
Total held-to-maturity securities 2,500 5,503
------- -------
Available-for-sale securities:
Maturities within one year:
U.S. government debt securities 1,502 979
State and local U.S. government debt securities 852 -
Corporate debt securities 8,015 4,976
Other debt securities 2,000 2,000
------- -------
12,369 7,955
------- -------
Maturities after one year through five years:
U.S. government debt securities - 1,503
State and local U.S. government debt securities 554 -
Corporate debt securities 1,011 3,102
------- -------
1,565 4,605
------- -------
Maturities after ten years:
U.S. government debt securities - 2,700
State and local U.S. government debt securities 1,000 -
------- -------
1,000 2,700
------- -------
Total available-for-sale securities 14,934 15,260
------- -------
Total investments $17,434 $20,763
======= =======
</TABLE>
The fair value of held-to-maturity securities at July 31,1999 and January 31,
1999 approximated amortized cost. Unrealized gains or losses on available-for-
sale securities were immaterial for all periods presented.
At July 31, 1999 and January 31, 1999, the Company held $1,554 and $2,700,
respectively, in available-for-sale securities with maturities in excess of one
year that were subsequently sold within one year of the respective balance sheet
dates. Proceeds from the sales were invested in short-term, available-for-sale
securities. Accordingly, the securities have been classified as current in the
July 31, 1999 and January 31, 1999 balance sheets.
4. Other Current Liabilities:
Included in "Other current liabilities" at July 31, 1999 is $1,369 of accrued
expenses associated with the June 1999 acquisition of Auco, Inc. (Notes 1 and
6).
10
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands)
(Unaudited)
5. Net Income Per Common Share:
Net income per common share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended July 31,
----------------------------------------------------------
1999 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS
Net income available to the common
stockholders $420 12,675 $ 0.03 $1,093 11,675 $ 0.09
====== ======
Effect of Dilutive Securities
Common stock options - 1,085 - 1,558
Note payable to stockholder - 3 1 5
Convertible preferred stock Series A - 495 - 834
Convertible preferred stock Series B - 217 - 293
---- ------ ------ ------
Diluted EPS
Net income available to common
stockholders and assumed conversions $420 14,475 $ 0.03 $1,094 14,365 $ 0.08
==== ====== ====== ====== ====== ======
<CAPTION>
Six Months Ended July 31,
---------------------------------------------------------
1999 1998
---------------------------- ---------------------------
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 $1,633 12,345 $ 0.13 $2,519 11,597 $ 0.22
====== ======
Effect of Dilutive Securities
Common stock options - 1,078 - 1,568
Note payable to stockholder 1 4 2 5
Convertible preferred stock Series A - 665 - 834
Convertible preferred stock Series B - 291 - 291
------ ------ ------ ------
Diluted EPS
Net income available to common
stockholders and assumed conversions $1,634 14,383 $ 0.11 $2,521 14,295 $ 0.18
====== ====== ======= ====== ====== ======
</TABLE>
11
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands)
(Unaudited)
6. Auco Acquisition
Prior to the June 1999 merger with Auco, Auco's fiscal year ended on December
31. In recording the business combination, Auco's prior period financial
statements were not restated to conform to the Company's fiscal year.
Accordingly, the consolidated balance sheet at January 31, 1999 combines the
Peerless balance sheet at January 31, 1999 and the Auco balance sheet at
December 31, 1998. The consolidated statements of income for the three and six
month periods ended July 31, 1998 and for the three month period ended April 30,
1999 consist of Peerless results of operations for the three and six month
periods ended July 31, 1998 and the three month period ended April 30, 1999 and
Auco's results of operations for the three and six month periods ended June 30,
1998 and the three month period ended March 30, 1999. Beginning in the current
quarter ended July 31, 1999, Auco's fiscal year end was changed to conform to
the Peerless' fiscal year end of January 31. Accordingly, Auco's results of
operations for the month of April 1999 were excluded from the Company's
consolidated operating results. Revenues and net income of Auco for April 1999
were $463 and $1, respectively, with the net income reflected as an adjustment
to retained earnings effective May 1, 1999.
