<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 April 30, 1999
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 May 11, 1999 was
11,204,099.
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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 13 through 15, 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
<TABLE>
<CAPTION>
======================================================================================
PART I - Financial Information
- --------------------------------------------------------------------------------------
Item 1: Financial Statements Page No.
--------------------
<C> <S> <C>
Balance Sheets
April 30, 1999 and January 31, 1999....................................4
Statements of Income
Three Month Periods Ended April 30, 1999 and 1998......................5
Statements of Cash Flows
Three Month Periods Ended April 30, 1999 and 1998......................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
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Item 6: Exhibits and Reports on Form 8-K........................................16
--------------------------------
Signatures..........................................................................17
</TABLE>
TRADEMARKS
Memory Reduction Technology(R) ("MRT"), PEERLESS SYSTEMS(R), WINEXPRESS(R),
PeerlessPrint(R) and QuickPrint(R) are registered trademarks of Peerless Systems
Corporation. PeerlessPowered(TM), CPL(TM) (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. 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) and P(TM)
(in logo), Peerless Systems(TM), PEERLESSPRINT 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
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
--------------------
PEERLESS SYSTEMS CORPORATION
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
--------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,072 $ 5,250
Short term investments 16,940 16,158
Trade accounts receivable, net 6,176 9,186
Unbilled receivables 4,144 2,994
Deferred tax asset 2,615 2,615
Prepaid expenses and other current assets 915 631
------- -------
Total current assets 39,862 36,834
Investments 2,050 4,605
Property and equipment, net 5,889 5,186
Other assets 697 549
------- -------
Total assets $48,498 $47,174
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,180 $ 672
Accrued wages 1,125 1,557
Accrued compensated absences 751 672
Other current liabilities 782 867
Income taxes payable 592 788
Deferred rent, current portion 76 76
Deferred revenue, current portion 1,060 1,118
------- -------
Total current liabilities 5,566 5,750
Deferred tax liability 394 394
Deferred rent 413 431
Deferred revenue 600 800
------- -------
Total liabilities 6,973 7,375
------- -------
Stockholders' equity:
Common stock, $.001 par value, 30,000 shares authorized,
11,204 and 11,084 shares issued and outstanding at
April 30, 1999 and January 31, 1999, respectively 11 11
Additional paid-in capital 39,912 39,293
Deferred compensation (172) (188)
Retained earnings 1,774 683
------- -------
Total stockholders' equity 41,525 39,799
------- -------
Total liabilities and stockholders' equity $48,498 $47,174
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PEERLESS SYSTEMS CORPORATION
STATEMENTS OF INCOME
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-------------------------------
1999 1998
------- -------
<S> <C> <C>
Revenues $ 8,194 $ 8,429
Cost of revenues 2,383 3,140
------- -------
Gross margin 5,811 5,289
------- -------
Operating expenses:
Research and development 2,027 1,708
Sales and marketing 1,233 914
General and administrative 1,176 913
------- -------
Total operating expenses 4,436 3,535
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Income from operations 1,375 1,754
Interest income, net 304 355
------- -------
Income before income taxes 1,679 2,109
Provision for income taxes 588 738
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Net income $ 1,091 $ 1,371
======= =======
Net income per common share $ 0.10 $ 0.13
======= =======
Net income per common share -
assuming dilution $ 0.09 $ 0.12
======= =======
Weighted average common shares
outstanding 11,149 10,725
======= =======
Weighted average common shares
outstanding and dilutive shares 11,845 11,819
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,091 $ 1,371
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 335 251
Amortization of investment discounts and premiums (26) -
Amortization of deferred compensation 16 30
Compensation expense on common stock issued to employees - 123
Changes in operating assets and liabilities:
Trade accounts receivable 3,010 (1,085)
Unbilled receivables (1,150) (187)
Prepaid expenses and other current assets (284) (342)
Other assets (202) -
Accounts payable 508 215
Accrued wages (432) (265)
Accrued compensated absences 79 65
Other current liabilities (85) (216)
Income taxes payable (196) 653
Deferred rent (18) (13)
Deferred revenue (258) 506
------- -------
Net cash provided by operating activities 2,388 1,106
------- -------
Cash flows from investing activities:
Purchases of property and equipment (530) (527)
Purchases of leasehold improvements (454) (351)
Purchases of available-for-sale securities (8,301) (974)
Proceeds from held-to-maturity securities 1,500 3,000
Proceeds from available-for-sale securities 8,600 -
------- -------
Net cash provided by investing activities 815 1,148
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 415 190
Proceeds from exercise of common stock options 204 188
------- -------
Net cash provided by financing activities 619 378
------- -------
Net increase in cash and cash equivalents 3,822 2,632
Cash and cash equivalents, beginning of period 5,250 3,199
------- -------
Cash and cash equivalents, end of period $ 9,072 $ 5,831
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-------------------------
1999 1998
------ ------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 652 $ -
===== =====
Interest $ - $ -
===== =====
Supplemental schedule of noncash investing and financing activities:
Common stock issued to employees $ - $ 78
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
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, 1999,
1998 and 1997, included in the Company's annual report filed on Form 10-K with
the SEC on April 26, 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.
