<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 April 30, 2000
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 May 15, 2000 was
14,894,543.
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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 and
storage; 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 financial
performance. 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
--------------------------------------------------------------------------------
Item 1: Financial Statements Page No.
--------------------
Consolidated Balance Sheets
April 30, 2000 and January 31, 2000.................... 4
Consolidated Statements of Operations
Three Month Periods Ended April 30, 2000 and 1999...... 5
Consolidated Statements of Cash Flows
Three Month Periods Ended April 30, 2000 and 1999...... 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
--------------------------------------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K 23
--------------------------------
Signatures ........................................................ 24
TRADEMARKS
Memory Reduction Technology(R) (MRT), PEERLESS SYSTEMS(R), Peerless Powered(R),
WINEXPRESS(R), PeerlessPrint(R), QuickPrint(R) and RedipS(R) are registered
trademarks of Peerless Systems Corporation. CPL(TM), PicturePrint(TM),
Acceleprint(TM), SPS(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) 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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PEERLESS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,591 $ 13,620
Short term investments 13,107 12,329
Restricted cash 742 --
Trade accounts receivable, net 7,909 10,168
Unbilled receivables 1,088 2,343
Income tax receivable 1,845 21
Deferred tax asset -- 682
Prepaid expenses and other current assets 1,254 682
----------- -------------
Total current assets $ 33,536 $ 39,845
Investments 5,518 2,922
Long term receivable 1,500 1,500
Property and equipment, net 6,555 6,565
Deferred tax asset -- 1,050
Other assets 794 683
----------- -------------
Total assets $ 47,903 $ 52,565
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 833 $ 615
Other current liabilities 4,133 4,320
Deferred revenue, current portion 2,089 671
----------- -------------
Total current liabilities $ 7,055 $ 5,606
Deferred rent 366 366
Other tax liabilities 2,380 2,799
----------- -------------
Total liabilities 9,801 8,771
----------- -------------
Stockholders' equity:
Common stock 15 15
Additional paid-in capital 48,464 47,953
Deferred compensation (107) (123)
Accumulated deficit (10,270) (4,051)
----------- -------------
Total stockholders' equity 38,102 43,794
----------- -------------
Total liabilities and stockholders' equity $ 47,903 $ 52,565
=========== =============
</TABLE>
See accompanying notes
4
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PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues:
Product licensing $ 1,773 $ 5,941
Engineering services and maintenance 2,614 4,799
-------- --------
Total revenue 4,387 10,740
-------- --------
Cost of revenues:
Product licensing 30 55
Engineering services and maintenance 3,313 3,309
-------- --------
Total cost of revenues 3,343 3,364
-------- --------
Gross margin 1,044 7,376
-------- --------
Operating expenses:
Research and development 3,563 2,221
Sales and marketing 1,566 1,503
General and administrative 2,826 1,883
-------- --------
Total operating expenses 7,955 5,607
-------- --------
Income (loss) from operations (6,911) 1,769
Interest income, net 256 302
-------- --------
Income (loss) before income taxes (6,655) 2,071
Provision for income taxes (436) 859
-------- --------
Net income (loss) $ (6,219) $ 1,212
======== ========
Basic earnings per share $ (0.42) $ 0.09
======== ========
Diluted earnings per share $ (0.42) $ 0.08
======== ========
Weighted average common shares
outstanding - basic 14,782 12,909
======== ========
Weighted average common shares
outstanding - diluted 14,782 15,198
======== ========
</TABLE>
See accompanying notes
5
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PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (6,219) $ 1,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 477 350
Amortization of investment discounts and premiums (3) (26)
Amortization of deferred compensation 16 16
Severance expense for option amendment 245 -
Deferred taxes 1,732 -
Changes in operating assets and liabilities:
Restricted cash (742) -
Trade accounts receivable 2,259 3,823
Unbilled receivables 1,255 (1,150)
Income taxes receivable (2,283) -
Prepaid expenses and other current assets (572) (284)
Other assets (111) (147)
Accounts payable 218 552
Other current liabilities (187) (550)
Deferred rent - (27)
Deferred tax liability 40 410
Deferred revenue 1,418 (112)
--------- --------
Net cash (used) provided by operating activities (2,457) 4,067
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (467) (587)
Purchases of leasehold improvements - (454)
Purchases of available-for-sale securities (10,121) (8,301)
Proceeds from held-to-maturity securities - 1,500
Proceeds from available-for-sale securities 6,750 8,600
--------- --------
Net cash (used) provided by investing activities (3,838) 758
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 225 420
Proceeds from exercise of common stock options 41 204
--------- --------
Net cash provided by financing activities 266 624
--------- --------
Net (decrease) increase in cash and cash equivalents (6,029) 5,449
Cash and cash equivalents, beginning of period 13,620 6,132
--------- --------
Cash and cash equivalents, end of period $ 7,591 $ 11,581
========= ========
</TABLE>
6
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PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
------------------
2000 1999
------ ------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 333 $ 652
====== ======
</TABLE>
7
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PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated 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, 2000,
1999 and 1998 included in the Company's annual report filed on Form 10-K with
the SEC on April 28, 2000. 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
Financial results for this year's first fiscal quarter included an additional
week due to a change in the Company's reporting cycle, which should be taken
into account when analyzing the Company's results of operations.