As a result of the acquisition, Auco's historical financial statements were
restated to adjust the income tax provision (benefit) for certain net operating
loss carryforward benefits which the Company believes will be realizable by the
combined companies. There were no transactions between Peerless and Auco prior
to the combination. Certain reclassifications were made to the Auco financial
statements to conform to Peerless' presentations.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ----------------
April 30, July 31, July 31,
1999 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Peerless $ 8,194 $ 8,454 $ 16,883
Auco 1,666 775 2,166
------- ------- --------
Combined $ 9,860 $ 9,229 $ 19,049
======= ======= ========
Net Income / (loss):
Peerless $ 1,091 $ 1,456 $ 2,827
Auco 122 (363) (308)
------- ------- --------
Combined $ 1,213 $ 1,093 $ 2,519
======= ======= ========
</TABLE>
In conjunction with the acquisition, the Company incurred transaction costs,
consisting primarily of fees for investment bankers, attorneys, accountants,
consultants, financial printing and other related charges of $2,014. These
costs are included in "Other non-recurring costs" in the consolidated statements
of income for the three and six month periods ended July 31, 1999.
12
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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 and networking systems to original equipment manufacturers of
digital document products. Digital document products include monochrome and
color printers, copiers, fax machines, and scanners, as well as multifunction
products that perform a combination of these imaging functions. In order to
process digital text and graphics, digital document products rely on a core set
of imaging software and supporting electronics, collectively known as an
embedded imaging system. Embedded networking systems supply the core software
technologies to digital document products that enable them to communicate over
local area networks and the Internet. The Peerless systems family of products
and engineering services provides advanced embedded imaging and networking
technologies that enable the company's OEM customers to develop networked
digital printers, copiers and multifunction products quickly and cost-
effectively.
In June 1999, the Company acquired Auco, Inc. ("Auco") a supplier of embedded
networking systems. The transaction was accounted for as a pooling of
interests. As a result of the acquisition, Auco became a wholly owned
subsidiary of the Company and was subsequently renamed Peerless Systems
Networking. Peerless Systems Networking provides comprehensive software
products and engineering services to office peripheral OEMs to enable networking
support in their products.
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time licensing fees for source code or software
development kits (SDKs). Recurring licensing revenues are derived from per unit
fees paid quarterly by the Company's OEMs upon manufacturing and subsequent
commercial shipment of products incorporating the Company's technology.
Recurring licensing revenues are derived, to a lesser extent, from arrangements
in which the Company enables third-party technology such as solutions from Adobe
to be used with its products. The Company often negotiates minimum recurring
license fee commitments from certain OEMs, which are generally paid up-front or
over four or more quarters. The Company's development licensing fees are paid
by OEMs for access to the Company's SDKs, 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 a
turnkey embedded imaging solution for their digital document products. The
Company's maintenance revenues are derived from software maintenance agreements.
Maintenance revenues currently constitute a small portion of total revenue.
Over the past several quarters, the Company has experienced a shift in its
business and financial model. The Company generates revenue from its OEMs
through the sale of embedded imaging solutions in either turnkey or software
development kit form. Historically, OEM demand for turnkey solutions has
exceeded demand for SDK solutions. Additionally, the Company has expanded its
solution offering by incorporating related embedded imaging
13
<PAGE>
and networking technologies licensed from third parties, which in future
quarters could result in incremental SDK, services and royalty revenue streams.
As noted above, the Company has recently experienced a shift away from turnkey
solutions to the sale of SDKs, particularly for its monochrome solutions, which
incorporate more mature technology. The shift to SDK sales has resulted in an
increase in the products shipping, as OEMs who utilize Peerless SDKs develop and
introduce multiple products. Turnkey solutions are expected to continue in color
and MFP where the technology is certain to evolve and where the turnkey
development challenge is more difficult for OEMs to assume.
