UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21287
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 April 30, 1997 was
10,515,871.
PEERLESS SYSTEMS CORPORATION
INDEX
Page No.
PART I - Financial Information
Item 1. Financial Statements
Balance Sheets
April 30, 1997 and January 31, 1997............................ 3
Statements of Operations
Three Months Ended April 30, 1997 and April 30, 1996........... 4
Statements of Cash Flows
Three Months Ended April 30, 1997 and April 30, 1996........... 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 7
PART II - Other Information
Item 1. Legal Proceedings.............................................. 11
Item 2. Changes in Securities.......................................... 11
Item 3. Defaults Upon Senior Securities................................ 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 5. Other Information.............................................. 11
Item 6. Exhibits and Reports on Form 8-K............................... 11
Signatures............................................................... 12
PART I FINANCIAL INFORMATION
PEERLESS SYSTEMS CORPORATION
Condensed Balance Sheets
(in thousands)
April 30, January 31, 1997
1997
----------- ------------------
(unaudited)
Assets
- - - ------
Current assets:
Cash and cash equivalents $26,257 $24,162
Short term investments 2,000 2,000
Trade accounts receivable 2,492 3,314
Unbilled receivables 364 363
Deferred tax asset 1,692 1,692
Prepaid expenses and other current
assets 223 253
------- -------
Total current assets 33,028 31,784
Property and equipment, net 1,706 1,665
Other assets 417 453
Deferred tax asset 1,207 1,207
------- -------
Total assets $36,358 $35,109
======= =======
Liabilities and Stockholders' Equity
- - - ------------------------------------
Current liabilities:
Accounts payable $ 464 $ 568
Accrued wages 475 711
Accrued compensated absences 441 345
Other current liabilities 508 337
Income taxes payable 487 100
Deferred rent, current portion 76 76
Deferred revenue, current portion 4,456 4,591
------- -------
Total current liabilities 6,907 6,728
Deferred rent 199 217
Deferred revenue 100 100
------- -------
Total liabilities 7,206 7,045
Stockholders' equity:
Common stock 10 10
Additional paid-in capital 37,488 37,225
Deferred compensation (316) (346)
Accumulated deficit (8,030) (8,825)
------- -------
Total stockholders' equity 29,152 28,064
------- -------
Total liabilities and stockholders'
equity $36,358 $35,109
======= =======
See accompanying notes to financial statements.
3
PEERLESS SYSTEMS CORPORATION
Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
-------------------------------------
APRIL 30, 1997 APRIL 30, 1996
----------------- ------------------
$ % $ %
--------- ------ --------- -------
Revenues:
Product licensing $ 3,515 68.5% $1,013 30.4%
Engineering services & maintenance 1,613 31.5 2,318 69.6
------- ----- ------ -----
Total revenues 5,128 100.0 3,331 100.0
------- ----- ------ -----
Cost of revenues:
Product licensing 35 0.7 33 1.0
Engineering services & maintenance 1,460 28.5 1,615 48.5
------- ----- ------ -----
Total cost of revenues 1,495 29.2 1,648 49.5
------- ----- ------ -----
Gross margin 3,633 70.8 1,683 50.5
------- ----- ------ -----
Operating expenses:
Research and development 1,070 20.9 422 12.7
Sales and marketing 885 17.3 597 17.9
General and administrative 716 14.0 500 15.0
------- ----- ------ -----
Total operating expenses 2,671 52.2 1,519 45.6
------- ----- ------ -----
Income from operations 962 18.8 164 4.9
Interest (income) expense, net (321) (6.3) 71 2.1
------- ----- ------ -----
Income before income taxes 1,283 25.0 93 2.8
Provision for income taxes 488 9.5 18 0.5
------- ----- ------ -----
Net income $ 795 15.5% $ 75 2.3%
======= ===== ====== =====
Net income per share $ 0.07 $ 0.02
Weighted average number of common and
common equivalent shares outstanding 11,689 7,762
See accompanying notes to financial statements.