2. Significant Accounting Policies
Revenue Recognition:
Development license revenues from the licensing of source code for the
Company's standard products are recognized upon delivery and customer acceptance
of the source code if no significant modification or customization of the
software is required and collection of the resulting receivable is probable. If
modification or customization is essential to the functionality of the software,
revenue is recognized over the course of the modification work or deferred until
the modification is complete. Recurring licensing revenues are recognized when
due from the Company's customers based on the number of products shipped
incorporating the Company's technology. In certain cases, the fixed or
determinable portion of the recurring licensing fee is recognized as revenue
upon delivery of the underlying technology.
The Company also enters into engineering services contracts with OEMs to
adapt the Company's software and supporting electronics to specific OEM
requirements. Revenues on such 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.
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, 1999. 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
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PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(Unaudited)
3. Investments:
Investments consisted of the following:
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
---------- -----------
<S> <C> <C>
Held-to-maturity securities:
Maturities within one year:
U.S. government debt securities $ 4,001 $ 5,503
---------- -----------
Total held-to-maturitiy securities 4,001 5,503
---------- -----------
Available-for-sale securities:
Maturities within one year:
U.S. government debt securities 3,485 979
State and local U.S. government debt securities 1,300 -
Corporate debt securities 4,998 4,976
Other debt securities 2,000 2,000
---------- -----------
11,783 7,955
---------- -----------
Maturities after one year through five years:
U.S.government debt securities 1,503
State and local U.S. government debt securities 156 -
Corporate debt securities 2,050 3,102
---------- -----------
2,206 4,605
---------- -----------
Maturities after ten years:
U.S. government debt securities - 2,700
State and local U.S. government debt securities 1,000 -
---------- -----------
Total available-for-sale securities 14,989 15,260
---------- -----------
Total investments $18,990 $20,763
========== ===========
</TABLE>
The fair value of held-to-maturity securities at April 30, 1999 and January
31, 1999 approximated amortized cost. Unrealized gains or losses on available-
for-sale securities were immaterial for all periods presented.
At April 30, 1999 and January 31, 1999, the Company held $1,156 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
April 30, 1999 and January 31, 1999 balance sheets.
9
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PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
(Unaudited)
4. Net Income Per Common Share:
Net income per common share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended April 30,
--------------------------------------------------------------------------------------------
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 $1,091 11,149 $0.10 $1,371 10,725 $0.13
========= ==========
Effect of Dilutive Securities
Common stock options - 696 - 1,094
--------- --------- --------- ---------
Diluted EPS
Net income available to common
stockholders and assumed
conversions $1,091 11,845 $0.09 $1,371 11,819 $0.12
========== ========= ========= ========= ========= ==========
</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 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
often negotiates minimum recurring license fee commitments from certain OEMs,
generally paid up-front or over four to six quarters. 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 currently constitute a small portion of total revenues.
As part of Peerless' efforts to focus on increasing its market penetration
in the embedded imaging industry, the Company seeks to strategically acquire
selected companies that complement its existing product offerings and its
internal product development efforts. On April 6, 1999, Peerless entered into a
merger agreement with Auco, Inc. ("Auco"), a privately held developer of
embedded networking technology based in Redwood City, California. The
transaction is structured as a merger in which the Company will exchange
approximately 2.5 million shares of its common stock for all currently
outstanding shares of Auco capital stock, on a fully-diluted basis, and its
convertible note payable at an exchange ratio of .2585. The merger will be
accounted for as a pooling of interests. As a result of the merger, Auco will
become a wholly-owned subsidiary of the Company. Consummation of the merger is
subject to terms and conditions customary for a transaction of this type,
including approval of certain matters by the shareholders of the Company and
Auco. The Peerless shareholders are scheduled to vote on the merger at a
special shareholder meeting to be held on June 10, 1999. The Company estimates
that it will incur transactions costs, consisting primarily of fees for
investment bankers, attorneys, accountants, consultants, financial
11
<PAGE>
printing and other related charges, of approximately $2.2 million which will be
expensed upon consummation of the merger.