On July 23, 1999, the Company entered into a distribution license agreement
with Adobe, Inc. for Adobe PostScript 3, PostScript fonts, both roman and double
byte, and certain other Adobe host software applications. This licensing
agreement will allow the Company to directly license Adobe technologies to its
OEMs, resulting in incremental revenues from licensing, recognized both when the
SDKs are delivered and subsequently as products utilizing these technologies are
launched. In addition, this new distribution agreement calls for the Company to
remit licensing fees to Adobe for the first time, which is expected to increase
the Company's cost of goods sold.
Traditionally, Peerless provided ASIC designs to chip foundries that
manufactured and distributed the Company's ASICs (Application Specific
Integrated Circuit) to the Company's OEMs. In return, the Company received
license revenue from its chip foundries. As part of the total solution being
offered to its OEMs, the Company is developing a direct distribution channel for
its ASICs chips. Under a "fabless" model, Peerless will distribute ASIC chips
from the foundry through a third party. The Company will be responsible for
administration, including the billings and collections to and from its OEMs but
it is expected that the third party will be responsible for the maintenance of
necessary inventories and coordination of production with the foundry. The
change from licensing ASIC technology to the distribution of the actual chips
will result in higher revenues and lower margins due to the cost of chips and
the costs of distribution and inventory carry. It is expected that direct
distribution will begin by year end.
Results of Operations
Three and Six Month Periods Ended July 31, 1999 and 1998
Revenues for the quarter ended July 31, 1999 increased 14% to $10.5 million
from the $9.2 million reported for the same quarter in 1998. Revenues for the
current six month period increased 7% to $20.4 million from the $19.0 million
reported for the six month period ended July 31, 1999. The increase in revenues
was driven by an increase in product licensing revenues for both the three and
six month periods. Product licensing revenues increased due to an increase in
the number of products shipped into the marketplace incorporating Peerless'
imaging and networking technology, an increase in the market penetration of
existing products, and an increase in sales of software code development kits or
SDKs ("SDKs"). Engineering services revenues decreased in the current three and
six month periods due to a shift in OEM demand from turnkey projects to
internally developed solutions based on Peerless SDKs.
The Company's gross margin as a percentage of total revenues increased to 69%
for the quarter ended July 31, 1999 from the 66% reported for the same quarter
in 1998. The gross margin as a percentage of total revenues increased to 69%
for the six month period ended July 31, 1999 from the 64% reported for the
comparable period last year. The margin improved as a result of a higher
percentage of licensing fees in the revenue mix in the three and six month
periods ended July 31, 1999. Licensing revenues have relatively low costs
associated with the revenues being recognized.
Peerless continues to invest heavily in the future by funding the research and
development of new technology solutions. Research and development expenses
decreased to 21% of total revenues for the quarter ended July 31, 1999 from 24%
of total revenues for the same quarter last year. Research and development
expenditures as a percentage of total revenues slightly declined to 22% in the
current six month period from 23% in the prior six month period. The decline as
a percentage of total revenues was a result of engineering efforts expended in
the prior
14
<PAGE>
year on-test tool efforts at Auco that were subsequently terminated. Management
anticipates that research and development costs will be consistent with the
quarter ending July 31, 1999 levels for the remainder of the fiscal year.
Sales and marketing expenses amounted to 14% of revenue compared to 12% of
revenue a year ago. Expenditures increased 36% between the quarters ended July
31, 1999 and 1998 and increased 31% between the six-month periods then ended.
The expense growth was due to an emphasis on penetrating new OEM customers, a
continued emphasis on industry trade shows, and other opportunities to promote
the Company's embedded imaging and network solutions. As result of this
additional effort, the Company added several new OEMs to its customer list
during the past year.
General and administrative expenses for the quarter ended July 31, 1999
amounted to 12% of revenue compared to 16% of revenue a year ago. Expenditures
declined 16% compared to the quarter ended July 31, 1998 but increased $373,000
or 14% comparing the two six month periods ended July 31, 1999 and 1998. The
expense decline in the current quarter was due to expenses included in the
quarter ended July 31, 1998 that were associated with a proposed transaction
that was terminated. The expense growth during the six month period related
primarily to an increase in personnel and professional services costs necessary
to support the growth of the Company's operations.