4
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Three Months Ended
---------------------
April 30, April 30,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income 795 75
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 157 91
Deferred compensation related to grant of stock options 30
Changes in operating assets and liabilities:
Trade accounts receivable 822 (651)
Unbilled receivables (1) 244
Deferred Tax Asset - -
Prepaid expenses and other current assets 30 29
Other Assets 36 (32)
Accounts payable (104) (90)
Accrued Expenses (236) (228)
Accrued Compensated Absenses 96 44
Other current liabilities 71 31
Income Taxes Payable 487 -
Deferred rent - (20)
Deferred revenue (135) (10)
----- -----
Net cash used in operating activities 2048 (517)
Cash flows from investing activities:
Purchases of property and equipment (198) (35)
-----
Cash flows from financing activities:
Net borrowing on line of credit - 500
Payments on obligations under capital leases - (43)
Proceeds from exercise of common stock options 48 -
Net proceeds from issuance of common stock 197 -
----- -----
Net cash provided by financing activities 295 457
Net change in cash and cash equivalents 2095 (95)
Cash and cash equivalents at beginning of period 24162 722
Cash and cash equivalents at end of period 26257 627
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes 102 9
Interest - 18
Supplemental schedule of non cash
investing and financing activities:
Increase in redemption value of
Series A and Series B Preferred stock - 6
Property and equipment acquired under capital lease obligations - -
See accompanying notes to financial statements.
5
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(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 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 December 31, 1994, and 1995,
and the year ended January 31, 1997, included in the Company's annual report
filed on Form 10-K with the commission on April 28, 1997. 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. Net Income Per Common Share:
Primary net income per share has been computed by dividing the net income
by the weighted average numbers of common and dilutive common equivalent shares
outstanding during the period. Common stock equivalents consist of stock
options using the treasury stock method.
Primary and fully diluted per share calculations do not differ for the
periods presented.
3. Stockholders' Equity:
On September 30, 1996, the Company converted all of the outstanding shares
of Class A Convertible Redeemable Preferred Stock, Class B Convertible
Redeemable Preferred Stock, Convertible Notes Payable and Warrants into new
shares of Common Stock simultaneously with the closing of the Company's initial
public offering.
6
PEERLESS SYSTEMS CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, this quarterly
Report on Form 10-Q may contain forward-looking statements. Investors are
cautioned that forward-looking statements are inherently uncertain. Actual
performance and results of operations may differ materially from those projected
or suggested in the forward-looking statements due to certain risks and
uncertainties. Information concerning certain risks and uncertainties is
contained in the Company's annual report filed on Form 10-K with the commission
on April 28, 1997, in the section entitled "Risk Factors," and in "Certain
Business Risks" below. The forward-looking statements contained herein represent
the Company's judgment as of the date of this release, and the Company cautions
readers not to place undue reliance on such statements.
OVERVIEW
The Company, founded in April 1982, provides software-based embedded
imaging systems to original equipment manufacturers ("OEMS") of digital document
products located primarily in the United States and Japan. The Peerless family
of products and engineering services provides advanced embedded imaging
technologies that enable the Company's OEM customers to develop digital
printers, copiers and multifunction products ("MFPS") quickly and cost
effectively. The Company's revenues are comprised of both recurring and one-time
product licensing fees as well as engineering services and maintenance fees
related to the Company's embedded imaging software and supporting electronics
technologies.
As of April 30, 1997, the Company had an accumulated deficit of
approximately $8.0 million. The Company changed its fiscal year-end from
December 31 to January 31, commencing February 1, 1996, in order to better align
the timing of the Company's financial reporting with the timing of receipt of
royalty information by the Company's OEM customers.
The Company's customers currently include, among others, Adobe and OEM
customers, Canon, IBM and Xerox. A significant portion of the Company's
revenues in recent years has been concentrated with a limited number of OEM
customers, and the Company anticipates that its revenues in the future may be
similarly concentrated.
