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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, 1998
Commission File Number: 000-21287
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PEERLESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
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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 29, 1998 WAS
10,835,908.
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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
Act of 1934 which are subject to the "safe harbor" created by those sections.
The forward-looking statements include, but are not limited to, statements
related to industry trends and future growth in the markets for digital document
products, embedded imaging systems and enterprise networks; Peerless Systems
Corporation's ("the Company's") strategies for reducing its customers' costs and
time-to-market; the Company's product development efforts; the effect of GAAP
accounting pronouncements on the Company's recognition of revenues; and the
Company's future research and development. Discussions containing such forward-
looking statements may be found in "Management Discussion and Analysis of
Financial Condition and Results of Operations." These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in such forward-looking statements. The
Company disclaims any obligation to update these forward-looking statements as a
result of subsequent events. The business risks on pages 13 and 14, among other
things, should be considered in evaluating the Company's prospects and future
financial performance.
2
Peerless Systems Corporation
INDEX
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PART I - FINANCIAL INFORMATION
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Item 1: FINANCIAL STATEMENTS PAGE NO.
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Balance Sheets
April 30, 1998 and January 31, 1998......................... 4
Statements of Operations
Three Months Ended April 30, 1998 and 1997.................. 5
Statements of Cash Flows
Three Months Ended April 30, 1998 and 1997.................. 6
Notes to Financial Statements................................. 8
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS.................................. 11
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PART II - OTHER INFORMATION
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Item 6: EXHIBITS AND REPORTS ON FORM 8-K............................. 15
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Signatures................................................................... 16
TRADEMARKS
Memory Reduction Technology (MRT)(R) is a registered trademark of Peerless
Systems Corporation. WINEXPRESS(TM), PeerlessPrint(TM) and QuickPrint(TM) are
trademarks of Peerless Systems Corporation and are subjects of applications
pending for registration with the United States Patent and Trademark Office.
Peerless Systems(TM) (in English and Japanese Katakana), PEERLESS(TM) (in logo)
and P(TM) (in logo) are trademarks and service marks of Peerless Systems
Corporation and are subjects of applications pending for registration with the
Japanese Patent Office. This Form 10-Q also refers to various products and
companies by their trademark names. In most, if not all cases, these
designations are claimed as trademarks or registered trademarks by their
respective companies.
3
PART I - FINANCIAL INFORMATION
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Item 1 Financial Statements
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PEERLESS SYSTEMS CORPORATION
BALANCE SHEETS
(in thousands)
April 30, January 31,
1998 1998
---------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,831 $ 3,199
Short term investments 16,487 16,982
Trade accounts receivable, net 6,662 5,577
Unbilled receivables 1,573 1,386
Deferred tax asset 1,234 1,544
Prepaid expenses and other current assets 1,544 892
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Total current assets 33,331 29,580
Investments 4,008 5,501
Property and equipment, net 5,051 4,426
Deferred tax asset 249 249
Other assets 303 339
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Total assets $42,942 $40,095
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,364 $ 1,149
Accrued wages 800 1,065
Accrued compensated absences 566 501
Other current liabilities 176 392
Income taxes payable 1,059 406
Deferred rent, current portion 76 76
Deferred revenue 2,784 2,278
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Total current liabilities 6,825 5,867
Deferred rent 408 421
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Total liabilities 7,233 6,288
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Stockholders' equity:
Common stock 11 11
Additional paid-in capital 38,453 37,952
Deferred compensation (245) (275)
Accumulated deficit (2,510) (3,881)
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Total stockholders' equity 35,709 33,807
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Total liabilities and stockholders' equity $42,942 $40,095
======= =======
The following notes are an integral part of these financial statements.