Other non-recurring costs of $2.0 million for the quarter and six month
periods ended July 31, 1999 represented transaction costs, consisting primarily
of fees for investment bankers, attorneys, accountants, consultants, financial
printing and other related charges associated with the June 1999 acquisition of
Auco.
Interest income earned in both periods was attributable to interest and
investment income earned on cash and cash equivalents and investment balances.
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
expected future operating results.
Liquidity and Capital Resources
Compared to January 31, 1999, total assets grew 3% to $52.2 million and
stockholders' equity grew 6% to $45.1 million. The Company's cash and short-
term investment portfolio totaled $24.1 million at July 31, 1999 and the current
ratio was 6.7:1. The Company used $321,000 in cash for operations during the
six month period ended July 31, 1999 as compared to $55,000 in cash generated
from operations during the six month period ended July 31, 1998.
The Company's investing activities during the six-month period ended July 31,
1999 generated cash of $1.9 million. Sales and maturities of investment
securities generated net cash of $3.4 million. It is the Company's policy to
invest the majority of its unused cash in low risk government and commercial
debt securities. The Company has not historically purchased, nor does it expect
to purchase in the future, derivative instruments or enter into hedging
transactions. Cash generated by investments during the six month period ended
July 31, 1999 was offset by purchases of property, equipment and leasehold
improvements. During the second quarter, the Company completed the expansion of
its corporate operating facility from 47,000 square feet to 56,000 square feet
in order to accommodate the current and expected growth in operations. As part
of the expansion, the Company made leasehold improvements in the amount of
$625,000. The remaining additions to property and equipment of $900,000
related to purchases of furniture, computers and equipment associated with the
growth in personnel.
Net cash provided by financing activities in the six month period ended July
31, 1999 and 1998 was $473,000 and $1.0 million, respectively. In the current
six month period, cash generated from the issuance of shares under the Company's
employee stock purchase plan and the exercise of common stock options was offset
by a $300,000
15
<PAGE>
payment to an Auco stockholder for a note payable. In the six month period ended
July 31, 1998, cash from investing activities was generated by cash from the
issuance of shares under the Company's employee stock purchase plan, the
exercise of common stock options and the issuance of Auco Convertible preferred
stock Series B.
The Company currently has no material commitments other than those under
operating lease agreements. Over the past several years, the Company has
experienced an increase in capital expenditures and operating lease
arrangements, which is consistent with increased staffing, and anticipates that
this relative increase may continue in the future. Additionally, the Company
will continue to evaluate possible acquisitions of, or investments in
businesses, products and technologies that are complimentary to those of the
Company, which may require the use of cash. Management believes existing cash
and investments will be sufficient to meet the Company's operating requirements
for at least the next twelve months; however, the Company may sell additional
equity or debt securities or obtain credit facilities to further enhance its
liquidity position.
RISKS AND UNCERTAINTIES
Future Growth Rate and Operating Results: The consolidated revenue growth rate
in fiscal 2000 is not expected to approach the 35% level attained in fiscal
1999. Further, although the Company is currently profitable, there can be no
assurance that the Company will maintain profitability on a quarterly or annual
basis in the future. Factors noted below may have a material adverse effect on
the Company's future revenue growth and/or results of operations.
Concentration of Revenues: The Company's major customers currently include,
among others, Adobe, Conexant, and Motorola and OEM customers Canon, Epson,
Hewlett-Packard, IBM, Minolta and Ricoh. Historically, a limited number of
customers have provided a substantial portion of Peerless' revenues. 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. A
change in business from a customer providing a significant portion of the
Company's revenues could have a material adverse effect on the Company's
operating results. In particular, the Company's recurring license fees exert a
disproportionate influence on profitability and are often dependent upon end-
user demand for OEM products that embed the Company's technology. In the second
quarter, the Company derived 18% of its total revenue from recurring license
fees associated with one family of multifunction products. If end user demand
for flagship OEM products were to decline significantly and unexpectedly, the
Company's results of operations would be adversely affected.