Revenue Recognition: The Company recognizes revenues in accordance with
Statement of Position 97-2 "Software Revenue Recognition" as amended by
Statement of Position 98-4.
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 revenues are recognized over the course of the modification
work.
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 electronics to specific OEM requirements. Revenues on such contracts
are recognized over the course of the development work on a percentage-of-
completion basis. Progress-to-completion under percentage-of-completion is
determined based on direct costs, consisting primarily of labor and materials,
expended on the arrangement. 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.
8
<PAGE>
Recurring licensing revenues are derived from per unit fees paid by the
Company's customers upon manufacturing and subsequent commercial shipment of
products incorporating Peerless technology. These recurring licensing revenues
are recognized on a per unit basis as products are shipped commercially. In
certain cases, the Company requires customers to pay minimum royalty
commitments. These minimum payments are typically made in one lump sum or extend
over a period of four or more quarters. The Company recognizes revenues
associated with recurring licensing fee commitments on delivery and acceptance
of software, when collection of the resulting receivable is probable and when
the fee is fixed and determinable. In cases where the royalty commitments are
not fixed and determinable, revenue is recognized as payments become due.
Further, when earned royalties exceed minimum royalty commitments, revenues are
recognized on a per unit basis as products are shipped commercially.
For fees on multiple element arrangements, values are allocated among the
elements based on vendor specific objective evidence of fair value ("VSOE"). If
VSOE does not exist, all revenue for the arrangement is deferred until the
earliest point at which such VSOE does exist or all elements of the arrangement
have been delivered. If an arrangement includes both software and service
elements, a determination is made as to whether the service element can be
accounted for separately as services are performed.
Deferred revenue consists of prepayments of recurring licensing royalties, and
payments billed to customers in advance of revenue recognized on engineering
services contracts. Unbilled receivables arise when the revenue recognized on a
contract exceeds billings due to timing differences related to billing
milestones as specified in the 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 will be recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. SFAS 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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." SAB 101 provides guidance for
revenue recognition under certain circumstances. The Company is currently
evaluating the impact of SAB 101 on its financial statements and related
disclosures. While the Company does not expect the impact on the financial
statements and results of operations to be material, it is not known at this
time what the ultimate impact will be. The accounting and disclosures prescribed
by SAB 101 are required to be adopted by the Company for the second quarter of
fiscal year 2001.
9
<PAGE>
3 Investments
Investments consisted of the following:
<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
---- ----
<S> <C> <C>
Available-for-sale securities:
Maturities within one year:
U.S. government debt securities $ - $ 1,500
Commercial Paper and Equivalents 5,943 -
State and local U.S. government debt securities 975 830
Corporate debt securities 6,189 9,999
------------ -------------
13,107 12,329
------------ -------------
Maturities after one year through five years:
State and local U.S. government debt securities 1,654 500
------------ -------------
1,654 500
------------ -------------
Maturities after ten years:
State and local U.S. government debt securities 3,864 2,422
------------ -------------
3,864 2,422
------------ -------------
Total available-for-sale securities 18,625 15,251
------------ -------------
Total Investments $ 18,625 $ 15,251
============ =============
</TABLE>
The fair value of securities at April 30, 2000 and January 31, 2000
approximated cost. Unrealized gains or losses on securities were immaterial
for all periods presented.