4
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
April 30,
-----------------------
1998 1997
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Revenues:
Product licensing $ 4,842 $ 3,515
Engineering services and maintenance 3,587 1,613
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Total revenues 8,429 5,128
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Cost of revenues:
Product licensing 35 35
Engineering services and maintenance 3,105 1,460
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Total cost of revenues 3,140 1,495
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Gross margin 5,289 3,633
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Operating expenses:
Research and development 1,708 1,070
Sales and marketing 914 885
General and administrative 913 716
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Total operating expenses 3,535 2,671
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Income from operations 1,754 962
Interest income, net 355 321
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Income before income taxes 2,109 1,283
Provision for income taxes 738 488
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Net income $ 1,371 $ 795
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Net income per common share $ 0.13 $ 0.08
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Net income per common share -
assuming dilution $ 0.12 $ 0.07
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Weighted average common shares
outstanding 10,725 10,493
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Weighted average common shares
outstanding and dilutive shares 11,819 11,635
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The following notes are an integral part of these financial statements.
5
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
April 30,
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1998 1997
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Cash flows from operating activities:
Net income $ 1,371 $ 795
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 251 157
Amortization of deferred compensation 30 30
Compensation expense on common stock issued to 123 -
employees
Changes in operating assets and liabilities:
Trade accounts receivable (1,085) 822
Unbilled receivables (187) (1)
Prepaid expenses and other current assets (342) 30
Other assets - 36
Accounts payable 215 (104)
Accrued wages (265) (236)
Accrued compensated absences 65 96
Other current liabilities (216) 71
Income taxes payable 653 487
Deferred rent (13) -
Deferred revenue 506 (135)
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Net cash provided by operating activities 1,106 2,048
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Cash flows from investing activities:
Purchases of property and equipment (878) (198)
Purchases of available-for-sale securities (974) -
Sales of held-to-maturity securities 3,000 -
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Net cash provided (used) by investing activities 1,148 (198)
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Cash flows from financing activities:
Proceeds from issuance of common stock 190 197
Proceeds from exercise of common stock options 188 48
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Net cash provided by financing activities 378 245
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Net increase in cash and cash equivalents 2,632 2,095
Cash and cash equivalents, beginning of period 3,199 24,162
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Cash and cash equivalents, end of period $ 5,831 $26,257
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The following notes are an integral part of these financial statements.
6
PEERLESS SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
April 30,
--------------------------
1998 1997
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Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ - $ 102
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Interest $ - $ -
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Supplemental schedule of noncash investing and financing activities:
Common stock issued to employees $ 78
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The following notes are an integral part of these financial statements.
7
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
- ------
The accompanying unaudited financial statements of Peerless Systems
Corporation (the "Company") have been prepared pursuant to the rules of the
Securities and Exchange Commission (the "SEC") for quarterly reports on Form 10-
Q and do not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements and notes
herein are unaudited, but in the opinion of management, include all the
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows of
the Company. These statements should be read in conjunction with the audited
financial statements and notes thereto for the years ended January 31, 1998 and
1997 and the year ended December 31, 1995, included in the Company's annual
report filed on Form 10-K with the SEC on April 24, 1998. The results of
operations for the interim periods shown herein are not necessarily indicative
of the results to be expected for any future interim period or for the entire
year.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
- ------
Revenue Recognition:
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
which supersedes Statement of Position 91-1, "Software Revenue Recognition."
SOP 97-2, and amendments thereto, provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions
and is effective for transactions entered into in years beginning after December
15, 1997. The Company adopted SOP 97-2 for all transactions on or after
February 1, 1998.
In accordance with SOP 97-2, the Company recognizes development license
revenue from the licensing of source code for the Company's standard products
upon shipment and customer acceptance of the source code if no significant
modification or customization of the software is required. If modification or
customization is essential to the functionality of the software, revenue is
recognized ratably over the services performed or deferred until the
modification is complete.
Future Developments:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that such
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. Management is currently evaluating the requirements of SFAS 131 and the
impact that adoption of SFAS 131 will have on the financial statements of the
Company.
8
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
NOTE 3 INVESTMENTS
- ------
April 30, January 31,
1998 1998
----------- ------------
Held-to-maturity securities:
Maturities within one year:
U.S. government debt securities $ 7,499 $ 6,007
Corporate debt securities 1,000 3,979
Certificates of deposit 2,000 2,000
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10,499 11,986
Maturities after one year through five years:
U.S. government debt securities 4,008 5,501
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14,507 17,487
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Available-for-sale securities:
Maturities within one year:
Corporate debt securities 3,988 2,996
Maturities after ten years:
Other debt securities 2,000 2,000
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5,988 4,996
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Total investments $ 20,495 $ 22,483
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The fair value of held-to-maturity securities at April 30, 1998 and January
31, 1998 approximated amortized cost. Unrealized gains or losses on available-
for-sale securities were immaterial for all periods presented.