Shifting OEM Demand for Software Development Kits vs Turnkey Solutions: Over
the past four quarters, the Company has experienced a shift in OEM demand from
the historically prevailing requirement for a turnkey solution towards software
development kits, or SDKs. Turnkey solutions require the Company to provide
engineering services in order to deliver customized imaging solutions to an OEM
customer, whereas OEMs that opt for an SDK solution choose to license the
company's embedded imaging technology and perform development internally using
the OEM's in-house engineers. Turnkey design wins result in engineering
services contracts that generate revenue for three to six quarters prior to
product launch, but lower profitability. SDK design wins result in development
license revenue that is typically recognized in one quarter and is generally
lower in magnitude to turnkey design wins prior to product launch but generates
higher profitability than engineering services revenue associated with a turnkey
design win.
Because the Company must maintain a certain level of engineering staff, the
Company requires a minimum level of demand for turnkey projects in order to
profitably maintain its engineering services operations. If the trend towards
SDKs and away from turnkey design wins were to accelerate, the Company may
experience insufficient demand for engineering services requiring a redeployment
of engineering resources to the research and development department.
Accordingly, its results of operations could be negatively affected in the
interim.
16
<PAGE>
Risks in Providing Engineering Services: In the past, the Company has
experienced significant fluctuations in quarterly engineering services results
that have been caused by many factors including: product development delays (see
"Technological Changes" below), third party delays, increases in the estimated
hours to complete particular engineering services projects, 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. There can be no assurance that similar factors will not
impact future engineering services results.
Recurring Product Licensing Reporting: The recurring product licensing
revenues reported by the Company are dependent, in part, 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 fiscal 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. In the event the Company is unable to estimate such revenues accurately
prior to public announcement of the Company's quarterly results, the Company may
be required to restate its recognized revenues or adjust revenues for subsequent
periods.
Technological Changes: Rapidly changing technology, evolving industry
standards and needs, and frequent new product introductions characterize the
market for the Company's products and services. 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.
Seasonality: 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 second calendar quarter
followed by a decrease in the third quarter, as well as an increase in demand in
the fourth calendar quarter followed by a significant decrease in the following
quarter. Although the Company has attempted to manage this risk with the
incorporation of guaranteed minimum royalty commitments, the Company's product
licensing revenues may be negatively impacted by seasonality of unit shipments
experienced by its OEMs.
ASIC Chips: The Company is in the process of developing a "fabless"
distribution model for the sale of ASIC chips. The Company has no direct
distribution experience and will place reliance on third parties to maintain
inventories to address OEM needs, manage manufacturing logistics, and distribute
the product in a timely manner. Additionally, there can be no assurance that
the OEMs will elect to purchase from Peerless as its distributor.
The Year 2000 Issue: As is true for most companies, Peerless faces risks from
the year 2000 issue. Peerless's operations could be adversely affected if
certain business systems do not correctly recognize date information when the
year changes to 2000. The year 2000 issue affects Peerless at the end of the
calendar year 1999. Peerless faces risks primarily in the following areas: 1)
systems used by Peerless to run its business including information systems,
equipment and facilities; 2) systems used by Peerless's suppliers; 3) potential
warranty or other claims from Peerless's OEMs; and 4) potential for reduced
spending by businesses as a result of significant information systems spending
on year 2000 remediation.
Peerless continues to evaluate and mitigate its exposure in these areas
where appropriate. Peerless intends for some of its disclosures and
announcements concerning its products and year 2000 programs, including those in
17
<PAGE>
this report on Form 10-K, to constitute "Year 2000 Readiness Disclosures" as
defined in the recently enacted Year 2000 Information and Readiness Disclosure
Act.
State of Readiness and Risks: Peerless has identified three key exposure
areas within Peerless with respect to the year 2000 issue, namely: key
transaction processing applications, equipment and facilities, Peerless
products, and key suppliers.
1. Key Transaction Processing Applications. Key transaction processing
applications include those used to run Peerless' business, such as technology
development, engineering, quality assurance, finance and administration.