10
<PAGE>
4. Earnings Per Share
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended April 30, Three Months Ended April 30,
2000 1999
Net Per-Share Net Per-Share
Loss Shares Amount Income Shares Amount
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Earnings available to common
stockholders $ (6,219) 14,782 $ (0.42) $ 1,212 12,909 $ 0.09
Effect of Dilutive Securities
Options - - - 2,289
-------- -------- -------- --------
Diluted EPS
Earnings available to common
stockholders with assumed
conversions $ (6,219) 14,782 $ (0.42) $ 1,212 15,198 $ 0.08
======== ======== ======== ======== ======== ========
</TABLE>
11
<PAGE>
5. Restricted Cash
On March 16, 2000, PSN entered into an agreement to lease approximately 12
thousand square feet of office space in Mountain View, California. The term of
the lease agreement is seven years. The Company has guaranteed the lease
commitment of PSN and has secured the first twelve months of the agreement with
a $742 standby letter of credit, which has been secured by a certificate of
deposit of a like amount. For the subsequent four years, the value of the
standby letter of credit shall be reduced to $594, $445, $297 and $148,
respectively.
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 current
expectations, estimates, forecasts and projections about the industry in which
Peerless operates, management's beliefs and assumptions made by management.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Overview
The Company, founded in April 1982, is a provider of software/hardware-based
embedded imaging, storage 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, hardware 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 (MFPs) quickly
and cost-effectively. Network Directories is a new storage technology which
operates on any common network operating system. These directory services use
LDAP (Lightweight Directory Access Protocol) for communication between directory
servers and clients. This directory service allows users to store a vast
quantity of information in an array of networked storage devices.
The Company's product licensing revenues are comprised of both recurring
licensing revenues and development 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 also derived from arrangements in which the
Company enables third-party technology, such as solutions from Adobe or Novell,
to be used with its products. In certain cases, the Company may sell a block
license, a specific quantity of licensed units, or may require the customer to
pay minimum royalty commitments. Associated payments are typically made in one
lump sum or extend
13
<PAGE>
over a period of four or more quarters. The Company's development licensing fees
are paid by OEMs for access to the Company's SDKs, which in turn generate
recurring licensing revenues if the Company's software is incorporated into OEM
products that are subsequently developed and commercially shipped.
The Company also has engineering services revenues that 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.
Historically, a limited number of customers have provided a substantial portion
of the Company's revenues. Therefore, new contracts or modifications and
additions to existing contracts with these customers may materially impact the
Company's financial position and results of operations from quarter to quarter.
The Peerless embedded imaging solution is based on a combination of software and
imaging Application Specific Integrated Circuits (ASICs), which together form a
cost-effective system that addresses most sectors of the printing market, from
low-end small office home office (SOHO) inkjets to high end laser digital color
copiers and printers. Low-cost, high-performance printers are increasingly
replacing expensive standalone copiers and printers in corporate offices. The
shift to low cost devices is placing considerable pressure on the Company and
its competitors to provide lower cost solutions while the OEM's themselves look
to bring their efforts inhouse to reduce their costs.
Traditionally, Peerless provided ASIC designs to chip foundries that
manufactured and distributed the Company's ASICs to the Company's OEMs. In
return, the Company received license revenue from these chip foundries. As part
of the total solution being offered to its OEMs, the Company has developed a
direct distribution channel for its ASICs chips. Under this "fabless" model,
Peerless is distributing ASIC chips from the foundry through a third party. The
Company is responsible for marketing and sales administration, including the
billings and collections to and from its OEMs and distributors, and the third
party is responsible for the coordination of production with the foundry,
maintenance of necessary inventories and providing just-in-time delivery to OEMs
and distributors. The Company has distribution agreements with Arrow Electronics
and Maruban Corporation. The agreement with Arrow Electronics requires title to
the inventory to remain with the Company until final acceptance by the OEM.
There can be no assurance that the OEM will accept the delivery in which case
the Company is responsible for all costs related to the delivery and shipment.
The agreement with Maruban requires that title to inventory be transferred to
Marabun upon order placement by the Company. As a result, the Company is not
responsible for any costs associated with the delivery of inventory if not
accepted by the OEM. The change in the business model from licensing ASIC
technology to the distribution of the actual chips will result in higher
revenues but lower margin percentages due to the cost of chips and the costs of
distribution and inventory maintenance by the third party. The Company made its
first direct distribution in the first quarter of fiscal year 2001.