Results of Operations
Comparison of Quarters Ended April 30, 1999 and 1998
Revenues for the quarter ended April 30, 1999 decreased 3% from the same
quarter in 1998. The decrease in revenues was driven by a decrease in
engineering services revenues partially offset by an increase in licensing
revenues. Product licensing revenues increased due to an increase in the number
of products shipped into the marketplace incorporating Peerless' imaging
technology, an increase in the market penetration of existing products, and an
increase in sales of source code development kits. Revenues for the current
quarter benefited from the launch of eight new color and monochrome printers and
multi-function devices into the market and the delivery of an additional four
completed products to OEMs. Engineering services revenues decreased in the
current quarter due to a focus on implementing process improvements and the
application of additional resources to several later-stage projects in order to
reduce delivery time.
The Company's gross margin as a percentage of total revenues increased to
71% for the quarter ended April 30, 1999 from the 63% reported for the same
quarter in 1998. The margin improved as a result of a higher percentage of
licensing fees in the revenue mix in the quarter ended April 30, 1999. Licensing
revenues have relatively low costs associated with the revenues being
recognized. Management does not expect the gross margin to remain 71% in future
quarters as engineering services revenues as a percentage of total revenues are
expected to resume to normal levels, driven by turnkey design wins.
Peerless continues to invest heavily in the future by funding the research
and development of new technology solutions. Research and development expenses
increased 19% to 25% of total revenues for the quarter ended April 30, 1999 from
20% of total revenues for the same quarter last year. The increased expenses
resulted primarily from a growth in the development staff headcount. The
increased funding was used from, among other things, development programs
associated with the Company's software development kits, common qualified code
base, color technology, multi-function technology, application specific
integrated circuit ("ASIC") designs and digital photography technology.
Sales and marketing expenses increased 35% between the quarters ended April
30, 1999 and 1998. The expense growth related to an increase in staffing and an
expanded emphasis on penetrating new OEM customers. 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 October 31, 1998
increased 29% over the comparable period last year. The expense growth related
primarily to an increase in personnel and professional services costs necessary
to support the growth of the Company's operations.
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.
12
<PAGE>
Liquidity and Capital Resources
Compared to January 31, 1999, total assets grew 3% to $48.5 million and
stockholders' equity grew 4% to $41.5 million. The Company's cash and short-term
investment portfolio totaled $26.0 million at April 30, 1999 and the current
ratio was 7.2:1. The Company generated $2.4 million in cash from operations
during the quarter ended April 30, 1999 as compared to $1.1 million in cash
generated from operations during the quarter ended April 30, 1998.
The Company's investing activities during the quarter ended April 30, 1999
generated cash of $815,000. Sales and maturities of investment securities
generated net cash of $1.8 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 quarter ended April 30,
1999 was offset by purchases of property, equipment and leasehold improvements.
During the current quarter, the Company expanded its 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, which will be completed
in the second quarter of this year, the Company made leasehold improvements in
the amount of $454,000. The remaining additions to property and equipment of
$530,000 related to purchases of furniture, computers and equipment associated
with the growth in headcount. Cash generated by investment activities during the
quarter ended April 30, 1998 totaled $1.1 million and related to net cash of
$2.0 million generated from investments offset by property and equipment
purchases of $527,000 and leasehold improvements of $351,000.
Net cash provided by financing activities in the quarters ended April 30,
1999 and 1998 was $619,000 and $378,000, respectively. This cash resulted from
the issuance of shares under the Company's employee stock purchase plan, as well
as the exercise of common stock options.
The Company currently has no material commitments other than those under
operating lease agreements and fees associated with the proposed acquisition of
Auco, Inc. 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 revenue growth rate in fiscal
2000 may not approach the level attained in fiscal 1999. Further, although the
Company has been profitable since the quarter ended December 31, 1995, 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.
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
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.
13
<PAGE>
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.
Concentration of Revenues: The Company's major customers currently include,
among others, Adobe and Conexant and OEM customers Canon, 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. The loss of a customer providing a significant
portion of the Company's revenues could have a material adverse effect on the
Company's operating results.
Technological Changes: The market for the Company's products and services is
characterized by rapidly changing technology, evolving industry standards and
needs, and frequent new product introductions. The Company'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 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, if any, of unit shipments experienced by its
OEMs.