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time licensing fees for source code. Recurring
licensing revenues are derived from per unit fees paid quarterly by the
Company's OEMs upon shipment or manufacture of products incorporating the
Company's technology. Recurring licensing revenues are derived to a lesser
extent from arrangements in which the Company enables its products to be used
with third-party technology such as certain arrangements with Adobe. The
Company's one-time licensing fees for source code are paid by OEMs for access to
the Company's software, which in turn
7
generates recurring licensing revenues if the software is incorporated into OEM
products that are subsequently developed and shipped.
The Company's engineering services revenues are derived primarily from
adapting the Company's software and supporting electronics to specific OEM
requirements. The Company provides its engineering services to OEMs seeking an
embedded imaging solution for their digital document products. The Company's
maintenance revenues are derived from software maintenance agreements.
Maintenance revenues constitute a very small portion of engineering services and
maintenance revenues.
The Company recognizes its recurring product licensing revenues on a
royalty basis generally when the Company's OEM customers ship products that
incorporate the Company's technology. In certain cases, the non-refundable
portion of guaranteed royalties is reported as royalty revenues upon receipt by
the Company. Generally, the Company recognizes its one-time licensing revenues
for software licenses upon shipment by the Company's OEM customers. The Company
recognizes engineering services revenues over the course of the development work
on a percentage-of-completion basis. Maintenance revenues are recognized ratably
over the term of the maintenance contract, which generally is twelve months.
Licensing revenues are recognized in accordance with Statement of Position 91-1
"Software Revenue Recognition."
RESULTS OF OPERATIONS
Revenues for the three months ended April 30, 1997, increased 54% to $5.1
million from the $3.3 million for the three months ended April 30, 1996. The
increase in revenue was primarily due to the 247% increase in product licensing
fee revenues that were generated by the increase in the shipments and number of
products incorporating Peerless imaging technology, as well as unusually large
one-time licensing fees for source code. Engineering services and maintenance
revenues for the three months ended April 30, 1997, decreased 30% to $1.6
million from $2.3 million in the three months ended April 30, 1996. The decrease
was due in part to the timing of design wins awarded to the Company period that
specified turn-key development services. These wins were awarded to the Company
at the end of the three-month.
Gross margin for the three months ended April 30, 1997, increased 116% to
$3.6 million from $1.7 million for the three months ended April 30, 1996. Gross
margin as a percentage of total revenues increased to 70.8% for the three months
ended April 30, 1997, compared to 50.5% in the three months ended April 30,
1996. These increases are primarily attributable to the shift in revenue mix
towards licensing revenues, which have relatively low costs related to the
revenue being recognized. Licensing revenues increased from 30.4% of total
revenues in the quarter ended April 30, 1996, to 68.5% of total revenue in the
quarter ended April 30, 1997. The gross margin on engineering services and
maintenance declined from 30% in the quarter ended April 30, 1996 to 9% in the
quarter ended April 30, 1997 as a result of increased staffing related to
anticipated wins which were awarded at the end of the quarter.
The Company's research and development expenses are comprised primarily of
employee salaries and benefits, an allocation of certain engineering management
and administrative staff expenses and an allocation of the corporate facilities
overhead. Research and development expenses in the
8
three months ended April 30, 1997, increased 153% to $1.1 million from $422,000
in the three months ended April 30, 1996. Research and development expenses for
the three months ended April 30, 1997, represented 20.9% of total revenues,
compared to 12.7% for the three months ended April 30, 1996, respectively. These
expenses increased due to increased focus on the Company's color technologies.
The Company's sales and marketing expenses are comprised primarily of
employee salaries and benefits, commissions and bonuses, advertising and
promotional expenses, the cost of operating the Japan sales office and an
allocation of the corporate facilities overhead. Sales and marketing expenses in
the three months ended April 30, 1997, increased 48% to $885,000 from the
$597,000 recorded in the three months ended April 30, 1996. These increases
are the result of an increase in the number of sales and marketing personnel, as
well as additional emphasis on industry trade shows which occurred in the
quarter ended April 30, 1997.