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
14
<PAGE>
exceeded demand for SDK solutions. In the last fiscal year, the Company
experienced a shift away from turnkey solutions to the sale of SDKs,
particularly for its monochrome solutions, which incorporate more mature
technology. Additionally, the Company has expanded its solution offering by
incorporating related embedded imaging and networking technologies licensed from
third parties, which in future quarters could result in incremental SDK,
services and royalty revenue streams.
The shift to SDK sales could result in an increase in the products shipping, as
OEMs who utilize Peerless SDKs develop and introduce multiple products. However,
the shift to SDKs has subjected the Company to additional risks. The engineering
services business has declined as OEMs have taken technology development in
house. This has resulted in a shift in costs to the Company as resources have
been reallocated to development. However, the Company expects to continue to
provide turnkey solutions in color and MFP where the technology is certain to
evolve and where the turnkey development challenge is more difficult for OEMs to
assume. There will be a limited number of monochrome turnkey opportunities due
to the Company's sales of SDKs in fiscal year 2000.
Peerless continues to sell its source code development kits ("SDK"), which allow
the OEMs to access Peerless' technology and perform their own customization. The
development kit sales should serve to increase the OEMs commitment to Peerless'
embedded imaging technology from a single point product solution to a broad
product platform solution for multiple printing products.
The Company continued to invest in research and development which, along with
the recent acquisitions, resulted in an increase in both the breadth and the
depth of its technical product offerings. Among other technologies, the Company
is working on a 100 page per minute (PPM) SDK. Currently, the Company's highest
speed software addresses a 75 PPM machine.
Results of Operations
Comparison of Quarters Ended April 30, 2000 and 1999
Financial results for this year's quarter included an additional week due to a
change in the Company's reporting cycle, which should be taken into account when
analyzing the Company's results of operations.
Revenues for the quarter ended April 30, 2000 decreased 59% from the same
quarter in 1999. The decrease in revenues resulted from a lower level of turnkey
bookings reflecting the strong SDK design win mix in fiscal year 2000. The shift
to SDKs resulted in a revenue trough between the time the source code is shipped
to the customer to when the customer ships product. In addition to not receiving
royalty revenue from the SDK the company also does not receive engineering
services revenue on what would have been an outsourced project. There can be no
assurances that revenue will return to prior levels. Additionally, for the first
quarter, there was a lower level of turnkey and SDK bookings as OEMs brought
work in house due to industry consolidation and pricing pressures and as the
Company's technology offerings did not keep pace with OEM's needs.
The Company's gross margin as a percentage of total revenues decreased to 24%
for the quarter ended April 30, 2000 from the 69% reported for the same quarter
in 1999 as a result of a 59% decrease in
15
<PAGE>
revenues. Cost of revenues for engineering services and maintenance were
comparable with the same quarter in 2000 but, as previously mentioned, a
decrease in engineering services revenue occurred due to the design win mix in
fiscal year 2000 and the lower level of turnkey bookings in the first quarter of
fiscal year 2001.
The Company continues to invest heavily in the future by funding the research
and development of new technology solutions. Research and Development expenses
increased 60% to 81% of total revenues for the quarter ended April 30, 2000 from
21% of total revenues for the same quarter in 1999. The increase was due to
lower sales levels and an increase in research and development costs. The
increase in funding was primarily due to third party development costs
associated with a new ASIC, continued investments in imaging and storage
technologies and development programs associated with the Company's SDKs.
Sales and Marketing expenses increased 4% between the quarters ended April 30,
2000 and 1999. This slight increase was primarily related to an additional week
included in the current quarter ended April 30, 2000.
General and Administrative expenses for the quarter ended April 30, 2000
increased 50% from the same quarter in 1999. This increase primarily related to
non-recurring expenses arising out of severance agreements during the quarter
and one-time start-up expenses associated with changes in professional advisory
firms and the use of outside strategy consultants.
Interest income earned in both periods was attributable to interest and
investment income earned on cash and cash equivalents and investment balances.
The provision for income taxes for the periods presented are based on the
estimated annual effective tax rate and include federal, state and foreign
income taxes. The tax benefit for the quarter ended April 30, 2000 relates to
the carryback of losses offset by foreign tax provision and changes in the
valuation reserve.