9
PEERLESS SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Note 4 NET INCOME PER COMMON SHARE
- ------
Net income per Common share is calculated as follows:
Three Months Ended April 30,
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1998 1997
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Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
-------- -------- --------- ------- -------- ---------
BASIC EPS
Net income available to the common
stockholders $ 1,371 10,725 $ 0.13 $ 795 10,493 $ 0.08
========= =========
EFFECT OF DILUTIVE SECURITIES
Options - 1,094 - 1,142
------- ------ ------- ------
DILUTED EPS
Net income (loss) available to common
stockholders and assumed conversions $ 1,371 11,819 $ 0.12 $ 795 11,635 $ 0.07
======= ====== ========= ======= ====== =========
10
PEERLESS SYSTEMS CORPORATION
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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
GENERAL The Company, founded in April 1982, is a leading provider of
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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.
CUSTOMERS The Company's customers currently include, among others, Adobe
---------
and Rockwell and OEM customers Canon, IBM, Minolta and Ricoh. A significant
portion of the Company's revenues in recent years has been concentrated with a
limited number of customers, and the Company anticipates that its revenues in
the future may be similarly concentrated.
PRODUCT LICENSING REVENUES 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 generates recurring
licensing revenues if the software is incorporated into OEM products that are
subsequently developed and shipped.
ENGINEERING SERVICES AND MAINTENANCE REVENUES 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 this revenue category.
REVENUE RECOGNITION The Company recognizes engineering services revenues
-------------------
over the course of the development work on a percentage-of-completion basis.
Maintenance revenues are recognized ratably over the term of the maintenance
contract, which generally is twelve months. The Company adopted Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2") for all software
licensing transactions entered into on or after February 1, 1998. Under the
provisions of SOP 97-2, 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
11
software licenses upon shipment to the Company's OEMS unless the underlying
software requires significant modification or customization. Revenues for
software licenses requiring material modification or customization are
recognized ratably over the services performed or deferred until the
modification is complete. The Company continues to apply the provision of
Statement of Position 91-1, "Software Revenue Recognition," for all agreements
entered into on or prior to January 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
REVENUES Revenues for the quarter ended April 30, 1998 increased 64% to
--------
$8.4 million from the $5.1 million reported for the same quarter in 1997. The
increase in revenues was driven by a 38% increase in product licensing revenues
and a 122% increase in engineering services and maintenance revenues. These
increases in product licensing revenues were generated by an increase in the
shipments and number of products incorporating Peerless' imaging technology.
Most of the licensing growth in the current fiscal year can be attributed to new
color laser and multi-function printers introduced by the Company's OEMS during
fiscal 1998 and an increase in the market penetration of existing products. The
growth in engineering services and maintenance revenues to $3.6 million for the
quarter ended April 30, 1998 from the $1.6 million reported for the same quarter
in 1997 was generated by increased outsourcing of digital document products by
OEMS during the current period.
GROSS MARGIN The Company's gross margin as a percentage of total revenues
------------
decreased to 63% for the quarter ended April 30, 1998 from 71% for the same
quarter in 1997. The lower gross margin in the current year was primarily
attributable to a shift in the revenue mix toward engineering services and
maintenance revenues, which have higher costs associated with the revenues being
recognized than product licensing revenues. Engineering services and
maintenance revenues increased as a percentage of total revenues from 31% for
the quarter ended April 30, 1997 to 43% for the same quarter in 1998.
RESEARCH AND DEVELOPMENT EXPENSES Peerless continues to invest heavily in
---------------------------------
the future by funding the research and development of new technology solutions.