The Company's general and administrative expenses are comprised primarily
of salaries, benefits and bonuses paid to its executive and administrative
staff, fees paid to the Company's external auditors, counsel and other corporate
consultants, an allocation of the corporate facilities overhead, and expenses
required of a public company. General and administrative expenses in the three
months ended April 30, 1997 increased 43% to $716000 from $500,000 in the three
months ended April 30, 1996. General and administrative expenses increased
primarily due to the addition of personnel to support the Company's operations.
The Company expects that its general and administrative expenses may increase in
order to support growth in operations.
The provisions for income taxes for the three month period 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 the utilization of net
operating loss carry forwards, offset by certain foreign taxes. The higher tax
rate in fiscal 1997 is primarily attributable to federal minimum tax.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had cash, cash equivalents and short-term
investments of $28.3 million compared to $26.2 million at January 31, 1997.
This increase is due to improved cash flows from operations.
As of April 30, 1997, accounts receivable were $2.5 million, compared to
$3.3 million at January 31, 1997. The decrease was a result of improved
collections and royalty payments received prior to the end of the quarter.
Property and equipment at April 30, 1997, and January 31, 1997, was $1.7
million
Accounts payable at April 30, 1997 were $464,000 compared to $568,000 at
January 31, 1996. The decrease primarily relates to improved payment cycles.
At present, the Company has available a $1.5 million revolving line of
credit with a bank, which is collateralized by substantially all assets of the
Company. The line of credit, which
9
terminates in May 1997, requires the Company to maintain compliance with certain
financial covenants. No amounts were outstanding under this line of credit at
April 30, 1997.
CERTAIN BUSINESS RISKS
The Company in the past has reported net losses and has only begun reported
net income in fiscal 1997. The Company has accumulated aggregate net losses from
inception through April 30, 1997, of approximately $8.0 million. Although the
Company has reported net income for the past five quarters ended April 30, 1997,
there can be no assurance that the Company will maintain profitability on a
quarterly basis or achieve profitability on an annual basis in the future. The
success of the Company and its business strategy is dependent upon, among other
things, the ability and willingness of the Company's OEM customers to timely
develop and promote digital document products that incorporate the Company's
technology. The Company believes that future revenues may be similarly
concentrated with a limited number of OEM customers. Consequently, any
significant decrease in product sales or reduction in licensing or engineering
services with a large OEM customer would have a material adverse effect on the
Company's operating results.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and needs, frequent new product
introductions and diminishing time frames within which to develop new products.
The failure of the Company and its OEM customers to meet these needs on a timely
basis or to anticipate or respond to rapidly changing technology could result in
a loss of competitiveness or revenues, which would have a material adverse
effect on the Company's operating results.
The recurring product licensing revenues reported by the Company are
dependent on the timing and accuracy of product sales reports received from the
Company's OEM customers. These reports are provided only on a calendar quarter
basis and, in any event, are subject to delay and potential revision by the OEM.
Therefore, the Company is required to estimate all of its quarterly revenues
from an OEM when the report from such OEM is not received in a timely manner.
As a result, the Company may be unable to estimate such revenue accurately prior
to public announcement of the Company's quarterly results. In such event, the
Company subsequently may be required to restate its recognized revenues or
adjust revenues for subsequent periods, which could have a material adverse
effect on the Company's operating results.
Also inherent in the Company's business are additional risks, which
include: competition in the market of embedded imaging systems for digital
document products, including internal development by OEMs; the risk of delays in
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, in 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 its revenues.
10
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 Financial Data Schedule
(b) Reports on Form 8-K
None
11
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 Gavaldon Date: June 16, 1997
------------------------------------------------
Edward Gavaldon
Chairman of the Board, President and Chief Executive Officer
By: /s/ Hoshi Printer Date: June 16, 1997
------------------------------------------------
Hoshi Printer
Chief Financial Officer
and Vice President, Finance and Administration
(Principal Financial and Accounting Officer)
12