Liquidity and Capital Resources
Compared to January 31, 2000, total assets decreased 9% to $47.9 million and
stockholders' equity decreased 13% to $38.1 million. The Company's cash and
short-term investment portfolio was $21.0 million at April 30, 2000 and the
current ratio was 5:1. The Company used $2.5 million in cash during the quarter
ended April 30, 2000 to finance operations as compared to $4.1 in cash generated
from operations during the quarter ended April 30, 1999.
The Company's investing activities during the quarter ended April 30, 2000
resulted in a net use of cash of $3.8 million. Purchases of investment
securities resulted in a net use of 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. This fiscal quarter, the Company invested $0.5 million in
property, equipment and leasehold improvements compared to $1.1 million invested
during the quarter ended April 30, 1999.
16
<PAGE>
Net cash provided by financing activities in the quarters ended April 30, 2000
and 1999 was $266,000 and $624,000, respectively. This cash primarily resulted
from the issuance of common stock under the Company's employee stock purchase
plan and the exercise of common stock options.
During the first quarter of fiscal year 2001, cash and investments decreased
$2.7 million compared to an increase of $6.2 million for the comparable quarter
ended April 30, 1999.
The Company's principal source of liquidity is its cash and cash equivalents and
investments of $26.2 million. For the quarter ended April 30, 2000, the Company
incurred a loss. The Company does not have a credit facility and the Company
does not expect to secure a line of credit. Although there can be no assurances,
the Company believes that its current cash and resources will provide sufficient
funds for planned operations for the remainder of the fiscal year ending January
31, 2001. However, if the Company does not generate anticipated cash flow from
sales, or if expenditures required to achieve the Company's plans are greater
than expected, the Company will have to reduce discretionary spending which
would require the Company to delay, scale back or eliminate some or all of its
development efforts which could have a material adverse effect on the Company's
business, results of operations and prospects.
Risks and Uncertainties
The following risks and uncertainties, among other things, should be considered
in evaluating the Company's outlook:
Future Growth Rate and Operating Results: The consolidated revenues for fiscal
----------------------------------------
year 2001 are expected to decline from the level attained in fiscal year 2000.
The Company was unprofitable in the first quarter of fiscal 2001 and does not
expect to return to profitability in fiscal 2001. Furthermore, there can be no
assurances that the Company will be profitable in the future and a continued
loss will deplete the Company's capital resources. The factors noted below may
have a material adverse effect on the Company's future revenues and/or results
of operations.
Product Offerings: The Company's current technology and products have been in
-----------------
the market place for an average of 21 months. Although the Company continues to
sell its technology and products to certain OEMs, there can be no assurance that
the OEMs will continue to need or utilize the technology and products offered by
the Company.
Industry and Market: The current market in which the Company operates has been
-------------------
consolidating and the demand for the technology and products offered by the
Company has been declining. Although the Company currently has certain contracts
with OEMs, there can be no assurance that the demand for the Company's
technology and products offered will continue.
Concentration of Revenues: During the first quarter of fiscal 2001, Canon, IBM
-------------------------
and Seiko Epson each generated greater than 10% of the Company's revenues. For
the three months ended April 30, 1999, five customers each generated more than
10% of the Company's revenues. Although recent acquisitions and
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sales efforts have expanded the Company's customer base, 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.
Shifting OEM Demand for Software Development Kits vs. Turnkey Solutions: Over
-----------------------------------------------------------------------
the past several quarters, the Company 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
whereas customers that opt for an SDK solution choose to license the Company's
embedded imaging technology and perform development internally using their in-
house engineers. Turnkey design wins result in engineering services contracts
that generate revenue for three to six quarters prior to product launch. SDK
design wins result in development license revenues that are typically recognized
in one quarter and are generally lower in magnitude than revenue associated with
turnkey design wins. SDK design wins generate higher profit margins than
revenues associated with turnkey design wins although recurring licensing
revenues are generally lower as slight discounts are offered.
Because the Company has experienced a shift in demand away from turnkey
solutions towards SDKs, engineering services resources were re-deployed to the
research and development department in recent quarters. Should this trend
reverse and turnkey design wins accelerate, the Company may need to transfer
resources back to engineering services. Accordingly, its results of operations
could be negatively affected in the interim.