Research and development expenses increased 60% between the quarters ended April
30, 1998 and 1997. The expense increases resulted primarily from a growth in
the development staff headcount. The increased funding was used to, among other
things, continue the development programs associated with the Company's color
technology, multi-function technology, application specific integrated circuit
("ASIC") designs, and digital photography technology. Management anticipates
that research and development costs will continue to increase in future periods.
SALES AND MARKETING EXPENSES Sales and marketing expenses increased 3%
----------------------------
between the quarters ended April 30, 1998 and 1997. The modest expense growth
related to an increase in the sales and marketing headcount and a continued
emphasis on industry trade shows and other opportunities to promote the
Company's embedded imaging solutions.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
-----------------------------------
for the quarter ended April 30, 1998 increased 28% from the comparable period
last year. The expense growth related primarily to an increase in personnel and
expenses necessary to support the growth of the Company's operations. General
and administrative expenses were 11% and 14% of total revenues for the three
month periods ended April 30, 1998 and 1997, respectively. The decrease over
the prior quarter was the result of an increased revenue base in the current
year.
INTEREST INCOME The Company earned net interest income of $355,000 and
---------------
$321,000 in the first quarters of fiscal 1999 and 1998, respectively. Interest
income was related to interest and investment income earned on cash equivalents
and investments.
12
INCOME TAX PROVISIONS The provisions for income taxes for all periods
---------------------
presented are based on the estimated annual effective tax rate and include
current federal, state and foreign income taxes. The effective tax rates for
the periods differ from the federal statutory rate primarily as a result of
foreign and state income tax provisions noted above offset by anticipated
changes in the deferred tax valuation allowance. The Company periodically
evaluates the sufficiency of its deferred tax asset valuation allowance, which
is adjusted as deemed appropriate based on operating results.
LIQUIDITY AND CAPITAL RESOURCES
Compared to January 31, 1998, total assets grew 7% to $42.9 million and
stockholders' equity grew 6% to $35.7 million. The Company's cash and short-
term investment portfolio totaled $22.3 million at April 30, 1998 and the
current ratio was 4.9. Cash generated by operations during the three months
ended April 30, 1998 and 1997 was $1.1 million and $2.0 million, respectively.
Net cash provided by investing activities during the three months ended
April 30, 1998 was $1.1 million and was comprised primarily of purchases and
sales of short-term and long-term held-to-maturity securities. Additions to
property and equipment during the three months ended April 30, 1998 totaled
$878,000 and related primarily to asset purchases associated with a growth in
headcount. Net cash used by investing activities of $198,000 during the three
months ended April 30, 1997 was comprised entirely of fixed asset purchases.
Net cash provided by financing activities in the three months ended April
30, 1998 and 1997 was $378,000 and $245,000, respectively. This cash resulted
from the issuance of shares of common stock as performance awards and under the
Company's employee stock purchase plan, as well as the exercise of common stock
options.
During the current quarter, the Company had available a $2.0 million
revolving line of credit with a bank, which was collateralized by substantially
all assets of the Company. The line expired in May 1998 and has not been
renewed. The Company is currently evaluating proposals for a new line with
additional borrowing capacity.
CERTAIN BUSINESS RISKS
Although the Company has been profitable since the quarter ended December
31, 1995, there can be no assurance that the Company will maintain profitability
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 could have a material adverse
effect on the Company's operating results.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and needs, frequent new product
introductions and diminishing time frames within which to develop new products.
The failure of the Company and its OEM customers to meet these needs on a timely
basis or to anticipate or respond to rapidly changing technology could result in
a loss of competitiveness or revenues, which would have a material adverse
effect on the Company's operating results.
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 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
13
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
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; 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, 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; compliance of the
Company's computer systems with Year 2000 issues; and risks associated with the
Company's international business activities, which account for a substantial
portion of its revenues.
14
PART II OTHER INFORMATION
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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
10.22 Fourth Amendment of Office Lease dated April 22, 1998 between the
Company and Continental Development Corporation
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
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 12, 1998
-----------------------------------------------
Edward Gavaldon
Chairman of the Board, President and Chief
Executive Officer
By: /s/Hoshi Printer Date: June 12, 1998
-----------------------------------------------
Hoshi Printer
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
16