Peerless has essentially completed its evaluation of these areas for year 2000
readiness and has made certain changes to its business systems, where necessary.
Peerless expects to complete integration testing and be ready for the calendar
year 2000 rollover by the end of November 1999. Peerless anticipates no
delays in implementing its internal systems, however, if Peerless identifies
significant new non-compliance issues, or if Peerless encounters unexpected
difficulties in areas previously considered to be year 2000 ready, Peerless'
ability to conduct its internal business or to record transactions could be
interrupted, which could adversely affect its results of operations or financial
condition.
2. Equipment and Facilities. Peerless is evaluating year 2000 readiness
of its mission-critical Equipment and facilities. Peerless is in the final
stages of contacting its key suppliers to ascertain year 2000 compliance of the
products and services used by the company. Peerless expects its critical
equipment to be ready for year 2000 no later than mid-November 1999. Peerless
does not anticipate any internal disruption that could adversely affect its
results of operations or financial condition. Peerless is also evaluating the
status of each of its OEMs and strategic partners worldwide, assessing their
year 2000 readiness. Because of the quality and size of Peerless' OEM and
strategic partner base, Peerless expects each will be ready for year 2000 by the
end of the calendar year. Peerless has conducted an extensive evaluation of its
currently available and installed array of products. Peerless believes that the
products currently offered by its OEMs are year 2000 ready. Peerless can never
be certain that older releases of its products will be year 2000 ready with
customers' systems or within existing networks. If any of its products do not
operate properly in the year 2000, Peerless could have increased warranty costs,
customer satisfaction issues or other costs of material and liabilities, which
could adversely affect its results of operations or financial condition.
3. Key Suppliers. Peerless has contacted its critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are year 2000 ready. Confirmation of the
continued year 2000 readiness of these key suppliers will continue throughout
the remainder of 1999. If key suppliers fail to adequately address the year 2000
issue for the products or services they provide to Peerless, critical material,
products and services may not be delivered in a timely manner, which could
adversely affect its results of operations or financial condition.
Most Reasonably Likely Worse-Case Scenario: Peerless believes that its most
reasonably likely worst-case year 2000 scenario would relate to problems with
the systems and services of third parties rather than with Peerless' internal
systems or products. Peerless believes the risks are greatest with
infrastructure (e.g., electricity supply and water and sewer service),
telecommunications, transportation and distribution channels and critical
suppliers of material and services. Peerless' operations are conducted mainly at
El Segundo, CA, Redwood City, CA and Tokyo, Japan. Each location relies on local
private and governmental suppliers for utilities, telephone, and other necessary
services and supplies. For example, failure in the electricity grid or
disruption to the continuous supply of power would be a worst-case scenario that
would completely shut down the affected facilities. Widespread electrical
failures could also adversely affect the delivery of water and sewer services,
and hinder the transportation of employees to and from the workplace. Peerless
cannot identify all possible disruption scenarios. Peerless is preparing
contingency plans specifying its actions if failures occur in key internal
systems and/or critical third party systems and services. The process includes
identifying and prioritizing risks, assessing the business impact of those
risks, evaluating risk mitigation alternatives, and preparing written
contingency plans for those failures with the greatest business risk to
Peerless. Preliminary contingency plans for critical business operations are
expected to be in place prior to year 2000. These plans will be validated and
modified as needed. Contingency plans will continue to be
18
<PAGE>
refined through 1999 as Peerless learns more about the preparations and
potential exposure of third parties to year 2000 disruptions.
Costs To Address Year 2000 Issues: These include hardware, software and
implementation costs for internal work and are not expected to exceed $400,000.
Through August 31, 1999, Peerless has incurred approximately $100,000 of these
costs, all of which have been expensed. All expected costs are based on its
current evaluation of the year 2000 programs and may change as the program
progresses. The remainder of its projected year 2000 costs include: i) hardware
and software upgrades or replacements primarily related to desktop systems and
telephone equipment; ii) consultant and contractor fees to assist in assessments
and to perform remediation and integration testing; iii) a contingency for
potential product upgrades or replacements; iv) a contingency for potential
disruption in supplier product or service delivery or in manufacturing
operations; and v) a contingency for potential unexpected costs associated with
replacing or repairing systems previously considered to be year 2000 ready.