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, delays in the
availability or stability of third-party technology and cancellation or
redirection of engineering services projects by the Company's OEMs. There can be
no assurance that similar factors will not impact future engineering services
results. Further, in the past, the Company has benefited from the inclusion of
cancellation fees in its engineering services agreements. There can be no
assurance that the Company will continue to be able to negotiate these fees into
future engineering services arrangements.
Shifting of the Recurring License Fee Model: Over the past several quarters, the
-------------------------------------------
Company's recurring licensing fee model has shifted from per unit royalties paid
upon OEM shipment of product to a model that results in revenues associated with
the sale of SDKs and guaranteed quarterly minimum royalties and sales of block
licenses. This shift occurred due to aging products in the market place, reduced
Adobe product penetration/rate in OEM products shipping and a design win mix
which was predominately SDK. Although the model benefited the Company's cash
flows and minimized the Company's risk associated with unexpected decreases in
demand for customer products, the Company's revenues have and could continue to
fluctuate significantly from quarter to quarter as the number and value of
design wins shift.
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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
reporting of the Company's quarterly results, the Company may be required to
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: the ability of the Company and its OEM customers to meet industry
changes and market demands in a timely manner; timely development and market
acceptance of the Company's technology and the digital document products of the
Company's OEM customers; 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.
Third Party Licensing: The Company currently sublicenses third party technology
---------------------
to its OEM customers. Such sublicense agreements are non-exclusive. If the
Company is not in compliance with the agreement with the licensee, the Company
could loose its rights to sublicense this technology to its OEM customers.
Additionally, the licensing of this technology has become very competitive and
there is no assurance that the Company can keep competitive in the market place.
Receivables: The Company's accounts receivables declined to $9.4 million from
-----------
$11.7 million reflecting strong collections from several major customers,
including the conversion of unbilled receivables to accounts receivable.
Inclusive in this amount is a receivable related to the Conexant dispute. The
Company feels that its accounts receivable reserves are adequate for the quarter
ended April 30, 2000, although there can be no assurance regarding this
assertion.
ASIC Chips: The Company has developed a "fabless" distribution model for the
----------
sale of ASIC chips. The Company has no direct distribution experience and places
reliance on third parties to maintain inventories to address OEM needs, manage
manufacturing logistics, and distribute the product in a timely manner. There
can be no assurance that these distribution agreements will be maintained or
that the OEMs will elect to purchase from Peerless as their distributor.
Dependence on Sole Source Providers: Currently, the Company is dependent on four
-----------------------------------
independent parties, Motorola, IBM Microelectronics, NEC and Intel, each of
which provides unique application
19
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specific integrated circuits ("ASICs") incorporating the Company's imaging
technology to certain of the Company's OEMs. Additionally, the Company has
relationships with Adobe and Novell that address many critical aspects of the
Company's OEM customers' needs. The Company has licensed, for internal
development purposes, from Adobe the right to use Adobe's PostScript Software to
enable the Company's products to be used with Adobe's PostScript Software, has
licensed to Adobe several of the Company's technologies and has developed
technologies for Adobe for which the Company receives royalties and engineering
services and maintenance fees. These sole source providers are subject to
materials shortages, excess demand, reduction in capacity and/or other factors
that may disrupt the flow of goods to the Company's customers and thereby
adversely affect the Company's customer relationships. Any such disruption could
limit or delay production or shipment of the products incorporating the
Company's technology, which could have a material adverse effect on the
Company's operating results.
The Company, through its subsidiary PSN, has entered into contracts with
entities and persons located in Hong Kong, which city is located in a political
district of the People's Republic of China. Through these long term
relationships, the Company operates at favorable cost, schedule and quality of
output advantages. The Company utilizes the services of these entities for
engineering development and tests. If the services provided by the entities were
to discontinue, the Company would have to bring these services inhouse which
could increase costs and delay deliverables. There can be no assurances that the
political and business climates in Hong Kong will remain stable. However, should
there be disruption in the aforesaid relationships, it is not expected to have a
materially adverse affect on the Company, its financial condition or results of
financial operations.
Costs and Expenses: A substantial portion of the Company's costs and expenses
------------------
are related to costs of engineering services and maintenance, product
development, other personnel costs, marketing programs and facilities. The level
of spending for such costs and expenses cannot be adjusted quickly and is based,
in significant part, on the Company's expectations of future revenues and
anticipated OEM commitments. As in the current fiscal year-to-date, if such
commitments do not materialize or are terminated or if revenues are below
expectations, the Company's quarterly and annual operating results will be
significantly adversely affected.