The Year 2000 Issue: 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.
The Company has divided its review of the Year 2000 Issue into three major
areas: (1) internal systems, (2) Company products and (3) potential year 2000
problems associated with outside development partners, vendors and customers.
The Company has substantially completed its review of its internal system,
including its development tools and business critical applications such as
general ledger, accounts payable, accounts receivable, job cost, and purchasing.
The Company has identified certain systems that require updating and has begun
to purchase and install updates that have been certified as year 2000 compliant
by vendors. The Company expects to complete its review of internal systems by
July 31, 1999 and does not expect the review to uncover a risk that would result
in a material adverse effect on its operations.
14
<PAGE>
The Company is in the process of reviewing the year 2000 compliance of its
products developed for OEMs. Based on an initial review, the Company believes
that its products do not contain date sensitive fields. Testing to validate this
assumption is expected to be completed by July 31, 1999. At this time, the
Company does not believe that product updates will be necessary.
The Company is in the process of identifying any potential year 2000
problems from outside development partners who work on engineering services
projects, vendors whose facilities manufacture ASICs that incorporate the
Company's technology or whose systems interface with the Company's internal
systems as well as customers whose products contain technology licensed from the
Company. The Company expects to complete its review by July 31, 1999. However,
since third-party year 2000 compliance is not within the Company's control, the
Company cannot assure its stockholders that the year 2000 problems affecting the
systems of other companies will not have a material adverse effect on the
Company's operations. This impact could include, among other things, product
time to market delays caused by year 2000 problems associated with development
partners which would negatively impact engineering services revenues and delays
in customer shipments which could negatively impact the Company's recurring
licensing revenues .
Costs to address the Year 2000 Issue include hardware, software and
implementation costs for internal work are not expected to exceed $200,000. To
date, the Company has incurred approximately $75,000 of these costs, all of
which have been expensed.
Proposed Merger: On April 6, 1999, Peerless entered into a merger agreement
with Auco. The Peerless shareholders are scheduled to vote on the merger at a
special shareholder meeting on June 10, 1999. Integrating the operations of Auco
with those of Peerless after the merger may be difficult and time consuming.
Management of the combined company will need to successfully integrate, among
other things, the product offerings, product development, sales and marketing
and customer service functions, an the management information systems of both
companies. In addition, the combined company will need to retain the management,
key employees, customers, distributors, vendors and other business partners of
both companies. The integration of these organizations may temporarily distract
management from the day-to-day business of the combined company following the
merger. The combined company may fail to manage this integration so as to
achieve any of the anticipated synergies and other benefits that both companies
hope to achieve from the merger.
Peerless and Auco estimate that they will incur transaction costs of
approximately $2.2 million, which will be expensed upon consummation of the
merger. If the total costs of the merger exceed estimates or the benefits of the
merger do not exceed the total costs of the merger, then the financial results
of the combined companies could be adversely affected.
The market price of Peerless common stock may decline significantly as a
result of the merger if: the integration of Peerless' and Auco's operations is
not successful, or the combined company does not experience the benefits of the
merger as quickly, or to the extent, as may be expected by financial analysts,
or if the merger is not in line with the expectations of financial analysts.
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
---------------------------------------------------
None
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 April 20, 1999, pursuant to "Item 5.
Other Events", whereby the Company disclosed it plans to merge with
Auco, Inc., a California corporation.
16
<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: June 10, 1999
----------------------------------------------------
Edward A. Gavaldon
Chairman of the Board, President and
Chief Executive Officer
By: /s/Carolyn M. Maduza Date: June 10, 1999
-----------------------------------------------------
Carolyn M. Maduza
Senior Vice President of Finance and Administration,
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q
FOR THE PERIOD ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 9,072
<SECURITIES> 18,990
<RECEIVABLES> 6,351
<ALLOWANCES> (175)
<INVENTORY> 0
<CURRENT-ASSETS> 39,862
<PP&E> 8,399
<DEPRECIATION> (2,510)
<TOTAL-ASSETS> 48,498
<CURRENT-LIABILITIES> 5,566
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 41,514
<TOTAL-LIABILITY-AND-EQUITY> 48,498
<SALES> 8,194
<TOTAL-REVENUES> 8,194
<CGS> 2,383
<TOTAL-COSTS> 2,383
<OTHER-EXPENSES> 4,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> 1,679
<INCOME-TAX> 588
<INCOME-CONTINUING> 1,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,091
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.09
</TABLE>