Peerless has not included in the total cost estimate any costs associated with
potential year 2000 litigation exposure since these costs are not estimable.
Peerless has adequate funds to pay for the expected costs of year 2000 programs.
As of the end of fiscal 1999, Peerless has not deferred any significant internal
information technology projects due to its year 2000 efforts.
Sales Impact: Year 2000 readiness is an issue for virtually all businesses
whose computer systems and applications may require significant hardware and
software upgrades or modifications. Companies owning and operating such systems
may plan to devote a substantial portion of their information systems' spending
to fund such upgrades and modifications and divert spending away from networking
solutions. In addition, companies may defer spending on networking solutions
while they test and ensure the stability of their current network
configurations. Such changes in customers' spending patterns could adversely
affect its sales, operating results or financial condition.
Also inherent in the Company's business are additional risks, which include
but are not limited to: competition in the market for 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.
19
<PAGE>
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1: Legal Proceedings
-----------------
Pursuant to an agreement for providing development services to a customer,
Peerless has given notice that it intends to seek binding arbitration in a
dispute regarding the payment of fees and costs for the services provided
to that customer. Peerless is actively pursuing settlement and expects to
prevail in this matter. The amount in contention does not have a material
effect on the financial results reported herein.
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 17, 1999. The June
17th meeting was adjourned and notice was given that the meeting would
reconvene on July 16, 1999. A copy of the certified list of stockholders
was presented at the meeting.
The Inspector of Election, Norwest Shareowner Services, reported that
9,515,129 shares out of a total of 11,286,967 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 9,305,146 - 209,983 -
Robert G. Barrett 9,310,594 - 204,535 -
Robert L. North 9,488,398 - 26,731 -
Robert V. Adams 9,484,379 - 30,750 -
</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 2,466,666 shares to 3,466,666 shares. The 1996 Equity
Incentive Plan, as amended, was approved by a vote of 3,874,380 for and
3,653,310 votes against and 1,987,439 non-voting.
20
<PAGE>
3) Ratification of Selection of Independent Auditors: The selection of
PricewaterhouseCoopers L.L.P. as the independent auditors was ratified
by a vote of 9,480,908 votes for and 30,821 votes against with 3,400
votes abstaining.
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
A Report on Form 8-K was filed on August 19, 1999, pursuant to "Item 6"
whereby the Company filed the press release announcing its earnings for
the quarter ended July 31, 1999, and consolidated pro forma earnings
for the periods ending April 30, 1998 through April 30, 1999.
21
<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
By: /s/ Edward A. Gavaldon
----------------------------------- Date: September 13, 1999
Edward A. Gavaldon
Chairman of the Board, President
and Chief Executive Officer
By: /s/ Carolyn M. Maduza
------------------------------------ Date: September 13, 1999
Carolyn M. Maduza
Senior Vice President of Finance
and Administration, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS
FORM 10-Q FOR THE PERIOD ENDED JULY 31, 1999 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-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 7,756
<SECURITIES> 17,434
<RECEIVABLES> 8,907
<ALLOWANCES> (520)
<INVENTORY> 0
<CURRENT-ASSETS> 42,240
<PP&E> 9,398
<DEPRECIATION> (3,127)
<TOTAL-ASSETS> 52,197
<CURRENT-LIABILITIES> 6,277
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 45,111
<TOTAL-LIABILITY-AND-EQUITY> 52,197
<SALES> 20,372
<TOTAL-REVENUES> 20,372
<CGS> 6,292
<TOTAL-COSTS> 6,292
<OTHER-EXPENSES> 12,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 606
<INCOME-PRETAX> 2,512
<INCOME-TAX> 879
<INCOME-CONTINUING> 1,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,633
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.11
</TABLE>