Dependence on Key Personnel: The Company is largely dependent upon the skills
---------------------------
and efforts of its senior management and other officers and key employees. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly skilled managerial, engineering, sales,
marketing and operations personnel, many of whom are in great demand.
Competition for such personnel recently has increased significantly. The loss of
key personnel or the inability to hire or retain qualified personnel has and
could continue to have a material adverse effect on the Company's operating
results. The Company only maintains key person life insurance policies for one
executive, Mr. Au.
International Activities: Peerless is substantially dependent on its
------------------------
international business activities and the Company expects that sales to
customers located outside the United States may increase in absolute dollars in
the future. The international market for products incorporating the Company's
technology is highly competitive, and the Company expects to face substantial
competition in this market from established companies and technologies developed
internally by its OEMs. Risks inherent in the Company's international business
activities also include currency fluctuations, changes in the economic condition
of foreign countries, the imposition of government controls, tailoring of
products to local requirements, trade restrictions, changes in tariffs and
taxes, and the burdens of complying with a wide variety of foreign laws and
regulations, any of which could have a material adverse effect on the
20
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Company's operating results. Although all of the Company's contracts are, and
the Company expects that its future contracts will be, denominated in U.S.
dollars, there can be no assurance that its contracts with international OEMs in
the future will be denominated in U.S. dollars. In the event that one or more
contracts are denominated in foreign currencies, the Company will be subject to
additional risks associated with currency fluctuations, which could have a
material adverse effect on the Company's operating results.
During the past few years, the Asian economy has been financially depressed. As
a result, some members of the imaging industry have reported negative financial
impacts attributable to a decrease in demand from Asian customers. Peerless'
Asian customers are comprised primarily of companies headquartered in Japan.
These Japanese customers sell products containing Peerless' technology primarily
in the North American and European marketplaces. There can be no assurance that
revenues from Asian customers will not decline in future quarters.
Volatility of Stock Price: The Company's common stock has experienced
-------------------------
significant price volatility and such volatility may occur in the future.
Factors that could affect the trading price of the common stock include swings
in quarterly results of operations, announcements of new products by the Company
or its competitors, developments or disputes with respect to proprietary rights,
general trends in the industry, overall market conditions and other factors. In
addition, the stock market historically has experienced extreme price and volume
fluctuations, which have particularly affected the market price of securities of
many related high technology companies and which at times have been unrelated or
disproportionate to the operating performance of such companies.
Market Risk: The Company is exposed to various market risks including changes in
-----------
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates. The Company has not been at
risk from adverse changes in foreign currency exchange rates as all transactions
have been denominated in U.S. dollars. The Company has not entered into
derivatives or other financial instruments for trading purposes.
Peerless' exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company invests its excess
cash in fixed rate debt instruments of the U.S. Government and high- quality
corporate issuers as well as floating rate money market funds. The Company, by
policy, limits the amount of credit exposure to any one issuer. Investments in
both fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, Peerless' future investment income may fall short of
expectations due to changes in interest rates, or Peerless may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates.
Year 2000: The Company, its subsidiaries, and to its knowledge the Company's
---------
third party suppliers did not experience any problems associated with its
defined exposure areas of its Licensed Products, their Key Transaction
Processing Applications, the Company's Equipment and Facilities and Key
Suppliers during the transition to the Year 2000. Additionally, as a result of
the work performed previously and experience in Year 2000 to date, the Company
does not foresee any problems in this area. The Company will maintain a discrete
observation of these potential exposure areas through Year 2000 in the ordinary
21
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course of business. There can be no assurances that such problems, should they
occur, will not have a materially adverse effect on the Company, its financial
condition, or results of operations.
22
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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
None
23
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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
/s/ Howard J. Nellor
By: -------------------------------- Date: June 13, 2000
Howard J. Nellor
Interim President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Carolyn M. Maduza
By: -------------------------------- Date: June 13, 2000
Carolyn M. Maduza
Senior Vice President of Finance
and Administration,
Chief Financial Officer, Secretary
And Treasurer
(Principal Financial and Accounting Officer)
24
